The Concept of ‘The Suretyship’ and the Solidary Liability of the Surety
| SUBJECT: The Concept of ‘The Suretyship’ and the Solidary Liability of the Surety |
I. Introduction
This memorandum provides an exhaustive analysis of the concept of suretyship and the principle of solidary liability as applied to a surety under Philippine civil law. The discussion is anchored primarily on the provisions of the Civil Code of the Philippines, specifically Title XVI, Chapter 3, Sections 1-6, from Article 2047 to Article 2084. The objective is to delineate the nature of the contract, the rights and obligations of the parties, the conditions for liability, and the critical distinctions between a suretyship and related contracts. A central focus is the doctrine of solidary liability and its implications for the creditor, principal debtor, and surety.
II. Definition and Nature of Suretyship
A suretyship is an accessory contract whereby a party, called the surety, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. It is governed by Article 2047 of the Civil Code, which states that by a suretyship, a person binds himself to the creditor to comply with the obligation of the principal debtor, if the latter should fail to do so. The contract is quintessentially accessory; it cannot exist without a valid principal obligation. It is also subsidiary or conditional in nature, as the surety’s obligation to pay arises only upon the default of the principal debtor. The suretyship is consensual and generally unilateral, creating obligations primarily for the surety.
III. Essential Elements and Formal Requisites
The essential elements of a suretyship are: (a) a valid principal obligation; (b) an agreement that the surety will be answerable for the principal debtor’s obligation; and (c) the consent of the surety. While no specific form is generally required for its validity, Article 1403(2)(b) of the Civil Code (the Statute of Frauds) provides that a special promise to answer for the debt, default, or miscarriage of another must be in writing, subscribed by the party charged, or his agent. Therefore, to be enforceable, a suretyship agreement must be evidenced by some note or memorandum in writing. The suretyship may secure both existing and future obligations, provided they are determinate or determinable.
IV. Distinction from Similar Contracts
It is crucial to distinguish suretyship from other security arrangements.
Guaranty vs. Suretyship: Often used interchangeably, Philippine jurisprudence distinguishes them. A guaranty is also an accessory promise to answer for the debt of another, but the liability of a guarantor is typically more explicitly subsidiary. The creditor must generally exhaust the property of the principal debtor before proceeding against the guarantor (Article 2058). In suretyship, the liability, especially when expressly stipulated as solidary*, is more direct.
Indorsement of a Negotiable Instrument: An indorser who signs without qualification guarantees payment, but the liability is governed by the Negotiable Instruments Law* and requires presentment, dishonor, and notice of dishonor.
Warranty*: A warranty assures the quality or title of a thing sold, not the performance of another’s personal obligation.
Solidary Obligation: A solidary obligation under Article 1207 involves two or more debtors bound to the same obligation where each is liable for the entire obligation. A surety may be made solidarily liable with the principal debtor, but the accessory* nature of his obligation remains.
V. The Principle of Solidary Liability in Suretyship
The default rule under the Civil Code is that the surety’s liability is subsidiary. Article 2047, paragraph 2, however, provides a critical exception: “A suretyship may be constituted to guarantee the performance of a solidary obligation. In such a case, the provisions of Section 4, Chapter 3, Title XVI of this Book shall be observed. If the suretyship is entered into without the knowledge or against the will of the principal debtor, the provisions of Article 2059 shall apply.” More importantly, the liability of the surety becomes solidary with that of the principal debtor when the contract expressly states so, or when the surety binds himself as a solidary co-debtor. The phrase “joint and several” in a contract is construed as imposing solidary liability. When the surety is solidarily liable, the creditor may proceed against him simultaneously with, or independently of, the principal debtor. The creditor is not required to exhaust the assets of the principal debtor first. This transforms the surety’s position from a secondary to a primary obligor, at the election of the creditor.
VI. Rights of the Surety
The surety possesses several rights for his protection:
Benefit of Excussion (Article 2058): The right to demand that the creditor exhaust all the property of the principal debtor first, unless he has waived it, bound himself as solidary debtor, or is a guarantor of a judicial bond*.
Benefit of Division (Article 2065): If there are two or more sureties for the same debt and same debtor, each is liable only for his proportionate share if the debt is divisible, unless solidary liability* is stipulated.
Right of Reimbursement (Article 2066): After paying the debt, the surety is entitled to recover from the principal debtor* the full amount paid, including legal interest and necessary expenses.
Right of Subrogation (Article 2067): Upon payment, the surety is subrogated to all the rights and remedies the creditor had against the principal debtor*. He may also proceed against co-sureties for their share.
Right to be Notified of Principal Debtor’s Default*: While not always a condition precedent, notice may be required depending on the terms.
Right to Set-Up Defenses: The surety may raise all defenses inherent to the debt (e.g., nullity, payment, prescription) and those personal to him (e.g., his own incapacity, fraud in the execution of the suretyship), but not those purely personal to the principal debtor*.
VII. Comparative Table: Suretyship vs. Solidary Obligation vs. Guaranty
| Aspect | Suretyship (with Solidary Liability) | Simple Solidary Obligation | Guaranty (Subsidiary) |
|---|---|---|---|
| Nature of Contract | Accessory contract; depends on a principal obligation. | Principal obligation itself; may be original or accessory. | Accessory contract; depends on a principal obligation. |
| Basis of Liability | Arises from a promise to answer for another’s default. | Arises from being a co-obligor in the same promise. | Arises from a promise to answer for another’s default. |
| Primary Character of Liability | Primary and solidary if expressly stipulated; otherwise, subsidiary. | Always primary and solidary among debtors. | Always subsidiary and not solidary unless expressly stipulated. |
| Creditor’s Recourse | May proceed directly against the surety without first exhausting the principal debtor’s assets if liability is solidary. | May proceed against any one, some, or all solidary debtors simultaneously. | Must generally exhaust the principal debtor’s assets first (benefit of excussion). |
| Effect of Debtor’s Defenses | Surety can raise defenses pertaining to the validity of the principal debt. | Each solidary debtor can raise defenses arising from the nature of the obligation or common to all co-debtors. | Guarantor can raise defenses pertaining to the validity of the principal debt and the benefit of excussion. |
| Right of Reimbursement | Surety has a right of reimbursement from the principal debtor after payment. | Paying solidary debtor has a right of reimbursement from co-debtors for their shares. | Guarantor has a right of reimbursement from the principal debtor after payment. |
VIII. Defenses and Extinguishment of Liability
The liability of a surety may be extinguished or defended against on several grounds:
Extinguishment of the principal obligation (e.g.*, payment, novation, compensation, condonation).
Any act or omission of the creditor that impairs the surety’s recourse against the principal debtor (e.g., material alteration of the principal contract without the surety’s consent, release of security, unwarranted extension of time for payment to the principal debtor without the surety’s consent) may result in the discharge of the surety* to the extent of the prejudice caused.
* Prescription of the principal obligation.
Waiver by the creditor of his rights against the surety*.
The surety’s* own defenses, such as incapacity, vitiated consent, or fulfillment of a resolutory condition.
It is important to note that the death of the principal debtor does not extinguish the obligation nor the suretyship, as the obligation passes to his estate.
IX. Judicial Interpretation and Doctrines
Philippine courts have consistently upheld the binding nature of suretyship agreements. The Supreme Court has ruled that a suretyship is a contractual relation and the parties are bound by its stipulations, provided they are not contrary to law, morals, good customs, public order, or public policy. The stipulation for solidary liability is strictly construed against the creditor; it must be clear and express. However, once established, the courts enforce it, making the surety “as liable as the principal debtor.” The surety is considered a favored debtor, and the law protects him by providing the benefits of excussion and division. These benefits, however, are deemed waived if the surety binds himself as a solidary co-debtor.
X. Conclusion
In summary, a suretyship under Philippine civil law is an accessory and typically subsidiary contract. Its most significant feature is the potential for the surety to assume solidary liability with the principal debtor, which is primarily a matter of contractual stipulation. When such solidary liability is expressly undertaken, the surety is elevated to the status of a primary obligor, and the creditor enjoys a direct and immediate right of action against him without need for prior recourse against the principal debtor. Despite this, the intrinsic accessory nature of the contract means the surety retains vital rights, such as reimbursement and subrogation, against the principal debtor upon payment. Practitioners must carefully examine the contract language to determine whether the liability undertaken is subsidiary or solidary, as this distinction fundamentally shapes the rights and remedies available to all parties involved.