ATOK FINANCE CORPORATION vs.

COURT OF APPEALS

Facts:
Private respondents Sanyu Chemical Corporation as principal and Sanyu Trading Corporation along with
individual private stockholders of Sanyu Chemical, namely, private respondents spouses Danilo E. Arrieta and
Nenita B. Arrieta, Leopoldo G. Halili and Pablito Bermundo as sureties, executed a Continuing Suretyship
Agreement in favor of Atok Finance as creditor.
On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November
1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the
amount of P105,000.00.
On 13 January 1984, Atok Finance commenced action against Sanyu Chemical. Atok Finance alleged that
Sanyu Chemical had failed to collect and remit the amounts due under the trade receivables.
The private respondents contended that the Continuing Suretyship Agreement, being an accessory
contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to
Atok Finance.
After trial, the trial court rendered a decision in favor of Atok Finance.
The Court of appeals reversed and set aside the decision of the trial court.

Issue: Whether or not the continuing suretyship is valid and thus subjecting respondents to liability.

Held: YES.
Article 2053. — A guarantee may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also
be secured.
A surety is not bound under any particular principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and
binding even before the principal obligation intended to be secured thereby is born.
Continuing surety agreements are quite common in present commercial practice. A financing company
which anticipates entering into a series of credit transactions with a particular company, requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement,
the principal places itself in a position to enter into the projected series of transactions with its creditor; with such
suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor.
The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the
liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment,
the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu Chemical,
resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other
words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and
transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms
of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents
(the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu
Chemical, by virtue of the operation of the Continuing Suretyship Agreement.

EMMANUEL C. ONGSIAKO, ET AL. vs. THE WORLD WIDE INSURANCE & SURETY CO.

Facts:
Catalina de Leon executed in favor of Augusto V. Ongsiako a promissory note in the amount of P1,200.00, payable
(90) days after date, with interest at 1 per cent per month. On the same date, a surety bond was executed by
Catalina de Leon, as principal, and the World Wide Insurance & Surety Co., Inc., as surety. As the obligation was
not paid on its date of maturity either by Catalina de Leon or by the surety, Ongsiako brought this action to recover
the same from both the principal and the surety. Judgment having been rendered for the ,plaintiff, both
defendants appealed to the court of first instance.
 The surety bond in question was executed in November 10, 1951 and among the important provisions it
contains is the following: that the principal and the surety "are held and firmly bound unto Dr. Augusto V. Ongsiako
in the sum of One Thousand Two Hundred Pesos (P1,200.00), Philippine Currency, for the payment of which well
and truly to be made, we bind ourselves . . . jointly and severally, firmly by these presents (and referring to the
Promissory Note) "whose terms and conditions are made parts hereof.' In said bond there also appears a special
condition which recites: The Liability of the World-Wide Insurance & Surety Co. Inc. under this bond will expire on
February 10, 1952.”

Issue: Whether or not Respondent Company is liable

Held: YES
The note therein referred to, on the other hand, provides that the obligation is payable ninety days from
date of issue, November 10, 1951, which means that its date of maturity is February 10, 1952. The evidence shows
that neither the principal nor the surety paid the obligation on said date of maturity and immediately thereafter
demands for payment were made upon them. Thus, it appears that as early as February 12, 1952, or two days
thereafter, the creditor wrote to the surety company a letter notifying it of the failure of its principal to pay the
obligation and requesting that it make good its guaranty under the bond, which demand was reiterated in
subsequent letters.
Respondent appealed from said judgment just to put up the additional defense that its liability under the
bond has already expired because of the condition that its liability shall expire on February 10, 1952.
Even if this were true, we consider however this stipulation as unfair and unreasonable for it practically
nullifies the nature of the undertaking assumed by appellant. It should be noted that the principal obligation is
payable ninety days from date of issue, which falls on February 10, 1952. Only on this date can demand for
payment be made on the principal debtor. If the debtor should fail to pay and resort is made to the surety for
payment on the next day, it would be unfair for the latter to allege that its liability has already expired. And yet
such is the stand taken by appellant. As the terms of the bond should be given a reasonable interpretation, it is
logical to hold that the liability of the surety attaches as soon as the principal debtor defaults, and notice thereof is
given the surety within reasonable time to enable it to take steps to protect its interest.

CITIZENS SURETY and INSURANCE COMPANY, INC. vs. COURT OF APPEALS

Facts:
The petitioner issued (2) surety bonds to guarantee compliance by the principal Pascual M. Perez
Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co.
In consideration of the issuance of the aforesaid bonds, Pascual M. Perez, in his personal capacity and as attorney-
in-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises executed on the same date
two indemnity agreements wherein he obligated himself and the Enterprises to indemnify the petitioner jointly
and severally.
In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a
collateral security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be
made to pay under the surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same day
of his stock of lumber with a total value of P400, 000.00. Subsequently, a second real estate mortgage was further
executed in favor of the petitioner to guarantee the fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with
Singer Sewing Machine Co., Ltd. Consequently, the petitioner was compelled to pay the total amount of
P144,000.00. Except for partial payments in the sum of P55,600.00 and notwithstanding several demands, Pascual
M. Perez Enterprises failed to reimburse the petitioner.
The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was
being administered by Pascual M. Perez.
Pascual M. Perez asserts that the surety bonds and the indemnity agreements had been extinguished by
the execution of the deed of assignment.
Issue: Whether or not the administrator's obligation under the surety bonds and indemnity agreements had
been extinguished by reason of the execution of the deed of assignment.

Held: NO.
It is the general rule that when the words of a contract are plain and readily understandable, there is no
room for construction thereof. However, this is only a general rule and it admits exceptions.
On its face, the document (deed of assignment) speaks of an assignment where there is a complete
conveyance of the stocks of lumber to the petitioner. However, in the light of the circumstances obtaining at the
time of the execution of said deed of assignment, we cannot regard the transaction as an absolute conveyance.
The transaction could not be dation in payment. When the deed of assignment was executed, the
obligation of the assignor to refund the assignee had not yet arisen. In other words, there was no obligation yet on
the part of the petitioner, to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date,
hence, there could not have been a dation in payment.
The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the
surety bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that
the deed of assignment was intended merely as a security for the issuance of the two bonds. Partial payments
amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under
the two surety bonds. Since later payments were made to pay the indebtedness, it follows that no debt was
extinguished upon the execution of the deed of assignment. Moreover, a second real estate mortgage was
executed. If indeed the deed of assignment extinguished the obligation, there was no reason for a second
mortgage to still have to be executed.

MARIANO LIM vs. SECURITY BANK CORPORATION

Facts:
Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types of credit
accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo for the amount
of P2,000,000.00 which is covered by a Credit Agreement/Promissory Note. Said promissory note stated that the
interest on the loan shall be 19% per annum, compounded monthly, for the first 30 days from the date thereof,
and if the note is not fully paid when due, an additional penalty of 2% per month of the total outstanding principal
and interest due and unpaid, shall be imposed.

The Continuing Suretyship executed by petitioner stipulated that:

If any of the Guaranteed Obligations is not paid or performed on due date (at stated maturity or
by acceleration), the Surety shall, without need for any notice, demand or any other act or deed,
immediately become liable therefor and the Surety shall pay and perform the same.
Guaranteed Obligations are defined in the same document as follows:
(i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which
the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as
defined hereinbelow.

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final
Demand, informing him that he was liable to pay the loan obtained by Raul and Edwina Arroyo, amounting to
P7,703,185.54. For failure of petitioner to comply with said demand, respondent filed a complaint for collection of
sum of money against him and the Arroyo spouses. Since the Arroyo spouses can no longer be located, summons
was not served on them, hence, only petitioner actively participated in the case.
After trial, the (RTC) rendered judgment against petitioner.
Petitioner appealed to the CA, but the appellate court affirmed the RTC judgment.
Issue: whether petitioner may validly be held liable for the principal debtor's loan obtained six months after the
execution of the Continuing Suretyship.

Held: YES.
Suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for
the purpose of fulfilling an obligation. A surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.
A bank or financing company which anticipates entering into a series of credit transactions with a
particular company, normally requires the projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the
projected series of transactions with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation extended to the principal
debtor.
The terms of the Continuing Suretyship executed by petitioner, are very clear. It states that petitioner, as
surety, shall, without need for any notice, demand or any other act or deed, immediately become liable and shall
pay "all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently
or hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or
indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies
under the Credit Instruments as defined hereinbelow." Such stipulations are valid and legal and constitute the law
between the parties, as Article 2053 of the Civil Code provides that "[a] guaranty may also be given as security for
future debts, the amount of which is not yet known;" Thus, petitioner is unequivocally bound by the terms of the
Continuing Suretyship.

Note: With regard to the award of attorney's fees, it should be noted that Article 2208 of the Civil Code does not
prohibit recovery of attorney's fees if there is a stipulation in the contract for payment of the same.
However, even if such attorney's fees are allowed by law, the courts still have the power to reduce the same if it is
unreasonable.
The award of attorney's fees amounting to ten percent (10%) of the principal debt, plus interest and penalty
charges, would definitely exceed the principal amount; thus, making the attorney's fees manifestly exorbitant.
Hence, we reduce the amount of attorney's fees to ten percent (10%) of the principal debt only.