| SUBJECT: The Rule on ‘Aval’ or ‘Guaranty’ in Negotiable Instruments |
I. Introduction
This memorandum exhaustively examines the rule on aval or guaranty in negotiable instruments under Philippine mercantile law. The primary legal framework is found in the Negotiable Instruments Law (Act No. 2031), specifically Sections 63 to 72, which govern contracts of guaranty and suretyship on negotiable paper. The concept of aval, while a term of art in international commerce (particularly from the Geneva Uniform Law on Cheques and Bills of Exchange), is not expressly used in the Philippine statute. However, its functional equivalent-a guaranty written on the instrument itself-is fully recognized and regulated. This memo will delineate the nature, requisites, forms, rights, liabilities, and discharge of parties under a contract of guaranty on a negotiable instrument, with particular attention to the distinctions between general guarantors and indorsers.
II. Definition and Nature of the Contract
A contract of guaranty on a negotiable instrument is an accessory, collateral undertaking by which a person, called the guarantor, binds himself to the holder of the instrument to answer for the payment of the instrument if the primary party (the accommodated party) does not pay. It is governed by the provisions on guaranty in the Negotiable Instruments Law, which are special provisions that take precedence over the general rules on guaranty found in the Civil Code. The liability of a guarantor is secondary and arises only upon the default of the principal debtor. The contract is strictly construed in favor of the guarantor, as the law considers it a strictissimi juris undertaking.
III. Requisites of a Valid Guaranty on the Instrument
For a guaranty to be valid and enforceable against a party on a negotiable instrument, the following requisites must concur:
IV. Form and Interpretation of the Guaranty
The guaranty may be written in any form, such as “Payment guaranteed,” “Collection guaranteed,” or “I guarantee payment.” The phrase used is critical as it defines the guarantor’s liability and the conditions for it.
Payment Guaranteed: Under Section 65, a guaranty of “payment” means the guarantor undertakes that the instrument will be paid at maturity, and the holder may proceed immediately against the guarantor upon default, without being required to first exhaust his remedy against the primary debtor or to give notice of dishonor. This makes the guarantor virtually a co-maker*.
Collection Guaranteed: Under Section 66, a guaranty of “collection” means the guarantor undertakes to pay only if the instrument is not paid after the holder has exhausted his legal remedies against the maker, acceptor, and all other prior parties by due diligence (e.g., suit and execution returned unsatisfied). The holder must also give the guarantor* notice of dishonor. This is a more conditional undertaking.
The absence of qualifying words renders the guaranty one of “payment.”
V. Rights and Liabilities of the Guarantor
The guarantor is liable to the holder to the same extent as the party for whom he became guarantor. If he guarantees payment for the maker, his liability is co-extensive with that of the maker. His liability is triggered according to the type of guaranty given (payment or collection). Upon paying the holder, the guarantor is subrogated to the rights of the holder against the party for whom he guaranteed and all prior parties. He is entitled to reimbursement from the principal debtor. The guarantor may also avail himself of all defenses that are available to the principal debtor, except those purely personal to the debtor (e.g., the debtor’s incapacity due to insanity). The guarantor is not discharged by the holder’s mere delay in presenting the instrument or giving notice of dishonor, unless the delay causes material prejudice to the guarantor.
VI. Distinction: Guarantor vs. Indorser
This is a crucial distinction under the Negotiable Instruments Law. An indorser, by the mere act of indorsement, engages that upon due presentment and dishonor, and upon receiving proper notice, he will pay the instrument. His liability is conditional upon these procedures for dishonor. A general guarantor (one who signs without reference to a specific prior party) is liable immediately upon the default of the principal debtor, regardless of notice of dishonor, if he guaranteed “payment.” The indorser warrants the genuineness of prior signatures; the guarantor does not, unless he is also an indorser. An accommodation party (one who signs for the purpose of lending his name to another) is treated as a surety under the law and is liable on the instrument to a holder for value, notwithstanding that the holder knew him to be only an accommodation party.
VII. Comparative Table: Key Parties and Liabilities on a Negotiable Instrument
| Party | Basis of Liability | Condition Precedent to Holder’s Action | Notice of Dishonor Required? | Primary Defense Against Holder |
|---|---|---|---|---|
| Maker / Acceptor | Primary and absolute obligation to pay. | Instrument must be due and payable. | No. | Real defenses (e.g., forgery, material alteration, infancy, duress affecting contract). |
| Indorser | Secondary; contract of indorsement under Section 66 of the NIL. | Due presentment to primary party, dishonor, and timely notice of dishonor. | Yes, essential to charge the indorser. | Failure of condition precedent (no presentment, dishonor, or notice); real defenses of prior parties if indorser is not a holder in due course. |
| Guarantor of Payment | Secondary but direct; contract of guaranty under Section 65 of the NIL. | Default by the principal debtor at maturity. | No, unless expressly stipulated. | Discharge of principal debtor; payment; real defenses of principal debtor (except personal incapacity). |
| Guarantor of Collection | Secondary and conditional; contract of guaranty under Section 66 of the NIL. | Exhaustion of remedies against all prior parties and notice of dishonor. | Yes, essential. | Holder’s failure to use due diligence in collection; discharge of principal debtor. |
| Accommodation Party | Statutory surety under Section 29 of the NIL; liable to a holder for value. | Default by the accommodated party. | Yes, to charge as an indorser; not if signed as maker/acceptor. | Payment by accommodated party; real defenses available to the accommodated party. |
VIII. Discharge of the Guarantor
A guarantor on a negotiable instrument may be discharged by:
IX. Aval in International Context and Philippine Application
The aval is a formal guarantee prevalent in jurisdictions following the Geneva Uniform Law. It is typically executed by writing “per aval” or similar words on the instrument, accompanied by a signature. It often guarantees payment for a specific party (e.g., “per aval for the drawer”). While the term “aval” is not used in the Negotiable Instruments Law, a guarantee written on an instrument that uses the term “aval” would be given full effect in Philippine jurisdiction as a contract of guaranty under Sections 63-72. The interpretation of its terms (whether it is for payment or collection) would follow the general principles outlined above. In cross-border transactions involving Philippine parties, an aval would be subject to Philippine law if the instrument is governed by it.
X. Conclusion and Practical Implications
The contract of guaranty on a negotiable instrument is a potent tool for securing payment, creating a secondary obligor whose liability is defined by the precise words used on the instrument. Practitioners must carefully draft the guarantee to reflect the intended undertaking-“payment guaranteed” creates an immediately actionable obligation, while “collection guaranteed” imposes conditions precedent. The distinction between a guarantor and an indorser remains vital for determining the necessary steps to enforce liability. Holders must ensure guarantees are written on the instrument itself to avail of the NIL’s provisions. While the Philippine legal system does not formally adopt the term “aval,” it recognizes and enforces its substance under the established framework for guarantees on negotiable instruments.
