Demand Letter Format for Loan Guarantors in the Philippines: A Comprehensive Guide

Introduction

In the Philippine legal system, a demand letter serves as a crucial preliminary step in enforcing contractual obligations, particularly in cases involving loans and guaranties. Under the Civil Code of the Philippines (Republic Act No. 386), guaranty is defined as a contract whereby a person (the guarantor) binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter fails to do so (Article 2047). When a borrower defaults on a loan, the creditor may turn to the guarantor for payment. A demand letter formalizes this request, providing the guarantor with notice of the default and an opportunity to settle the debt before escalation to litigation.

This article explores the intricacies of drafting a demand letter specifically for loan guarantors in the Philippine context. It covers the legal foundations, essential elements, standard format, potential defenses available to guarantors, procedural considerations, and best practices. While demand letters are not mandatory in all cases, they are often required to establish the creditor's good faith and to trigger certain legal consequences, such as the accrual of interest or the running of prescription periods.

Legal Basis for Demand Letters in Guaranty Contracts

The Philippine legal framework for guaranties is primarily governed by the Civil Code, supplemented by jurisprudence from the Supreme Court and relevant statutes like the Negotiable Instruments Law (Act No. 2031) for promissory notes tied to loans.

Obligation to Demand Payment: In a contract of guaranty, the guarantor is subsidiarily liable, meaning the creditor must first exhaust remedies against the principal debtor unless the guaranty is solidary (Article 2059). A demand letter to the guarantor typically follows a prior demand on the debtor. However, if the guaranty waives the benefit of excussion (the right to require exhaustion of the debtor's assets), the creditor can proceed directly against the guarantor (Article 2059).
Extrajudicial Demand Requirement: Article 1168 of the Civil Code states that in obligations to pay money, demand is necessary for delay (mora) to set in, which triggers default interest. Supreme Court rulings, such as in Development Bank of the Philippines v. Licuanan (G.R. No. 150097, February 26, 2007), emphasize that a formal demand is essential to hold the obligor in default, especially in loan agreements.
Prescription and Statute of Limitations: Actions based on written contracts prescribe in 10 years (Article 1144). A demand letter interrupts this period, restarting the clock (Article 1155). For guarantors, the prescription period runs from the time the cause of action accrues, often upon the debtor's default and subsequent demand.
Consumer Protection Aspects: If the loan involves consumer credit, provisions under the Truth in Lending Act (Republic Act No. 3765) and the Consumer Act of the Philippines (Republic Act No. 7394) may apply, requiring transparency in disclosures. Demand letters must avoid unconscionable terms or harassment, as prohibited by the Anti-Debt Collection Abuse Law (though not yet enacted, similar protections exist under general civil law).

In practice, demand letters are tools for amicable settlement, aligning with the policy of alternative dispute resolution under Republic Act No. 9285.

Essential Elements of a Demand Letter for Loan Guarantors

A well-drafted demand letter must include specific components to be legally effective. Omission of key details can weaken the creditor's position in court. The following are indispensable:

Identification of Parties:
- Creditor's full name, address, and contact details.
- Guarantor's full name and address.
- Reference to the principal debtor and the original loan agreement.
Recital of Facts:
- Details of the loan: amount, date of agreement, interest rate, maturity date, and any collateral.
- Evidence of default: missed payments, bounced checks, or other breaches.
- Proof of prior demand on the debtor, if applicable.
Demand for Payment:
- Clear statement of the amount due, including principal, interest, penalties, and attorney's fees (if stipulated).
- Deadline for payment, typically 10-30 days.
- Mode of payment (e.g., bank transfer, check).
Consequences of Non-Compliance:
- Warning of legal action, such as filing a collection suit, foreclosure of mortgage (if secured), or referral to credit bureaus.
- Potential for additional costs, like litigation expenses.
Legal References:
- Citation to relevant Civil Code articles or contract clauses to bolster the demand.
Signature and Notarization:
- Signed by the creditor or authorized representative (e.g., lawyer).
- Notarization is optional but recommended for evidentiary value, as it creates a public document under the Rules on Notarial Practice.

Standard Format of a Demand Letter

Demand letters in the Philippines follow a formal business letter format, often on letterhead. Below is a structured template, adaptable to specific circumstances:

[Creditor's Letterhead]
[Creditor's Address]
[City, Province, ZIP Code]
[Date]

[Guarantor's Full Name]
[Guarantor's Address]
[City, Province, ZIP Code]

Subject: Demand for Payment as Guarantor under Loan Agreement Dated [Date of Loan]

Dear [Guarantor's Name],

This letter serves as a formal demand for payment in your capacity as guarantor for the loan extended to [Principal Debtor's Name] ("Debtor") pursuant to the Loan Agreement dated [Date], with a principal amount of [Amount in Words and Figures] Philippine Pesos (PHP [Amount]), bearing interest at [Rate]% per annum, and maturing on [Maturity Date].

As guarantor, you executed a Deed of Guaranty on [Date of Guaranty], wherein you bound yourself subsidiarily [or solidarily, as applicable] to fulfill the Debtor's obligations in the event of default. Regrettably, the Debtor has defaulted by failing to pay the installments due on [Specify Dates of Missed Payments], resulting in an outstanding balance of PHP [Total Amount Due], broken down as follows:

Principal: PHP [Amount]
Accrued Interest: PHP [Amount]
Penalties: PHP [Amount]
Other Charges: PHP [Amount]

Despite prior demands made on the Debtor via letter dated [Date of Prior Demand], no payment has been received. In accordance with Article 2047 et seq. of the Civil Code, we now call upon you to settle the full amount within [Number] days from receipt hereof. Payment should be made via [Specify Method, e.g., bank deposit to Account No. [Details] at [Bank Name]].

Failure to comply will compel us to pursue all available legal remedies, including but not limited to filing a civil action for collection of sum of money before the appropriate court, which may result in attachment of your properties and additional liability for costs and attorney's fees equivalent to [Percentage]% of the amount due, as provided in the agreement.

We urge you to address this matter promptly to avoid escalation. Should you require any clarification or wish to discuss settlement terms, please contact [Creditor's Contact Person] at [Phone/Email].

Sincerely,

[Creditor's Full Name]
[Position, if applicable]
[Signature]

[Notary Public, if notarized]

Variations and Special Considerations

Solidary vs. Subsidiary Guaranty: In solidary guaranties (Article 2047), the demand can be simultaneous with or independent of the debtor. Adjust the language accordingly.
Secured Guaranties: If backed by real estate mortgage or chattel mortgage, reference Republic Act No. 3135 (Real Estate Mortgage Law) and include threats of foreclosure.
Corporate Guarantors: For corporations, address to the board or authorized officer, and verify compliance with the Revised Corporation Code (Republic Act No. 11232) regarding ultra vires acts.
Multiple Guarantors: Send individual letters or a joint one, specifying joint and several liability if applicable.
Electronic Demands: Under the Electronic Commerce Act (Republic Act No. 8792), email demands are valid if acknowledged, but registered mail with return receipt is preferred for proof.

Potential Defenses and Responses for Guarantors

Guarantors may challenge demands on grounds such as:

Extinguishment of Principal Obligation: If the debt is paid, novated, or condoned (Article 2076).
Benefit of Excussion: Unless waived, the creditor must prove exhaustion of debtor's assets (Article 2059).
Fraud or Vitiated Consent: If the guaranty was induced by misrepresentation (Article 1390).
Prescription: If more than 10 years have lapsed without interruption.
Usurious Interest: Rates exceeding those allowed by the Bangko Sentral ng Pilipinas circulars.

Creditors should anticipate these and include supporting documents (e.g., promissory notes, payment records) with the letter.

Procedural Steps After Sending the Demand

Proof of Service: Use registered mail, personal delivery with acknowledgment, or email with read receipt to establish receipt date.
Follow-Up: If no response, send a final demand before filing suit.
Litigation: File in the Regional Trial Court or Metropolitan Trial Court based on amount (Batas Pambansa Blg. 129). Small claims for amounts up to PHP 1,000,000 (as of A.M. No. 08-8-7-SC amendments).
Alternative Dispute Resolution: Propose mediation under the Alternative Dispute Resolution Act.

Best Practices and Common Pitfalls

Clarity and Conciseness: Avoid ambiguous language to prevent misinterpretation.
Professional Tone: Maintain politeness to encourage settlement.
Legal Review: Consult a lawyer to ensure compliance with specific contract terms.
Avoid Harassment: Do not threaten criminal action for civil debts, as this may violate anti-harassment laws.
Record-Keeping: Retain copies and proofs for court use.
Cultural Context: In the Philippines, personal relationships matter; a demand letter can strain ties, so consider negotiation first.

Common errors include incorrect computations, failure to attach evidence, or demanding without basis, which can lead to counterclaims for moral damages.

Conclusion

A demand letter for loan guarantors is more than a mere notice; it is a strategic document that sets the stage for enforcement while promoting resolution. By adhering to the Civil Code and jurisprudential guidelines, creditors can effectively assert their rights, and guarantors can evaluate their liabilities. In a jurisdiction emphasizing equity and good faith, such letters embody the balance between contractual enforcement and fair dealing. For complex cases, professional legal advice is indispensable to navigate nuances and avoid costly disputes.