Extension for payment of debt (Article 2079)

In the case of CCC INSURANCE CORPORATION v. KAWASAKI STEEL CORPORATION (G.R. No. 156162, June 22, 2015), to free the petitioner from the liabilities under the Surety and Performance Bonds, CCCIC cites Article 2079 of the Civil Code, which reads:
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein.
The aforequoted provision clearly speaks of an extension for the payment of a debt granted by the creditor to a debtor without the consent of the surety. The theory behind Article 2079 was further explained by the Supreme Court in Trade and Investment Development Corporation of the Philippines (Formerly Philippine Export and Foreign Loan Guarantee Corporation) v. Asia Paces Corporation (G.R. No. 187403, February 12, 2014), thus:
Comparing a surety's obligations with that of a guarantor, the [Supreme] Court, in the case of Palmares v. CA, illumined that a surety is responsible for the debt's payment at once if the principal debtor makes default, whereas a guarantor pays only if the principal debtor is unable to pay, viz.:
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 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. x x x.

Despite these distinctions, the Supreme Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., and later in the case of Security Bank, held that Article 2079 of the Civil Code, which pertinently provides that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty," equally applies to both contracts of guaranty and suretyship. The rationale therefor was explained by the High Court as follows:

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety's consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. x x x.

Applying these principles, the Highest Tribunal found in the above-cited case that the payment extensions granted by Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement did not have the effect of extinguishing the bonding companies' obligations to TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions were made without their consent. This is because Article 2079 of the Civil Code refers to a payment extension granted by the creditor to the principal debtor without the consent of the guarantor or surety. It was found by the Supreme Court that there were two sets of transactions that should be treated separately and distinctly from one another following the civil law principle of relativity of contracts "which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof."

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