Guaranty and Suretyship (Articles 2047-2084)

Chapter 1. Nature and Extent of Guaranty (Arts. 2047-2084)

Piczon vs. Piczon
Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president
of borrowing firm) bound himself as guarantor and agreed to the use of the loan as
surety cash deposit for the registration with the SEC. Consuelo Piczon (lending
firm) brought action to recover the amount loaned. Court ruled in favor of Consuelo
Piczon and ordered Esteban Piczon and Sosing-Lobos to pay him as guarantor the
amount of the loan + interest.
Issue: WON Esteban Piczon is a surety or a guarantor?
Held: Under the terms of the contract Esteban Piczon expressly bound himself only
as guarantor. A guaranty must express, and it would be violative of the law to
consider a party to be bound as surety when the very word used in the agreement
is guarantor.
Palmares vs. CA (288 SCRA 422)
Facts: Private respondent M.B. Lending Corporation extended a loan to the spouses
Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the
amount of P30,000.00 payable on or before May 12, 1990, with compounded
interest at the rate of 6% per annum to be computed every 30 days from the date
thereof. 1 On four occasions after the execution of the promissory note and even
after the loan matured, petitioner and the Azarraga spouses were able to pay a
total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were
made after the last payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory
note, respondent corporation filed a complaint 3 against petitioner Palmares as the
lone party-defendant, to the exclusion of the principal debtors, allegedly by reason
of the insolvency of the latter.
Issue: WON Palmares is liable
Held: If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship. It is a cardinal rule in the interpretation of contracts
that if the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall control. 13 In the
case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's liability is that of a surety.

Machetti vs. Hospicio de San Jose

Facts: By a written agreement, Machetti undertook to construct a building for
Hospicio de San Jose. One of the conditions was that Machetti obtain the guarantee
of Fidelity & Surety Co. to the amount of 12K. It was subsequently found out that
the work had not been carried out in accordance with the specifications. Hospicio
refused to pay therefore Machetti brought an action to recover the amount.
Issue: WON the undertaking assumed by FSC that of guarantor or surety?
Held: Circumstances may be shown which convert the contract into one of
suretyship but that does not exist. It appears that the contract is the guarantors
separate undertaking in which the principal does not join, that it 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 collateral
undertaking separate and distinct from the latter. All these are features of a
contract of guaranty.
Severino vs. Severino
Facts: Melecio Severino upon his death, left considerable properties. To end
litigation among heirs a compromise was effected where defendant (son of MS)
took over the property of deceased and agreed to pay installment of 100K to
plaintiff (wife of MS) payable first in 40K cash upon execution of document in 3
equal installments. Enrique Echauz became guarantor. Upon failure to pay the
balance, plaintiff filed and action against the defendant and Echauz. Enchauz
contends that he received nothing from affixing his signature in the document and
the contract lacked the consideration as to him.
Issue: WON there is a consideration for the guaranty?
Held: 1. The guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. 2. It is neither
necessary that guarantor or surety should receive any part of the benefit, if such
there be accruing to his principal.
Municipaity of Gasan vs. Marasigan
Facts: Municipality of Gasan granted Marasigan fishing privileges within the
jurisdictional waters. To secure payment of license fees, Marasigan filed a bond
subscribed by G and H who bound themselves to pay if Marasigan failed to comply
with the terms of the contract. Contract was declared illegal by the Executive
Bureau therefore the Municipality awarded the privilege to another person who
failed to pay the deposit and yielded the privilege to Marasigan. The municipality
told Marasigan that the contract was to be effective so the municipality sought to
recover from Marasigan and G and H, the amount representing the license.

Issue: WON the contract and bond are valid and enforceable?
Held: No. Contract was not consummated and was cancelled. It ceased to be valid
when it was cancelled so Marasigsan and G&H were not bound to comply with the
terms of the contract. A guaranty cannot exist without a valid obligation.

Held: It is in substance a contract of suretyship. A contract of guaranty is where a

guarantor binds himself to pay only in case the latter should fail to do so; while a
contract of suretyship, the surety binds himself solidarily with the principal debtor.
Since Regala Jr. bound himself jointly and severally, he is bound to pay the amount
of indebtedness of his wife.
Commonwealth of the Philippines vs. Far Eastern Surety and Insurance
Facts:

Plaridel Surety Insurance vs. Artex Development Co.

Facts: Artex withdrew from the Bureau of Customs shipments of imported goods
which were subject to customs duties and other taxes after posting surety bonds
pursuant to RA 4086 because its applications for tax exemptions were not
approved by the Board of Industries. In consideration of the obligation assumed by
Plaridel, Artex agreed to pay the premiums and cost of documentary stamps in
advance due on bonds for each period of 12 months until bonds and its renewals,
extensions or substitutions be cancelled in full by the person or entity guaranteed
or by court of competent jurisdiction. Artex stopped paying premiums and costs of
documentary stamps after it was granted tax exemption. Plaridel maintains that it
renewed the surety bonds more or less 8 months before the tax exemption.
Plaridel seeks recovery of renewal of premiums on bonds which were already null
and void upon grant of tax exemption to principal
Issue: WON Artex is liable for accrued premiums and costs of doc stamps on
renewals of the surety bonds after grant of tax exemption to Plaridel?
Held: No. Suretyship cannot exsist without valid obligation. The renewals were
without consideration. Plaridel incurred no risk from Artex tax exemption
application was approved. Any renewals were void from the beginning because the
cause or object of said renewals did not exist at the time of the transtaction.
Express stipulation by parties, surety bonds became null and void upon grant of
tax exemption.
Pacific Banking Corp. vs. IAC
Facts: Cecilia Regala obtained from plaintiff the issuance and use of Pacific card
credit card. Robert Regala Jr., spouse of Cecilia, executed a Guarantors
Undertaking in favor of Pacific wherein the Regala Jr., agreed jointly and severally
with Cecilia Regala, to pay Pacific upon demand and all indebtedness, obligations,
charges or liabilities due and incurred by her. Cecilia was declared in default for
failure to pay 92K within the reglementary period. Regala Jr. admitting the
execution of the Guarantors Understanding but with the understanding that his
liability would be limited to 2K/month.
Issue: WON the Guarantors Understanding is a guaranty or suretyship?

Issue:
Held:

PNB vs. CA, Luzon Surety Co.

Facts: Estanislao Depusoy, and the Republic of the Philippines, represented by the
Director of Public Works, entered into a building contract, for the construction of
the GSTS building at Arroceros Street, Manila, Depusoy to furnish all materials,
labor, plans, and supplies needed in the construction. Depusoy applied for credit
accommodation with the plaintiff. This was approved by the Board of Directors in
various resolutions subject to the conditions that he would assign all payments to
be received from the Bureau of Public Works of the GSIS to the bank, furnish a
surety bond, and the surety to deposit P10,000.00 to the plaintiff. The total
accommodation granted to Depusoy was P100,000.00. This was later extended by
another P10,000.00 and P25,000.00, but in no case should the loan exceed
P100,000.00. In compliance with these conditions, Depusoy executed a Deed of
Assignment of all money to be received by him from the GSIS to PNB. Depusoy
defaulted in his building contract with the Bureau of Public Works, and sometime in
September, 1957, the Bureau of Public Works rescinded its contract with Dernisoy.
No furher amounts were thereafter paid by the GSIS to lie plaintiff bank. The
amount of the loan of Depusoy which remains unpaid, including interest, is over
P100,000.00. Demands for payment were made upon Depusoy and Luzon, and as
no payment was made, therefore herein petitioner filed with the trial court a
complaint against Estanislao Depusoy and private respondent Luzon Surety Co.
Inc. (LSCI).
Issue: WON Luzon Surety is liable
Held: the bonds executed by private respondent LSCI were to guarantee the
faithful performance of Depusoy of his obligation under the Deed of Assignment

and not to guarantee payment of the loans or the debt of Depusoy to petitioner to
the extent of P100,000.00. Besides, even if there had been any doubt on the terms
and conditions of the surety agreement, the doubt should be resolved in favor of
the surety. As concretely put in Article 2056 of the Civil Code, "A guaranty is not
presumed, it must be ex-pressed and cannot extend to more than what is
stipulated therein." LSCI is liable to the full extent thereof, such liability is strictly
limited to that assumed by its terms."

Facts: To guarantee the fulfillment of the obligation of D, as agent of X in the sale

of the latters petroleum products, Cho Siong subscribed to a personal bond in the
sum of 3K. Cho Siong also subscribed the 3K bond and signed an instrument in
favor of X in which he assumed responsibility for account of Xs former agent.

El Vencedor vs. Canlas

Facts: An accounting between X company and D, its agent for the sale of
merchandise, showed that D had failed to pay X for the merchandise of the value
of 5K. X therefore refused to continue to furnish D merchandise for sale unless he
gave a bond. Canlas bound himself as surety and guarantor to D to become liable
in case of his inability to pay damages. It did not appear that at the time of the
execution of the bond Canlas had knowledge of the fact that D was indebted to X
in any sum. Canlas had no knowledge.

Held: No. Under the terms of the bond, Cho Siong did not answer for D, save for
the latters acts by virtue of the contract of agreement between D and X. A
contract of suretyship or guaranty is to strictly interpreted and is not to be
extended beyond its terms.

Issue: Should the bond respond for the debt contracted by D prior to execution?
Held: No. Canlas was liable only for the value of goods furnished to D subsequent
to the execution of the bond. A contract of suretyship or guaranty is ordinarily not
retrospective and no liability attached for defaults occurring before it is entered
into unless intent to be so liable is indicated either by express words or by
necessary implication.
BPI vs. Forester
Facts: The Board of directors of corporation X authorized its treasures to obtain for
them a credit n current account for 100K from BPI. Credit was granted and X began
to draw against it even before the formal document of the agreement for the said
credit was issued. The accountant G gave a bond in his name as surety and agreed
to be bound jointly and severally in the sum of 100K. The overdraft and interest
amounted to 84,900. BPI was able to collect 43,100 as a result of an action brought
against X. BPI receives 25,500 subsequently.
Issue: WON the bond covered the amounts from BPI prior to its date?
Held: Yes. It is very true that bonds or other contracts of suretyship are ordinarily
not to be construed retrospectively, but that rule must yield to the intention of the
contracting parties as revealed by the evidence. In the present case, the
circumstances clearly indicated that the bond given by G was intended to cover all
of the indebtedness.
Standard Oil Co. of NY vs. Cho Siong

Isssue: WON Cho Siong is liable for the debt of the former agent of X which D
assumed in virtue of another contract of which Cho Siong was not aware?

Municipality of Lemery vs. Mendoza and Blas

Facts: Municipality of Lemery granted fishing privileges to D for a period of 2 years
for the sum of 23K for each year. Mendoza and Blas as bondsmen, executed a
document which declared, among other thing, the lease by D of the privilege of
fishing referred to for the term of 2 years. In said document, Mendoza and Blass
obligated themselves jointly and severally to pay the sum of 46K in case D shall
fail to comply with the conditions of the bond of which we are informed. D failed to
pay.
Issue: WON Mendoza and Blas are bound to pay 46K or 23K
Held: 23K. The obligating clause of the contract of guaranty is quite clear to the
effect that the rent to be paid for the privilege of fishery was 23K for the full term
of 2 years. It is true that Mendoza and Blas declared 46K, but it was only because
the bond was required to be made in double the amount of the principal liability as
an assurance of the performance of the principal obligation.
Wise and Co. vs. Kelly
Facts: D purchased merchandise from C on credit and agreed that D would apply
the proceeds of its sale to the discharge of his indebtedness in the amount of 13K
the purchase price. Kelly as surety for D, undertook that D would pay over to C the
entire proceeds from the sale of the merchandise.
Issue: WON Kelly is liable for the difference between the amount realized from the
sale of the merchandise and the purchase price of the same?
Held: No. Kelly did not undertake absolutely to pay the sum of 13K. His agreement
was limited to respond for the performance by D of his undertaking to deliver to C
the total proceeds of the sale of the merchandise for the invoice value of which a
promissory note was given by D.

Pacific Tobacco Corp. vs. Lorenzana

Facts: The Pacific Tobacco Corp. is engaged in the business of manufacturing and
distributing cigarettes cigars and other tobacco products. Lorenzana and PTC
entered into an agreement whereby Lorenzana will act as Distributor of PTC.
Lorenzana put up a bond in the amount of 3K with Visayan Surety & Insurance
Corporation, as surety, to guarantee the faithful fulfillment of Lorenzanas part in
the contract to sell and distribute PTCs cigarettes.
Issue: WON the delivery of merchandise to Lorenzana at a place other than that
appearing in the contract constitutes a material alteration of the same that would
release Lorenzana from liability?
Held: No. The mention of Manila and Rizal in said agreement was designed more as
a declaration or identification of the places wherein Lorenzana was expressly
authorized and assigned to sell PTCs products which is no obstacle to his
acceptance of additional territories in order to fulfill his obligation. A departure
from the terms of contract will not have the effect of discharging a compensated
surety unless it appears that such departure has resulted in injury, loss or prejudice
to the surety.