GUARANTY

Credit Transactions

A. GENERAL CONCEPTS

Definition
ART.
By

2047 par. 1

guaranty a person, called the

guarantor, binds himself to the
creditor to fulfill the obligation of
the principal debtor in case the
latter should fail to do so.

Characteristics of the
Contract
1.
2.
3.
4.
5.
6.
7.
8.
9.

Accessory
Subsidiary and Conditional
Unilateral
Guarantor must be a person
distinct from the debtor
Nominate
Consensual
It is a contract between the
guarantor and creditor
Falls under the statute of frauds
Gratuitous

Classification of
Guaranty

(1) Guaranty in the Broad

Sense
Guaranty may be:
(a)personal guaranty;
(b) or real guaranty.

(2) Personal Guaranty

This may be in the form of:
(a) guaranty (in the strict sense)
(b) suretyship (one where the surety
binds himself solidarily, not
subsidiarily, with the principal debtor).

(3) Real Guaranty

Here, the guaranty is PROPERTY
(a) If real propertythe guaranty
may be in the form of:
1) a real mortgage;
2) antichresis.
(b) if personal property the
guaranty may be in the form of:
1) pledge;
2) chattelmortgage.

(4) As to its origin

(a) Conventional
(b) Legal
(c) Judicial
(5) As to Consideration
(a) Gratuitous
(b) Onerous

(6) As to the Person Guaranteed

(a) Single
(b) Double or Sub-guaranty
(7) As to Scope and Extent
(a) Definite
(b) Indefinite or simple
(c) Specific
(d) Continuing

Guarantor not insurer of

debt guaranteed
The

guarantor only binds himself

to pay if the principal debtor
cannot or unable to pay.

An

insurer of the solvency of the

debtor

Terminologies
Terminologies

used by the
parties not controlling

Use

of the term guarantee or

guarantor is not conclusive
that the contract is one of
guaranty

Art. 2048
Art.

2048. A guaranty is
gratuitous, unless there is a
stipulation to the contrary.

Cause

of Contract of Guaranty
(1)Presence of cause which supports
principal obligation
(2)Absence of direct consideration
received by guarantor
(3)Absence of direct or personal
interest of guarantor over the
obligation

Guaranty undertaken
without the knowledge of
debtor
Creditor

has every right to take

all possible measures to secure
the payment of his credit.

Hence,

it can be constituted
without the knowledge and even
against the will of the principal
debtor

Guaranty by reason of
origin
conventional
legal

(by agreement);

(required by law);

judicial

(required by the court

as when an attachment is to be
lifted).

Double or sub-guaranty
It

may be also constituted, not only

in favor of the principal debtor , but
also in favor of the other guarantor,
with the latters consent, or without
his knowledge, or even his
objection.

It

should not be confounded with

guaranty wherein several
guarantors concur.

Necessity of a valid
principal obligation
Guaranty

is an accessory

contract.
A

guaranty can be valid even if

the principal obligation is:
(a)Voidable;
(b) unenforceable;
(c) natural.

Guaranty not
presumed
As

a contract, guaranty requires

the expression of consent on the
part of the guarantor to be
bound.

Guarantee covered by the

Statute of Frauds
Guaranty

must not only be

expressed but must also be
reduced into writing.

Guaranty strictly
construed
Guaranty

has to be strictly
interpreted against the creditor
and in favor of the guarantor
and is not to be extended
beyond its terms or specified
limits.

Extent of guarantors
liability
Where

guaranty DEFINITE the

obligation of the guarantor
under the terms of the contract
is limited in whole or in part to
the principal debt, to the
exclusion of the accessories.

 Where

guaranty INDEFINITE or
SIMPLE it shall comprise not
only the principal obligation, but
also all its accessories, including
the judicial costs provided, with
respect to the latter, that the
guarantor shall only be liable for
those costs incurred after he has
been judicially required to pay

Liability of guarantor for

judicial costs
The

guarantor shall answer for

such judicial costs only as
have been incurred after he
has been judicially required to
pay.

Acceptance of guaranty
by creditor and notice
thereof to guarantor
In

declaring that guaranty must be

express, the law refers solely and
exclusively to the obligation of the
guarantor because it is he alone
who binds himself by his
acceptance. With respect to the
creditor, no such requirement need
to be prescribed because he binds
himself to nothing.

Selection of guarantor
Specified

person stipulated as
guarantor
Guarantor selected by the
principal debtor
Guarantor personally
designated by the creditor

C. Obligations Secured

A
guaranty
may
performance of a:

secure

the

Voidable Contract unless it is

annulled by a proper action in
court. (Article 1390)
Unenforceable
Contract

because such contract is not void

and may be ratified. (Article 1403)

C. Obligations Secured

Natural Obligation - One which in

honor and conscience binds the
person who has contracted it, but
which cannot be enforced in a court of
justice.
when the debtor himself offers a
guaranty for his natural obligation,
he impliedly recognizes his liability,
thereby transforming the obligation
from natural into a civil one.

C. Obligations Secured

Future Debts debts existing at the

time of the constitution of the guaranty
but the amount thereof is unknown and
not to debt not yet incurred and existing
at that time.
also known as continuing guaranty or
suretyship
not limited to a single transaction
covers a series of transactions
generally for an indefinite time or until
revoked

C. Obligations Secured
Conditional

Obligations

obligations which are subject to

certain conditions such as:
Suspensive
Condition

the
guarantor is liable only after the
fulfillment of the condition.
Resolutory
Condition

the
happening
of
the
condition
extinguishes
both
the
principal
obligation and the guaranty.

C. Obligations Secured
The guarantor CANNOT bind himself for
more than the principal debtor.
If he does, his liability shall be REDUCED
to the limits of that of the debtor.

D. Parties To A
Guaranty
Creditor is an entity (person or
institution) that extends credit by
giving another entity permission to
borrow money if it is paid back at a
later date.
Principal

Debtor - the person in

respect of whose default the

guarantee is given.

D. Parties To A
Guarantor binds himself to the
Guaranty

creditor to fulfill the obligation of the

principal debtor in case the latter
should fail to do so. (Article 2047, paragraph
1)

The guarantor must be a person

distinct from the debtor because a
person cannot be the personal
guarantor himself.
A guarantor warrants the solvency of
the promissor.

D. Parties To A
Guaranty
A married woman may guarantee

an obligation
without the husbands consent, but shall not thereby
bind the conjugal partnership, except in cases
provided by law.(Article 2049)
Example: when the guaranty redounded to the
benefit of the
family

A married woman who acts as guarantor ordinarily

binds only her separate property.

D. Parties To A
Guaranty
QUALIFICATIONS OF A
GUARANTOR
1. He possesses integrity
2. He has capacity to bind himself;
and
3. He has sufficient property to
answer for the obligation which
he guarantee