DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies

Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
LAW ON CREDIT TRANSACTIONS

I. GOVERNING RULES ON PAYMENT OF LOAN

(a) If the subject matter is MONEY, the obligation of the debtor or borrower shall
be governed by Arts 1249 and 1250.

Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then the currency
which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or

other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.

In the meantime, the action derived from the original obligation shall be held
in abeyance.

Art. 1250. In case an extraordinary inflation or deflation of the currency

stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
agreement to the contrary.

(b) If the subject matter is OTHER CONSUMABLE OR FUNGIBLE THINGS, the

debtor or borrower shall pay another thing of the same kind, quantity, and
quality, even if it should change in value. If this cannot be done, the value of
the thing at the time of its perfection (delivery) shall be the basis of the
payment of loan.

II. NO INTEREST SHALL BE DUE UNLESS IT IS STIPULATED IN WRITING

Applicability – applies only to interest for use of money. It is not applicable to

interest as indemnity for damages.

Interest – the compensation agreed to be paid by the borrower for the use of the
money lent to him by the lender

Classes of Interest

(a) Simple – interest which is paid for the use of the principal at a certain rate
stipulated in writing by the parties.
(b) Compound – that interest which is imposed upon the accrued interest, that
is, interest due and unpaid.

(c) Legal – that interest which the law directs to be paid in the absence of any
agreement as to the rate. It is fixed at 6% or12% per annum. However, the use
of the legal rate of interest is not justified where there is stipulated rate of
interest in the loan contracts.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale

- Bangko Sentral ng Pilipinas (BSP) Circular No. 799 (1 July 2013), lowered
the default interest from 12% to 6% per annum for loans or forebearances
of money, goods, or credits, AND the rate allowed in judgments in the
absence of an express contract

Right to Interest, Basis – The right to interest arises only by reason of the contract
(stipulation in writing) or by reason of delay or failure to pay principal on which
interest is demanded.

Interest on Damages – a special kind of interest which is imposed in a judgment

as indemnity for damages. This kind of interest need not be in writing. The interest
on damages awarded should be computed from the time of the finality of the
decision, and not from the filing of the complaint against the accused.

III. USURIOUS LOANS

- Contracts and stipulations, under cloak or device whatever, intended to

circumvent the laws against usury shall be void. The borrower may recover
in accordance with the laws on usury.

- In usurious loans, the entire obligation does not become void because of
an agreement for usurious interest – the unpaid principal debt still stands
and remains valid, but the stipulation as to the usurious interest is void,
and the debt is to be considered without stipulations as to the interest.

- The amount paid as interest under a usurious agreement is recoverable by

the debtor, since the payment is deemed to have been made under
restraint, rather than voluntary.

USURY LAW CEILING ON INTEREST LIFTED BY CENTRAL BANK CIRCULAR

NO. 905 – While the Usury Law ceiling on interest rates was lifted by a CB
Circular, nothing in the said circular grants carte blanche authority to raise
interests to levels which would either enslave their borrowers or lead to a
hemorrhaging their assets (Solangon v. Salazar)

HOW TO DETERMINE INTEREST, WHEN PAYABLE IN KIND - if the interest by

stipulation is payable in kind, the products or goods to be paid as interest
must be appraised to determine their value in money. The basis is the current
price of the products or goods at the time and place of payment

IV. VOLUNTARY DEPOSIT, CONCEPT

- It is a contract or juridical relation where a thing is delivered at will of a person

(depositor) to another (depositary) for the purpose of safekeeping by the
latter coupled with the obligation of returning it upon demand.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
DEPOSITOR NEED NOT BE THE OWNER OF THE THING – It must be noted that
one of the characteristics of deposit is that ownership of the thing deposited is
not transferred to the depositary. Hence, the depositor need not be the owner.

INTERPLEADER (Second Sentence of Art. 1968, NCC) – “A deposit may also be

made by two or more persons each of whom believes himself entitled to the
thing deposited with a third person, who shall deliver it in a proper case to the
one to whom it belongs.”

- Whenever conflicting claims upon the same subject matter are or may be
made against a person who claims no interest whatever in the subject
matter, or in interest which in whole or in part is not disputed by the
claimants, he may bring an action against conflicting claimants to compel
them to interplead and litigate their several claims among themselves.

V. FORM OF THE CONTRACT OF DEPOSIT

The contract of deposit may be entered into either orally or in writing or partly
oral and partly in writing. There are no formalities required, except the delivery of
the thing, to make the contract valid and enforceable.

VI. DEPOSIT MADE BY AN INCAPACITATED PERSON (Depositor incapacitated)

INCAPACITATED PERSON, CONCEPT – A person is considered incapacitated if

he cannot give consent to the contract such as minors, insane, demented
persons, deaf-mutes.

- Where one of the parties is incapable of giving consent to a contract, the

contract is voidable. However, in case of deposit, the capacitated person
who accepts the deposit made by an incapacitated shall be subject to all the
obligations of a depositary, as if there is regular contract of deposit.

- If the depositary refuses to return the thing deposited, he can be compelled to

return it by the legal representative of the incapacitated person or by the
latter himself if he becomes capacitated.

VII. DEPOSIT MADE TO AN INCAPACITATED PERSON (Depositary incapacitated)

- The depositor may only recover the thing deposited if it still in the possession
of the incapacitated depositary. If the thing is already disposed of in favor of a
third person who acted in good faith whose rights cannot be disturbed, the
only remedy of the depositor is to collect amount by which the incapacitated
person had been enriched or benefitted.

However, if the third person acted in bad faith, that is, he is aware of the flaw
in the possession of the incapacitated depositary, the depositor can recover
the thing from him with damages.

VIII. OBLIGATIONS OF THE DEPOSITARY

Depositary’s Principal Obligafions:

(1) To keep the thing safely;

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
(2) To return the thing deposited when required, to the depositor or his heirs or
successors in interest.

Law to Govern the Safekeeping of the thing – the Law on Obligations and
Contracts

- STANDARD OF CARE OR DILIGENCE - The depositary shall observe the

diligence of a good father of a family in the performance of his obligations to
protect and preserve the thing deposited, unless a higher degree of diligence
is stipulated by the parties.

Greater care or diligence is required if the deposit is for compensation than

when it is for free.

- If the thing is LOST, the depositary is liable if the loss is due to his own fault
(Art, 1172). But not when the loss is due to fortuitous event or force majeure
(Art. 1174)

Exception to the Rule that the Depositary is Not Liable When Loss is Due to
Fortuitous Event:

(1) If it so stipulated
(2) If he uses the thing without the depositor’s permission
(3) If he delays its return
(4) If he allows others to use it, even though he himself may have been
authorized to use the same.

IX. DEPOSITARY PROHIBITED FROM DEPOSITING THE THING WITH A THIRD

PERSON – A depositary cannot deposit the thing deposited with him with a third
person because deposit is founded on trust and confidence. The depositor may
not have the trust and confidence in the third person.

EXCEPTION: If there is a stipulation to the contrary.

EXECPTION to the EXCEPTION: If the thing is deposited with a person manifestly

careless and unfit.

- The depositary is also liable if the loss or damage to the property is caused
through the negligence of the depositary’s employees.

X. WAY OR MANNER OF DEPOSIT CANNOT BE CHANGED BY DEPOSITARY – The

place of delivery and other conditions of the deposit cannot be modified by the
depositary except when he may reasonably presume that the depositor would
agree to the modification if the depositor knew of the facts of the situation

Even then, the law requires that notice be sent to the depositor and to await the
latter’s decision before any change be made, unless time is of the essence to
avoid danger.

XI. COLLECTIONS OF PRINCIPAL AND INTERESTS WHEN DUE BY DEPOSITARY –

If the thing deposited generates interests like bonds, securities, etc., the
depositary who has the obligation to preserve the thing must collect the interest

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
as well as the principal when they became due. He must see to it that that the
securities and the rights corresponding to them preserve their value.

RENT OF SAFETY DEPOSIT BOX, Character – Not an ordinary contract of lease of

things but a special kind of deposit. It is not strictly governed by the provisions
on deposit.

XII. COMMINGLING OF GRAINS OR ARTICLES OF SAME KIND AND QUALITY IS

ALLOWED – The depositary may commingle grains or other items of same kind
and quality pertaining to two or more depositors, unless there is a prohibition.

The different depositors shall own proportionate share in the mass of the things
deposited. Impliedly, if the grains, etc. are not of the same kind and quality, the
depositary must keep them separately.

XIII. DEPOSITARY PROHIBITED FROM USING THE THING DEPOSITED – Without the
permission of the depositor, the depositary cannot use the thing deposited. If he
does so, he will be liable for damages.

XIV. IRREGULAR DEPOSIT -If the depositary is permitted to make use of the thing
deposited, the deposit ceases to be one. It is converted into a contract of loan
unless the principal reason for the contract is still the safekeeping of the
property. In such a situation, the use of the thing is merely secondary.

The contract is still a deposit, however it is called irregular deposit.

PERMISSION TO USE THE THING NOT PRESUMED – The burden of proof to

establish that permission to use the thing was granted is on the depositary. The
presumption to use is not presumed, it must be proven.

When the use of the thing is necessary to preserve it, the depositary may use the
same but only for such purpose.

XV. DEPOSITS IN BANKS ARE CONSIDERED SIMPLE LOANS – Fixed, savings, and
current deposits of money in banks and similar institutions are not true deposits.
They are considered as simple loans.

XVI. CLOSED AND SEALED DEPOSIT – if the thing deposited is delivered closed and
sealed, the same must be returned in the same condition by the depositary.

- If the seal or lock is broken due to the fault of the depositary, he shall be liable
for damages suffered by the depositor reason of such breaking. It is
presumed that the depositary is at fault, unless the contrary is proved.

VALUE OF THE THING DEPOSITED – If there is a controversy on the value of the

thing deposited which is delivered closed and sealed, the statement of the
depositor shall be accepted prima facie evidence of the value of the thing,

BREAKING OF SEAL OR LOCK NOT DUE TO DEPOSITARY’S FAULT – The

depositary is nevertheless still duty bound to keep the contents thereof a
secret.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
If in the keeping of the sealed or locked deposit, the depositor has some
instructions which could not be performed by the depositary without opening
the box or receptacle, the depositary is presumed authorized to do so.

If the depositor has left the key to the box or receptacle to the depositary, there
is a presumption of authority to open the same.

XVII. OTHER THINGS TO BE RETURNED IN A CONTRACT OF DEPOSIT – When the

depositary returns the thing in deposit, he must also return all its products,
accessories, and accessions.

WHEN THE DEPOSIT CONSISTS OF MONEY – the money deposited must be

returned together with interest for the use thereof.

XVIII. DEPOSITOR CANNOT BE REQUIRED BY DEPOSITARY TO PROVE HIS

OWNERSHIP – The depositary may not accept a thing for the purpose of
safekeeping. He is under no obligation to do so. However, once he accepts a
thing for deposit an actual possession is placed in his hands, he cannot demand
that the depositor proves his ownership over the thing.

Reasons:

(1) It is not necessary because there is no transfer of ownership in contract of

deposit;
(2) A bailee is estopped from asserting title to the thing received as against the
bailor;
(3) To require proof of ownership, the depositary, on the pretext that he needs to
know the nature and mode of acquisition of the thing by the depositor, may
be able to retain the thing until the issue is settled.

WHEN THE THING APPEARS TO BE UNLAWFULLY ACQUIRED; DUTY OF

DEPOSITARY – If the depositary has learned or received reliable information that
the thing he accepted in deposit is not lawfully acquired by the depositor, he
may return the thing to the depositor to avoid possible liability.

WHEN THE THING IS A STOLEN PROPERTY – should the true owner be identified,
the depositary shall advise the true owner of the deposit so that he may take
necessary precautions or actions to retrieve it.

- The depositary is not authorized to return the thing unceremoniously to the

alleged owner without the knowledge of the depositor. His duty is merely to
advise the owner of the deposit.

- If despite the advice made to the true owner of the existence and deposit of
the thing to the depositor, the true owner failed to claim the thing, the
depositary shall be relieved from responsibility by returning the thing to the
depositor

XIX. RESPECTIVE RIGHTS OF TWO OR MORE DEPOSITORS

(1) If joint depositors – each one may only demand the return of his
proportionate share in the divisible thing/s deposited

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Example:

A and B deposited 100 cases of softdrinks (same size and brand). If A

deposited 30 cases and B deposited 70 cases, they can only demand the
number of cases which each had deposited.

(2) If solidary depositors – and the thing is not capable of division, the depositary
may return the thing to anyone of the solidary depositors.

- If there is a stipulation to return the thing to one of the depositors, the

depositor shall return the thing only to that designated depositor.

XX. DEPOSITOR LOSES CAPACITY TO CONTRACT AFTER HAVING MADE THE

DEPOSIT – the depositary shall not deliver or return the thing to any one except
to the person who has administration of the depositor’s property and rights.

XXI. IN WHAT PLACE SHALL THE THING BE RETURNED

(1) Place designated in the contract of deposit

(2) If no place is designated, in the place where the things may be, even if this
place be different from the place of deposit. But there must be no bad faith
on the part of the depositary in changing the place.

Expenses for Transportation – shall be borne by the depositor

XXII. TIME TO RETURN THING DEPOSITED – the thing deposited must be returned
upon demand – whether or not a period is fixed for the return. The reason for this
is that the term or period if agreed upon, is for the benefit of the depositor.
Hence, the depositor can always seek the return of the thing at any time.

-However, if the deposit is for compensation, the depositary must still be paid
for the services

EXCEPTION TO “RETURN UPON DEMAND:”

(1) Thing in possession of the depositary is subject to writ of attachment;

(2) There is an opposition to return of the thing of the depositor and the
depositary is duly notified thereof;
(3) There is an opposition to the removal of the thing deposited and the
depositary is duly notified thereof;
(4) The thing is stolen and the period of 30 days from notice to the true owner for
him to claim it had not yet lapsed.

XXIII. GRATUITOUS DEPOSIT – not for valuable consideration

- The depositary may demand that the thing be retrieved by the depositor before
the lapse of the period of deposit

IN CASE OF DEPOSITOR’S REFUSAL TO ACCEPT THE THING – the depositary

may resort to judicial consignation to be relieved from responsibility

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
DEPOSIT FOR VALUABLE CONSIDERATION – unless the reason for not
continuing with deposit constitutes a force majeure, the depositary cannot just
return the thing until the arrival of the period designated in the contract.

XXIV. NO LIABILITY FOR LOSS DUE TO FORCE MAJEURE OR GOVERNMENT ORDER

General Rule: If the thing deposited is lost/confiscated by the government,

depositary is NOT liable for failure to return the thing upon demand of the
depositor.

- If the depositary had received money or an equivalent thing for the property, ge
must deliver the same to the depositor, for that belongs to the latter.

XXV. DEPOSITARY HAS DIED AND LEFT HEIRS WHO TOOK POSSESSION OF THE
THING IN THE CONCEPT OF AN OWNER AND SOLD IT IN GOOD FAITH TO A
THIRD PERSON

- The heirs must return the purchase price received to the depositor; If the buyer
has not yet paid the price, the right of action must be assigned to the
depositor.

IF HEIRS IN BAD FAITH:

(1) The depositor may sue them for damages

(2) The depositor may seek annulment of contract of sale on the basis of fraud
(3) File a criminal case for estafa

XXVI. OBLIGATIONS OF THE DEPOSITOR

(1) DEPOSIT IS FOR COMPENSATION – the depositor is NOT required to pay the
depositary for the latter’s expenses for the preservation of the property
(necessary expenses)

(2) DEPOSIT IS GRATUITOUS – the depositor must reimburse the depositary for
the latter’s expenses incurred for the preservation of the thing deposited

USEFUL AND LUXURIOUS EXPENSES NOT INCLUDED – the depositor is

under no obligation to reimburse the depositary for useful and luxurious
expenses

XXVII. DEPOSITOR LIABLE FOR DAMAGES/LOSSES SUFFERED BY DEPOSITARY – If

the depositary suffers loss/damage from the character of the thing deposited,
the depositor is liable therefor and must reimburse the depositary for such
loss/damage.

EXCEPTIONS:

(1) The depositor was not aware of such character at the time of deposit
(2) The depositor was not expected to know such dangerous character
(3) The depositor has notified the depositary of such character
(4) The depositary was independently aware of it without need of advice from
depositor

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
XXVIII. RIGHT OF DEPOSITARY TO RETAIN THE THING

- If the depositary has not been paid by the depositor for what may be due to
him, he may retain the thing deposited until he is fully reimbursed.

XXIX. GROUNDS FOR EXTINGUISHMENT OF DEPOSIT

(1) Upon loss or destruction of the thing

(2) In case of gratuitous deposit, upon the death of either the depositor or the
depositary

Others:

- Expiration of the period agreed upon

- Demand at will of the depositor
- Mutual withdrawal from contract
- Fulfillment of the purpose of the deposit
- Fulfillment of the resolutory condition agreed upon

XXX. NECESSARY DEPOSIT - not made by will of the parties but by force of law

(1) When it is made in compliance with a legal obligation

(2) When it takes place on the occasion of any calamity

Governing rules:

(1) Deposit made in compliance with a legal obligation – governed by the law
establishing it

(2) Deposit on the occasion of a calamity – governed by the provisions concerning

voluntary deposit

XXXI. DEPOSIT OF TRAVELER’S EFFECTS; NATURE

- The term traveler = guests

- Keepers of hotels/inns have the obligations imposed to depositaries with
respect to the effects/belongings of their guests, provided:

(1) Notice was given to them or their employees of the presence of

effects/belongings; and

(2) Guests must observe the precautions prescribed by the hotel/inn keeper.

XXXII. LIABILITY OF HOTEL-KEEPER FOR VEHICLE, ANIMALS, AND ARTICLES

- The protection and safety of the above when have been introduced or placed
in the annexes of the hotel is also within the responsibility of the hotel-keeper

XXXIII. RESPONSIBILITY OF HOTEL-KEEPERS

- A hotel-keeper is liable for damages arising from the loss of or injury to the
personal effects of guests caused by:

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
(1) The negligence of its servants
(2) Loss/damage due to strangers

- There is no liability when loss is due to force majeure (acts of man)/ fortuitous
event (acts of God)

XXXIV. THEFT/ROBBERY COMMITTED IN A HOTEL ROOM, NOT A FORCE MAJEURE – If

the loss of the thing is due to act of a theft/robber, the hotel-keeper is liable.

- However, if the theft/robber used arms (like knife/gun) and irresistible force,
there is deemed a force majeure for which the hotel-keeper is rendered free
from liability.

- What if theft/robbery is committed by an employee? Article 2000 will apply,

meaning hotel-keeper is liable.

XXXV. LOSSES NOT CHARGEABLE TO HOTEL-KEEPERS

(1) Acts of guest’s employees

(2) Acts of guest’s family
(3) Acts of guest’s servants/visitor
(4) Character of the thing of the guests

XXXVI. POSTING OF EXCULPATORY NOTICES

- Notices posted in the hotel that the hotel-keeper is not liable for articles
brought by the guest/traveler cannot free the hotel-keeper from responsibility
for loss/damage

XXXVII. RIGHT TO RETAIN GIVEN TO HOTEL KEEPER

- If the guest who checked-in has brought things/belongings into the hotel and
does not pay the hotel bills, the hotel-keeper has the right to retain said
things/belonging as security for payment

- Does the right to retain = right to sell?

XXXVIII. GUARANTY AND SURETYSHIP

GUARANTY - A contract where 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.

SURETYSHIP – A contract where a person binds himself solidarily with the

principal debtor.

GUARANTY v. SURETYSHIP

GUARANTY SURETYSHIP
Liability depends on an independent Surety assumes liability as a regular
agreement to pay the obligation of party to the contract
the principal if he fails to do so
Guarantor is secondarily liable Surety is primarily liable

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Guarantor binds himself to pay if the Surety undertakes to pay if principal
principal cannot pay does not pay.
Insurer of solvency of debtor Insurer of the debt
Guarantor can avail of the benefit of Surety CANNOT avail of the benefit of
excussion and division in case excussion and division
creditor proceeds against him

SIMILARITY BETWEEN GUARNTY AND SURETYSHIP

- Both guarantor and surety promise or undertake to answer for the debt,
default, or miscarriage of another person.

XXXIX. CHARACTERISTICS OF A CONTRACT OF GUARANTY

(a) UNILATERAL – The contract of guaranty may be undertaken without the

knowledge of the principal debtor. It exists for the benefit of the creditor and
not for the benefit of the principal who is not a party to a contract of guaranty.

- The contract is unilateral because what arises therefrom are solely obligations
on the part of the guarantor with relation to the creditor, although its
fulfillment or consummation gives rise to obligation on the part of the person
guaranteed with respect to the guarantor.

(b) GRATUITOUS – A guaranty is gratuitous unless there is stipulation to the

contrary (Art. 2048, NCC).

- A guaranty or surety agreement is regarded valid despite the absence of any

direct consideration received by the guarantor or surety.

XL. KINDS OF GUARANTY

General Classification

(a) Personal – where an individual personally assumes the fulfillment of the

principal obligation of the debtor.
(b) Real – where a property whether movable or immovable is formally
committed to answer for the principal obligation.

As to its origin

(a) Conventional – constituted by agreement of the parties

(b) Legal – imposed by virtue of a provision of law
(c) Judicial – required by a court to guarantee the eventual right of the parties in
a case

As to consideration

(a) Gratuitous – The guarantor does not receive any price or remuneration for
acting as such

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
(b) Onerous – One where the guarantor receives valuable consideration for his
guaranty.

As to person

(a) Single – It is constituted solely to guarantee or secure performance by the

debtor of the principal obligation
(b) Double or sub-guaranty – It is constituted to secure the fulfillment of the
obligation of a guarantor by a sub-guarantor

As to scope and extent

(a) Definite – One where the guaranty is limited to the principal obligation only,
or to a specific portion thereof
(b) Indefinite or Simple – one where the guaranty included all the accessory
obligations of the principal (e.g. costs)

XLI. OBLIGATIONS THAT MAY BE SECURED BY A CONTRACT OF GUARANTY

(1) Valid obligations

(2) Voidable obligations, unless it is annulled by proper action in court
(3) Unenforceable obligations
(4) Natural obligations – when the debtor himself offers a guaranty for his natural
obligation, he impliedly recognizes his liability, thereby transforming a natural
obligation to a civil one.
(5) Conditional obligations - only in case of suspensive condition because upon
its happening, it gives rise to the principal and hence, gives rise also to
accessory obligations.

GUARANTY FOR PRESENT AND FUTURE DEBTS

There can be a guaranty for:

(a) Present debts

(b) Future debts even if the amount is not yet known

XLII. VALIDITY OF THE PRINICIPAL CONTRACT – A valid principal obligation is

necessary in a contract of guaranty since guaranty is an accessory contract. It is
an indispensable condition for its existence that there must be a principal
obligation.

- Hence, if the principal obligation is void, a contract of guaranty is also void.

XLIII. STATUTE OF FRAUD IN A CONTRACT OF GUARANTY – A contract of guaranty

must be expressed and in writing, otherwise, it is unenforceable unless it is
ratified. It need not be in a public instrument.

- The Statute of Frauds does not require that the contract of guaranty itself be in
writing. What it requires to be in writing for the contract of guaranty to be

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
enforceable is the undertaking or the special promise of guarantor, which
must be signed by him.

XLIV. ACCEPTANCE OF THE CREDITOR IN A CONTRACT OF GUARANTY

General Rule: The acceptance of the creditor is NOT essential in a contract of

guaranty

Exception: When there is a mere offer of a guaranty or a conditional guaranty

wherein the obligation does not become binding until it is accepted by the
creditor and notice of such acceptance is given to the guarantor.

XLV. PARTIES TO A CONTRACT OF GUARANTY

(a) Guarantor – the person who is bound to another for the fulfillment of a
promise or undertaking of a third person
(b) Creditor

QUALIFICATIONS OF A GUARANTOR

(1) Possesses integrity

(2) Capacity to bind himself
(3) Has sufficient property to answer for the obligation which he guarantees

MARRIED WOMAN AS A GUARANTOR

General rule: A married woman can be a guarantor without the consent of her
husband but binds only her separate property

Exceptions:

(a) If with her husband’s consent, it binds the community or conjugal

partnership property
(b) Without the husband’s consent, in cases provided for by law, such as when
the guaranty has redounded to the benefit of the family.

XLVI. RIGHTS OF A THIRD PERSON (GUARANTOR or SURETY) WHO PAYS FOR THE
DEBT GUARANTEED OR SECURED

(1) If payment is made WITHOUT the knowledge or AGAINST THE WILL of the
debtor:

(a) The guarantor can recover only insofar as the payment has been
beneficial to the debtor
(b) Guarantor cannot compel the creditor to subrogate him in his rights

(2) If payment is made WITH knowledge or consent of the debtor – the guarantor
is subrogated to ALL the rights which creditor had against the debtor.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale

XLVII. EXTENT OF GUARANTOR’S LIABILITY

(1) Where guaranty is DEFINITE – it is limited in whole or in part to the

PRINICIPAL DEBT to the exclusion of accessories.

(2) Where the guaranty is INDEFINITE or SIMPLE – It shall comprise not only the
PRINCIPAL OBLIGATION but also its ACCESSORIES, including judicial costs.

XLVIII. EFFECT IN CASE OF DEATH OF A PARTY

(1) Guarantor’s death – His heirs will still be liable TO THE EXTENT OF THE
VALUE OF THE INHERITANCE because the obligation is not purely personal
and is therefore transmissible (Estate of Hemady v. Luzon Surety & Ins. Co.,
G.R. No. L08437, 28 Nov 1956)

(2) Debtor’s death – his obligation will survive. His estate will be answerable. If
the estate has no sufficient assets, the guarantor shall be liable.

XLIX. BENEFIT OF EXCUSSION – a right by which the guarantor cannot be compelled

to pay the creditor unless the latter has exhausted all the properties of the
principal debtor and has resorted to all legal remedies against such debtor.

Requisites of benefit of exhaustion or excussion:

(a) The guarantor must set up the right of excussion against the creditor upon
the latter’s demand from him; and

(b) He must point out to the creditor the available property of the debtor which is
not exempted from execution and is found in the Philippine territory.

L. RIGHT OF INDEMNITY AND REIMBURSEMENT OF THE GUARANTOR WHO

PAID THE DEBT

General Rule: The guarantor who pays for a debtor must be indemnified by the
latter.

Exceptions:

(1) Guaranty is constituted without the knowledge or against the will of the
debtor.

(2) Payment by third persons who does not intend to be reimbursed; and

(3) If the guarantor has paid without notifying the debtor and the latter not being
aware of the payment, repeats it, the guarantor has no remedy against the
debtor, but only against the creditor.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
EXCEPTION TO THE EXCEPTION:

(1) In case of gratuitous guaranty

(2) If the guarantor was prevented by the fortuitous event from advising the
debtor of the payment; and

(3) The creditor becomes insolvent, the debtor shall reimburse the guarantor
for the amount paid.

THE GUARANTOR IS ENTITLED TO BE REIMBUSED BY THE DEBTOR FOR:

(a) Total amount of the debt paid;

(b) Legal interest from the time payment was made known to the debtor (even
though it did not earn interest for the creditor);
(c) Expenses incurred after notifying debtor that demand to pay was made upon
him; and
(d) Damages in accordance with law, if they are due.

LI. RIGHT OF SUBROGATION

- The guarantor has the right of subrogation after the payment of the debt is
made to the creditor. The guarantor is subrogated to all the rights which the
creditor had against the debtor.

- If the guarantor pays without notice to the debtor, the debtor may interpose
against the guarantor defenses available to the debtor as against the creditor
at the time payment was made.

LII. PAYMENT OF THE GUARANTOR BEFORE MATURITY

General Rule: The guarantor cannot seek reimbursement from the debtor until
expiration of the period stipulated. The guarantor must wait. For being subsidiary
in character, the guaranty is not enforceable until the debt has become due.

Exception: If the premature payment was ratified by the debtor, he can now be
compelled to reimburse.

LIII. RIGHT OF THE GUARANTOR TO PROCEED AGAINST DEBTOR BEFORE

PAYMENT

General Rule: Guarantor cannot proceed against the principal debtor before
having paid the creditor

Exceptions:

(1) When he is sued for payment

(2) In case of insolvency of the principal debtor

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
(3) When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired
(4) When the debt has become demandable by reason of the expiration of the
period of payment
(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
(6) If there are reasonable grounds to fear that the principal debtor intends to
abscond
(7) If the principal debtor is in imminent danger of becoming insolvent

LIV. SUB-GUARANTY

- Double or sub-guaranty is one constituted to guarantee the obligation of the

guarantor

ENTITLEMENT TO RIGHT OF EXCUSSION

- A sub-guarantor is entitled to the right of excussion both with respect to the

guarantor and to the principal debtor.

LV. CONTINUING GUARANTY/SURETYSHIP – one which covers all transactions,

including those arising in the future, which are within the description or
contemplation of the contract of guaranty until the expiration or termination
thereof.

GUARANTY OF FUTURE DEBTS – Future debts, even if the amount is not yet
known, may be secured by a guarantee. However, there can be no claim against
the guarantor until the amount of the debt is ascertained or fixed and
demandable.

LVI. EXTINGUISHMENT OF GUARANTY

Two Causes of Extinguishment of Guaranty

(1) Direct – when the guaranty itself is extinguished, independently of the

principal obligation; or

(2) Indirect – when the principal obligation ends, the accessory obligation of
guaranty naturally ends.

Grounds for Extinguishing a Contract of Guaranty

(1) Principal obligation is extinguished

(2) Same causes as all other obligations

a. Payment or performance
b. Loss of the thing due
c. By condonation or remission of debt

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
d. By confusion or merger of the rights of the creditor and debtor
e. By compensation
f. By novation
g. Other causes such as annulment, rescission, fulfillment of resolutory
condition and prescription

(3) Release by acceptance of property by the creditor – if the creditor accepts

payment in form of immovable or movable property, there is a novation on
the subject matter

(4) Release in favor of one of the guarantors, without consent of the others,
benefits all to the extent of the share of the guarantor to whom it has been
granted (Art. 2078)

(5) Extension granted to debtor by creditor without consent of the guarantor

(Art. 2079)

(6) When the guarantors through some act of the creditor cannot be
subrogated to the rights, mortgages, and preferences of the latter (Art.
2080).

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