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SURETY

Ramil F. De Jesus

Introduction

In securing loan from a one has to get a co-maker. The banks will not

approve the loan if the borrower does not have a credible co-maker. This is the

practice of the almost all financial institution.

A co-maker is generally treated as a surety. In a contract of suretyship,

one lends his credit by joining in the principal debtors obligation, so as to render

himself directly and primarily responsible with the principal debtor. A surety is

bound equally and absolutely with the principal, and is deemed an original

promisor and debtor from the beginning. This is because in suretyship, there is

but one contract, and the surety is bound by the same agreement which binds

the principal(http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-

guarantor/).

The contract of suretyship is different from a contract of guaranty. Most

often than not it is used interchangeably but it has a very different meaning and a

different set of obligations are pegged unto these contracts.

Objective

To provide an overview discussion on surety and its undertaking citing

relevant cases and jurisprudence.

Discussion

By 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.

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.

http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-guarantor/http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-guarantor/http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-guarantor/http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-guarantor/

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In a broad sense, guaranty it includes pledge and mortgage because the

purpose of guaranty may be accomplished not only by securing the fulfillment of

an obligation contracted by the principal debtor through the personal

guaranty of a third person but also by furnishing to the creditor for his

security, property with authority to collect the debt from the proceeds of the

same in case of default.(De Leon citing Manresa).

Suretyship is defined as a relation which exist where one person (principal

or obligor) has undertaken an obligation and another person (surety) is also

under a direct or primary obligation or duty to a third person (oblige), who is

entitled to but one performance, and as between the who are bound, the one

rather than the other should perform.(De Leon citing AgroConglomerates, Inc. V.

CA, 348 SCRA450).

If a person binds himself to be solidary liable with the principal debtor, the

contract is suretyship and not a contract of guaranty. The terms used in a

contract is not binding. What is controlling is the terms and condition of the

contract.

In Palmares v. CA, G.R. No. 12649, the Court had occasion to discuss

what a surety and a guaranty, it held that A surety is an insurer of the debt,

whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is

an undertaking that the debt shall be paid; a guaranty, an undertaking that the

debtor shall pay. Stated differently, a surety promises to pay the principal's debt

if the principal will not pay, while a guarantor agrees that the creditor, after

proceeding against the principal, may proceed against the guarantor if the

principal is unable to pay. A surety binds himself to perform if the principal does

not, without regard to his ability to do so. A guarantor, on the other hand, does

not contract that the principal will pay, but simply that he is able to do so. In

other words, a surety undertakes directly for the payment and is so responsible

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at once if the principal debtor makes default, while a guarantor contracts to pay if,

by the use of due diligence, the debt cannot be made out of the principal debtor.

Liability is contractual and accessory but direct

Surety ship is a contractual relation. The suretys obligation although not

an original and direct one for the performance of his act, but merely accessory or

collateral to the obligation contracted by the principal but since he promised to be

bound solidarily with the obligation, his liability is direct and primary.

The peculiar nature of a surety agreement is that it is regarded as valid

despite the absence of any direct consideration received by the surety either

from the principal obligor or from the creditor. A contract of surety, like any other

contract, must generally be supported by a sufficient consideration. However, the

consideration necessary to support a surety obligation need not pass directly to

the surety; a consideration moving to the principal alone will suffice. It has been

held that if the delivery of the original contract is contemporaneous with the

delivery of the suretys obligation, each contract becomes completed at the same

time, and the consideration which supports the principal contract likewise

supports the subsidiary one. And this is the kind of surety contract to which the

rule of strict construction applies as opposed to a compensated surety contract

undertaken by surety corporations which are organized for the purpose of

conducting an indemnity business at established rates and compensation unlike

an ordinary surety agreement where thesurety binds his name through motives of

friendship and accommodation.( Garcia, Jr. v. CA G.R. No. 80201Nov. 20, 1990).

A creditor's right to proceed against the surety exists independently of his

right to proceed against the principal. Under Article 1216 of the Civil Code, the

creditor may proceed against any one of the solidary debtors or some or all of

them simultaneously. The rule, therefore, is that if the obligation is joint and

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accommodation secured by the surety bond; hence,ALPHA is liable for the debt.

Note however that by the express terms of Surety BondNo. G-1689, ALPHA bound itself to pay the discountingline of Community Builders only which has a personalitydistinct and separate from Rojas. The promissory note,on the other hand, was signed both by Rojas and byCommunity Builders. Also, the amount of the credit linewhich ALPHA agreed to secure was only P50,000;whereas, the promissory note was for P150,000. Clearlytherefore, the debt on which PCIB bases its action is notwithin the purview of the Surety Bond No. G-1689.Thus,even granting that Rojas and Community Buildersoffered Surety Bond No. G-1689 as security for theP150,000 debt, ALPHA, which merely undertook tosecure a P50,000 credit line of Community Builders,cannot be held answerable for the debt.

The definition and characteristics of a suretyship bring into focus the fact

that a surety agreement is an accessory contract that introduces a third party

element in the fulfillment of the principal obligation that an obligor owes an

obligee. In short, there are effectively two (2) contracts involved when a surety

agreement comes into play - a principal contract and an accessory contract of

suretyship. Under the accessory contract, the surety becomes directly, primarily,

and equally bound with the principal as the original promissor although he

possesses no direct or personal interest over the latter's obligations and does not

receive any benefit therefrom.(Intra Strata Assurance Company v. Republic).

Liability arises only if principal is held liable

In taking these positions, the petitioners appear to misconstrue the nature

of a surety relationship, particularly the fact that two types of relationships are

involved, that is, the underlying principal relationship between the creditor

(government) and the debtor (importer), and the accessory surety relationship

whereby the surety binds itself, for a consideration paid by the debtor, to be

jointly and solidarily liable to the creditor for the debtor's default. The creditor in

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this latter relationship accepts the surety's solidary undertaking to pay if the

debtor does not pay. Such acceptance, however, does not change in any

material way the creditor's relationship with the principal debtor nor does it make

the surety an active party to the principal creditor-debtor relationship. The

contract of surety simply gives rise to an obligation on the part of the surety in

relation with the creditor and is a one- way relationship for the benefit of the

latter.

In other words, the surety does not, by reason of the surety agreement,

earn the right to intervene in the principal creditor-debtor relationship; its role

becomes alive only upon the debtor's default, at which time it can be directly held

liable by the creditor for payment as a solidary obligor. A surety contract is made

principally for the benefit of the creditor-obligee and this is ensured by the

solidary nature of the sureties' undertaking. Under these terms, the surety is not

entitled as a rule to a separate notice of default, nor to the benefit of excussion,

and may be sued separately or together with the principal debtor. The words of

this Court in Palmares v. CA are worth noting:

Demand on the surety is not necessary before bringingthe suit against them. On this point, it may be worthmentioning that a surety is not even entitled, as a matterof right, to be given notice of the principal's default.Inasmuch as the creditor owes no duty of activediligence to take care of the interest of the surety, his

mere failure to voluntarily give information to the suretyof the default of the principal cannot have the effect ofdischarging the surety. The surety is bound to takenotice of the principal's default and to perform theobligation. He cannot complain that the creditor has notnotified him in the absence of a special agreement tothat effect in the contract of suretyship.(Intra Strata

Assurance Company v. Republic).

Surety is not entitled to exhaustion as held in G.R. L-26449, the Court ruled that:

The surety's contention is untenable. The counterbondcontemplated in the rule is evidently an ordinaryguaranty where the sureties assume a subsidiaryliability. This is not the case here, because the surety inthe present case bound itself "jointly and severally" (in

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solidum) with the defendant; and it is prescribed inArticle 2059, paragraph 2, of the Civil Code of thePhilippines that excusion (previous exhaustion of theproperty of the debtor) shall not take place "if he (theguarantor) has bound himself solidarily with the debtor".

The rule heretofore quoted cannot be construed asrequiring that an execution against the debtor be firstreturned unsatisfied even if the bond were a solidaryone; for a procedural rule may not amend thesubstantive law expressed in the Civil Code, and furtherwould nullify the express stipulation of the parties thatthe surety's obligation should be solidary with that of thedefendant.

A surety is not entitled to the exhaustion of the properties of the principal

debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15,

1969, 28 SCRA 58, 63).

Undertaking is to creditor, not to debtor

The contract is between the surety and the oblige and not between surety

and the principal obligor.

Surety is not entitled to notice of principals default

Demand on the surety is not necessary before bringing suit against them,

since the commencement of the suit is a sufficient demand. A surety is not even

entitled, as a matter of right , to be given notice of the principals default.

Inasmuch as the creditor owes no duty of active diligence to take care of the

interest of the surety, his mere failure to voluntarily give information to the surety

of the default of the principal cannot have the effect of discharging the surety

The surety is bound to take notice of the principal and to perform the

obligation. He cannot complain that the creditor has not notified him in the

absence of a special agreement to the effect in the contract of

suretyship(Palmares V. CA).

Prior demand by the creditor to the principal not required

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or from inclination to favor the principal. The neglect of the creditor to sue the

principal at the time the debt falls due does not discharge the surety, even if such

delay continue until the principal becomes insolvent. And, in the absence of proof

of resultant injury, a surety is not discharged by the creditors mere statement

that the creditor will not look to the surety, or that he need not trouble himself.

The consequences of the delay, such as the subsequent insolvency of the

principal, or the fact that the remedies against the principal may be lost by lapse

opf time, are immaterial.

The raison deetre for the rule is that there is nothing to prevent the

creditor from proceeding against the principal at any time. At any rate, if the

surety is dissatisfied with the degree of activity displayed by the creditor in the

pursuit of the principal, he may pay the debt and become subrogated to all the

rights and remedies of the creditor.

In the same case of Palmares the Supreme Court also stated that Surety

is not exonerated by neglect of creditor to sue principal it ruled:

We agree with respondent corporation that its mere failureto immediately sue petitioner on her obligation does notrelease her from liability. Where a creditor refrains fromproceeding against the principal, the surety is notexonerated. In other words, mere want of diligence orforbearance does not affect the creditor's rights vis-a-visthe surety, unless the surety requires him by appropriatenotice to sue on the obligation. Such gratuitous indulgence

of the principal does not discharge the surety whethergiven at the principal's request or without it, and whether itis yielded by the creditor through sympathy or from aninclination to favor the principal, or is only the result ofpassiveness. The neglect of the creditor to sue theprincipal at the time the debt falls due does not dischargethe surety, even if such delay continues until the principalbecomes insolvent. And, in the absence of proof ofresultant injury, a surety is not discharged by the creditor'smere statement that the creditor will not look to the surety,or that he need not trouble himself. The consequences ofthe delay, such as the subsequent insolvency of the

principal, or the fact that the remedies against the principalmay be lost by lapse of time, are immaterial.

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In the case of Clark vs. Seliner (42 Phil. 384), action was deferred for over

four years, but the sureties were never the less held liable. As said in 21 C. L.,

1032:

It is a general principle that a creditor is under noobligation to be actively diligent in pursuit of his principaldebtor. He may forbear the prosecution of his claim, andremain inactive, without impairing his right to resort to thesurety, particularly when his forebearance amounts to nomore than a mere inaction or passivity. Therefore the mereneglect of a creditor to sue or to attempt to collect a debt athe time it falls due does not discharge the sureties,although the principal had ample means at the time, andsubsequently became insolvent. Similarly, merepassiveness or mere delay in the prosecution of an

execution against the principal debtor after judgment, willnot discharge the surety. The principal underconsideration, however, comprehends something morethan mere passivity or inaction resulting from negligence.Thus, a gratuitous indulgence of the principal, whetherextended at his request or without it, and whether it isyielded by the creditor from sympathy and from aninclination to favor him, or is the result or merepassiveness, will not operate to discharge the surety,unless he omits to do, when required by the surety, whatthe law or his duty enjoins him to do, or unless he neglects,to the injury of the surety, to discharge his duty in any

matter in which he occupies the position of a trustees forthe surety. Mere delay or negligence in proceeding againstthe principal will not discharge a surety unless there isbetween the creditor and principal debtor a valid andbinding agreement therefore, one which tends to prejudicehim, or to deprive him of the power of obtaining indemnityby presenting a legal obstacle, for the time, to theprosecution of an action on the original security. Positiveand wilful interference by a creditor, embarrassing therecovery of the claim against the principal, will, however,release the surety. In some jurisdictions, moreover, theduty of active diligence in the prosecution of suits, or of

execution against the principal can be devolved on thecreditor by the surety, if he desires, by requesting it. Also,of course, if a delay in calling on the principal for themoney is the result of fraud, that surety will be exonerated.In extension of the principle that the mere delay of thecreditor to proceed against the principal will not dischargethe surety, it has been held that the surety is notdischarged, even if the delay of the creditor is such that hisremedy against the principal becomes barred by imitation.

Conclusion

Contract of suretyship is very much different from a contract of guaranty. A

surety is like a principal because he assumes the responsibility of the principal as

if he received a consideration for the contract.