CASE LIST

Ortega vs CA {245 SCRA 529} (1995) ....... 64

Definition/Elements/Existence (1767-1783)

Tocao vs CA {342 SCRA 20} (2000) .......... 67

Contents
Definition/Elements/Existence (1767-1783) ...... 1

Woodhouse v Halili (93 P 26)

Mendiola vs CA {497 SCRA 346} (2006) ... 72

Woodhouse v Halili (93 P 26)........................ 1

Lim Tong Lim vs Phil. Fishing Gear

Industries, Inc. {317 SCRA 728} (1999) ..... 76

Evangelista v Abad-Santos (51 S 416) {1973}

....................................................................... 6

Tacao vs CA (365 SCRA 463) 2001 ............ 81

Duterte v Rallos (2 P 509).............................. 9

Estanislao, Jr. v CA (160 S 830) {1988} ..... 11
Moran, Jr. v CA (133 S 88).......................... 14
Pascual v CIR (166 S 560) ........................... 23
Ang Pue Co. v Sec. of Commerce (5 S 645)
{1962} ......................................................... 27

Tai Tong Chuache & Co. vs Insurance

Commission, 158 SCRA 366 (1988) ............ 82
Heirs of Tan Eng Kec vs Court of Appeals,
341 SCRA 740 (2000).................................. 85
Heirs of J. Lim vs Lim, 614 SCRA 141 (2010)
..................................................................... 91
Ona vs CIR 45 SCRA, 74 (1972) ................. 96

Arbes v Polistico (53 P 489) {1929}............ 28

Orbillos, Jr. vs CIR, 1395 436 (1985) ........ 102

Deluao v Casteel (26 S 475) {1968} ............ 30

Philex Mining Corp. vs CIR, 551 SCRA 428

(2008)......................................................... 104

Aurbach v Sanitary Wares Mfg Corp. (180 S

130) {1989} ................................................. 38
Evangelista v CIR (102 P 140) {1957} ........ 47
Fortis v Guiterrez (6 P 100) ......................... 50
Pastor v Gaspar (2 P 592) ............................ 52
Aguila v CA (319 S 246) {1999}................. 55
Tuason v Bolanos (95 P 106) {1954} .......... 58
In Re: Ozaela & Sycip (92 S 1) .................... 60

Sardane vs CA 167 SCRA, 524 (1988) ...... 109

Litonjua, Jr. vs Litonjua, Sr., 477 SCRA 576
(2005)......................................................... 112

G.R. No. L-4811

July 31, 1953

CHARLES
F.
WOODHOUSE, plaintiff-appellant,
vs.
FORTUNATO F. HALILI, defendant-appellant.
Taada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and
appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a written
agreement, Exhibit A, with the defendant, the most
important provisions of which are (1) that they shall
organize a partnership for the bottling and distribution of
Mision soft drinks, plaintiff to act as industrial partner or
manager, and the defendant as a capitalist, furnishing the
capital necessary therefor; (2) that the defendant was to
decide matters of general policy regarding the business,
while the plaintiff was to attend to the operation and
development of the bottling plant; (3) that the plaintiff was
to secure the Mission Soft Drinks franchise for and in behalf
of the proposed partnership; and (4) that the plaintiff was to
receive 30 per cent of the net profits of the business. The
above agreement was arrived at after various conferences
and consultations by and between them, with the assistance
of their respective attorneys. Prior to entering into this
agreement, plaintiff had informed the Mission Dry
Corporation of Los Angeles, California, U.S.A.,
manufacturers of the bases and ingridients of the beverages
bearing its name, that he had interested a prominent
financier (defendant herein) in the business, who was
willing to invest half a million dollars in the bottling and
distribution of the said beverages, and requested, in order
that he may close the deal with him, that the right to bottle

and distribute be granted him for a limited time under the

condition that it will finally be transferred to the corporation
(Exhibit H). Pursuant for this request, plaintiff was given "a
thirty-days" option on exclusive bottling and distribution
rights for the Philippines" (Exhibit J). Formal negotiations
between plaintiff and defendant began at a meeting on
November 27, 1947, at the Manila Hotel, with their lawyers
attending. Before this meeting plaintiff's lawyer had
prepared the draft of the agreement, Exhibit II or OO, but
this was not satisfactory because a partnership, instead of a
corporation, was desired. Defendant's lawyer prepared after
the meeting his own draft, Exhibit HH. This last draft
appears to be the main basis of the agreement, Exhibit A.
The contract was finally signed by plaintiff on December 3,
1947. Plaintiff did not like to go to the United States
without the agreement being not first signed. On that day
plaintiff and defendant went to the United States, and on
December 10, 1947, a franchise agreement (Exhibit V) was
entered into the Mission Dry Corporation and Fortunato F.
Halili and/or Charles F. Woodhouse, granted defendant the
exclusive right, license, and authority to produce, bottle,
distribute, and sell Mision beverages in the Philippines. The
plaintiff and the defendant thereafter returned to the
Philippines. Plaintiff reported for duty in January, 1948, but
operations were not begun until the first week of February,
1948. In January plaintiff was given as advance, on account
of profits, the sum of P2,000, besides the use of a car; in
February, 1948, also P2,000, and in March only P1,000. The
car was withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already on operation, plaintiff
demanded of defendant that the partnership papers be
executed. At first defendant executed himself, saying there
was no hurry. Then he promised to do so after the sales of
the product had been increased to P50,000. As nothing
definite was forthcoming, after this condition was attained,
and as defendant refused to give further allowances to
plaintiff, the latter caused his attorneys to take up the matter
with the defendant with a view to a possible settlement. as
none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the

contract of partnership, an accounting of the profits, and a
share thereof of 30 per cent, as well as damages in the
amount of P200,000. In his answer defendant alleges by
way of defense (1) that defendant's consent to the
agreement, Exhibit A, was secured by the representation of
plaintiff that he was the owner, or was about to become
owner of an exclusive bottling franchise, which
representation was false, and plaintiff did not secure the
franchise, but was given to defendant himself; (2) that
defendant did not fail to carry out his undertakings, but that
it was plaintiff who failed; (3) that plaintiff agreed to
contribute the exclusive franchise to the partnership, but
plaintiff failed to do so. He also presented a counter-claim
for P200,000 as damages. On these issues the parties went
to trial, and thereafter the Court of First Instance rendered
judgment ordering defendant to render an accounting of the
profits of the bottling and distribution business, subject of
the action, and to pay plaintiff 15 percent thereof. it held
that the execution of the contract of partnership could not be
enforced upon the parties, but it also held that the defense of
fraud was not proved. Against this judgment both parties
have appealed.

of the defendant to the contract was vitiated by fraud and it

is, consequently, null and void.

The most important question of fact to be determined is

whether defendant had falsely represented that he had an
exclusive franchise to bottle Mission beverages, and
whether this false representation or fraud, if it existed,
annuls the agreement to form the partnership. The trial court
found that it is improbable that defendant was never shown
the letter, Exhibit J, granting plaintiff had; that the drafts of
the contract prior to the final one can not be considered for
the purpose of determining the issue, as they are presumed
to have been already integrated into the final agreement;
that fraud is never presumed and must be proved; that the
parties were represented by attorneys, and that if any party
thereto got the worse part of the bargain, this fact alone
would not invalidate the agreement. On this appeal the
defendant, as appellant, insists that plaintiff did represent to
the defendant that he had an exclusive franchise, when as a
matter of fact, at the time of its execution, he no longer had
it as the same had expired, and that, therefore, the consent

Whereas, the manager is the exclusive grantee of

a franchise from the Mission Dry Corporation
San Francisco, California, for the bottling of
Mission products and their sale to the public
throughout the Philippines; . . . .

Our study of the record and a consideration of all the

surrounding circumstances lead us to believe that
defendant's contention is not without merit. Plaintiff's
attorney, Mr. Laurea, testified that Woodhouse presented
himself as being the exclusive grantee of a franchise, thus:
A. I don't recall any discussion about that matter. I
took along with me the file of the office with
regards to this matter. I notice from the first draft
of the document which I prepared which calls for
the organization of a corporation, that the
manager, that is, Mr. Woodhouse, is represented
as being the exclusive grantee of a franchise from
the Mission Dry Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea prepared,
which was made before the Manila Hotel conference on
November 27th, expressly states that plaintiff had the
exclusive franchise. Thus, the first paragraph states:

3. The manager, upon the organization of the said

corporation, shall forthwith transfer to the said
corporation his exclusive right to bottle Mission
products and to sell them throughout the
Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of
integration of jural acts. We find that the principle invoked
is inapplicable, since the purpose of considering the prior
draft is not to vary, alter, or modify the agreement, but to

discover the intent of the parties thereto and the

circumstances surrounding the execution of the contract.
The issue of fact is: Did plaintiff represent to defendant that
he had an exclusive franchise? Certainly, his acts or
statements prior to the agreement are essential and relevant
to the determination of said issue. The act or statement of
the plaintiff was not sought to be introduced to change or
alter the terms of the agreement, but to prove how he
induced the defendant to enter into it to prove the
representations or inducements, or fraud, with which or by
which he secured the other party's consent thereto. These
are expressly excluded from the parol evidence rule. (Bough
and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port
Banga Lumber Co. vs. Export & Import Lumber Co., 26
Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false
representation are an incident to the creation of a jural act,
not to its integration, and are not governed by the rules on
integration. Were parties prohibited from proving said
representations or inducements, on the ground that the
agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud.
Furthermore, the parol evidence rule expressly allows the
evidence to be introduced when the validity of an
instrument is put in issue by the pleadings (section 22, par.
(a), Rule 123, Rules of Court),as in this case.

By virtue of this letter the option on exclusive bottling was

given to the plaintiff on October 14, 1947. (See Exhibit J.)
If this option for an exclusive franchise was intended by
plaintiff as an instrument with which to bargain with
defendant and close the deal with him, he must have used
his said option for the above-indicated purpose, especially
as it appears that he was able to secure, through its use,
what he wanted.

secure it for the partnership. To show that the insertion of

the above provision does not eliminate the probability of
plaintiff representing himself as the exclusive grantee of the
franchise, the final agreement contains in its third paragraph
the following:

Plaintiff's own version of the preliminary conversation he

had with defendant is to the effect that when plaintiff called
on the latter, the latter answered, "Well, come back to me
when you have the authority to operate. I am definitely
interested in the bottling business." (t. s. n., pp. 60-61.)
When after the elections of 1949 plaintiff went to see the
defendant (and at that time he had already the option), he
must have exultantly told defendant that he had the
authority already. It is improbable and incredible for him to
have disclosed the fact that he had only an option to the
exclusive franchise, which was to last thirty days only, and
still more improbable for him to have disclosed that, at the
time of the signing of the formal agreement, his option had
already expired. Had he done so, he would have destroyed
all his bargaining power and authority, and in all probability
lost the deal itself.

and in paragraph 11 it also expressly states:

That plaintiff did make the representation can also be easily

gleaned from his own letters and his own testimony. In his
letter to Mission Dry Corporation, Exhibit H, he said:.

The trial court reasoned, and the plaintiff on this appeal

argues, that plaintiff only undertook in the agreement "to
secure the Mission Dry franchise for and in behalf of the
proposed partnership." The existence of this provision in the
final agreement does not militate against plaintiff having
represented that he had the exclusive franchise; it rather
strengthens belief that he did actually make the
representation. How could plaintiff assure defendant that he
would get the franchise for the latter if he had not actually
obtained it for himself? Defendant would not have gone into
the business unless the franchise was raised in his name, or
at least in the name of the partnership. Plaintiff assured
defendant he could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit HH, the above
provision is inserted, with the difference that instead of
securing the franchise for the defendant, plaintiff was to

. . . He told me to come back to him when I was

able to speak with authority so that we could
come to terms as far as he and I were concerned.
That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining
position. . .
I would propose that you grant me the exclusive
bottling and distributing rights for a limited period
of time, during which I may consummate my
plants. . . .

. . . and the manager is ready and willing to allow

the capitalists to use the exclusive franchise . . .

1. In the event of the dissolution or termination of

the partnership, . . . the franchise from Mission
Dry Corporation shall be reassigned to
the manager.
These statements confirm the conclusion that defendant
believed, or was made to believe, that plaintiff was the
grantee of an exclusive franchise. Thus it is that it was also
agreed upon that the franchise was to be transferred to the
name of the partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in
California he learned that plaintiff did not have the
exclusive franchise, was to reduce, as he himself testified,
plaintiff's participation in the net profits to one half of that
agreed upon. He could not have had such a feeling had not
plaintiff actually made him believe that he (plaintiff) was
the exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the
assistance of counsel in the making of the contract made
fraud improbable. Not necessarily, because the alleged
representation took place before the conferences were had,
in other words, plaintiff had already represented to
defendant, and the latter had already believed in, the
existence of plaintiff's exclusive franchise before the formal
negotiations, and they were assisted by their lawyers only
when said formal negotiations actually took place.
Furthermore, plaintiff's attorney testified that plaintiff had

said that he had the exclusive franchise; and defendant's

lawyer testified that plaintiff explained to him, upon being
asked for the franchise, that he had left the papers
evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff did
actually represent to defendant that he was the holder of the
exclusive franchise. The defendant was made to believe,
and he actually believed, that plaintiff had the exclusive
franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he
believed that plaintiff did have that exclusive privilege, and
that the latter would be able to get the same from the
Mission Dry Corporation itself. Plaintiff knew what
defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not
be allowed to deny that defendant was induced by that
belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of
Court.)
We now come to the legal aspect of the false representation.
Does it amount to a fraud that would vitiate the contract? It
must be noted that fraud is manifested in illimitable number
of degrees or gradations, from the innocent praises of a
salesman about the excellence of his wares to those
malicious machinations and representations that the law
punishes as a crime. In consequence, article 1270 of the
Spanish Civil Code distinguishes two kinds of (civil) fraud,
the causal fraud, which may be a ground for the annulment
of a contract, and the incidental deceit, which only renders
the party who employs it liable for damages. This Court had
held that in order that fraud may vitiate consent, it must be
the causal (dolo causante), not merely the incidental (dolo
causante), inducement to the making of the contract.
(Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil.
160.) The record abounds with circumstances indicative that
the fact that the principal consideration, the main cause that
induced defendant to enter into the partnership agreement
with plaintiff, was the ability of plaintiff to get the exclusive
franchise to bottle and distribute for the defendant or for the
partnership. The original draft prepared by defendant's
counsel was to the effect that plaintiff obligated himself to

secure a franchise for the defendant. Correction appears in

this same original draft, but the change is made not as to the
said obligation but as to the grantee. In the corrected draft
the word "capitalist"(grantee) is changed to "partnership."
The contract in its final form retains the substituted term
"partnership." The defendant was, therefore, led to the belief
that plaintiff had the exclusive franchise, but that the same
was to be secured for or transferred to the partnership. The
plaintiff no longer had the exclusive franchise, or the option
thereto, at the time the contract was perfected. But while he
had already lost his option thereto (when the contract was
entered into), the principal obligation that he assumed or
undertook was to secure said franchise for the partnership,
as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a
false representation, this was not the causal consideration,
or the principal inducement, that led plaintiff to enter into
the partnership agreement.
But, on the other hand, this supposed ownership of an
exclusive franchise was actually the consideration or price
plaintiff gave in exchange for the share of 30 percent
granted him in the net profits of the partnership business.
Defendant agreed to give plaintiff 30 per cent share in the
net profits because he was transferring his exclusive
franchise to the partnership. Thus, in the draft prepared by
plaintiff's lawyer, Exhibit II, the following provision exists:
3. That the MANAGER, upon the organization of
the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle
Mission products and to sell them throughout the
Philippines. As a consideration for such transfer,
the CAPITALIST shall transfer to the Manager
fully paid non assessable shares of the said
corporation . . . twenty-five per centum of the
capital stock of the said corporation. (Par. 3,
Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had
experience in the production or distribution of beverages.
As a matter of fact, when the bottling plant being built, all

that he suggested was about the toilet facilities for the

laborers.
We conclude from the above that while the representation
that plaintiff had the exclusive franchise did not vitiate
defendant's consent to the contract, it was used by plaintiff
to get from defendant a share of 30 per cent of the net
profits; in other words, by pretending that he had the
exclusive franchise and promising to transfer it to
defendant, he obtained the consent of the latter to give him
(plaintiff) a big slice in the net profits. This is the dolo
incidentedefined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's consent to a big
share in the profits, an incidental matter in the agreement.
El dolo incidental no es el que puede producirse
en el cumplimiento del contrato sino que significa
aqui, el que concurriendoen el consentimiento, o
precediendolo, no influyo para arrancar porsi solo
el consentimiento ni en la totalidad de la
obligacion, sinoen algun extremo o accidente de
esta, dando lugar tan solo a una accion para
reclamar indemnizacion de perjuicios. (8 Manresa
602.)
Having arrived at the conclusion that the agreement may not
be declared null and void, the question that next comes
before us is, May the agreement be carried out or executed?
We find no merit in the claim of plaintiff that the
partnership was already a fait accompli from the time of the
operation of the plant, as it is evident from the very
language of the agreement that the parties intended that the
execution of the agreement to form a partnership was to be
carried out at a later date. They expressly agreed that they
shall form a partnership. (Par. No. 1, Exhibit A.) As a
matter of fact, from the time that the franchise from the
Mission Dry Corporation was obtained in California,
plaintiff himself had been demanding that defendant comply
with the agreement. And plaintiff's present action seeks the
enforcement of this agreement. Plaintiff's claim, therefore,
is both inconsistent with their intention and incompatible
with his own conduct and suit.

As the trial court correctly concluded, the defendant may

not be compelled against his will to carry out the agreement
nor execute the partnership papers. Under the Spanish Civil
Code, the defendant has an obligation to do, not to give. The
law recognizes the individual's freedom or liberty to do an
act he has promised to do, or not to do it, as he pleases. It
falls within what Spanish commentators call a very
personal act (acto personalismo), of which courts may not
compel compliance, as it is considered an act of violence to
do so.
Efectos de las obligaciones consistentes en hechos
personalismo.Tratamos de la ejecucion de las
obligaciones de hacer en el solocaso de su
incumplimiento por parte del deudor, ya sean los
hechos personalisimos, ya se hallen en la facultad
de un tercero; porque el complimiento espontaneo
de las mismas esta regido por los preceptos
relativos al pago, y en nada les afectan las
disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto
consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.
Se tiene por corriente entre los autores, y se
traslada generalmente sin observacion el principio
romanonemo potest precise cogi ad factum. Nadie
puede ser obligado violentamente a haceruna
cosa. Los que perciben la posibilidad de la
destruccion deeste principio, aaden que, aun
cuando se pudiera obligar al deudor, no deberia
hacerse, porque esto constituiria una violencia, y
noes la violenciamodo propio de cumplir las
obligaciones (Bigot, Rolland, etc.). El maestro
Antonio Gomez opinaba lo mismo cuandodecia
que obligar por la violencia seria infrigir la
libertad eimponer una especie de esclavitud.
xxx

xxx

xxx

En efecto; las obligaciones contractuales no se

acomodan biencon el empleo de la fuerza fisica,
no ya precisamente porque seconstituya de este
modo una especie de esclavitud, segun el dichode
Antonio Gomez, sino porque se supone que el
acreedor tuvo encuenta el caracter personalisimo
del hecho ofrecido, y calculo sobre laposibilidad
de que por alguna razon no se realizase.
Repugna,ademas, a la conciencia social el empleo
de la fuerza publica, mediante coaccion sobre las
personas,
en
las
relaciones
puramente
particulares; porque la evolucion de las ideas ha
ido poniendo masde relieve cada dia el respeto a
la personalidad humana, y nose admite bien la
violencia sobre el individuo la cual tiene caracter
visiblemente penal, sino por motivos que
interesen a la colectividad de ciudadanos. Es,
pues, posible y licita esta violencia cuando setrata
de las obligaciones que hemos llamado ex lege,
que afectanal orden social y a la entidad de
Estado, y aparecen impuestas sinconsideracion a
las conveniencias particulares, y sin que por
estemotivo puedan tampoco ser modificadas; pero
no debe serlo cuandola obligacion reviste un
interes puramente particular, como sucedeen las
contractuales, y cuando, por consecuencia,
paraceria salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela fuerza colectiva,
las diferencias producidas entre los ciudadanos.
(19 Scaevola 428, 431-432.)
The last question for us to decide is that of
damages,damages that plaintiff is entitled to receive because
of defendant's refusal to form the partnership, and damages
that defendant is also entitled to collect because of the
falsity of plaintiff's representation. (Article 1101, Spanish
Civil Code.) Under article 1106 of the Spanish Civil Code
the measure of damages is the actual loss suffered and the
profits reasonably expected to be received, embraced in the
terms dao emergente and lucro cesante. Plaintiff is entitled
under the terms of the agreement to 30 per cent of the net
profits of the business. Against this amount of damages, we
must set off the damage defendant suffered by plaintiff's

misrepresentation that he had obtained a very high

percentage of share in the profits. We can do no better than
follow the appraisal that the parties themselves had adopted.
When defendant learned in Los Angeles that plaintiff did
not have the exclusive franchise which he pretended he had
and which he had agreed to transfer to the partnership, his
spontaneous reaction was to reduce plaintiff's share form 30
per cent to 15 per cent only, to which reduction defendant
appears to have readily given his assent. It was under this
understanding, which amounts to a virtual modification of
the contract, that the bottling plant was established and
plaintiff worked as Manager for the first three months. If the
contract may not be considered modified as to plaintiff's
share in the profits, by the decision of defendant to reduce
the same to one-half and the assent thereto of plaintiff, then
we may consider the said amount as a fair estimate of the
damages plaintiff is entitled to under the principle
enunciated in the case of Varadero de Manila vs. Insular
Lumber Co., 46 Phil. 176. Defendant's decision to reduce
plaintiff's share and plaintiff's consent thereto amount to an
admission on the part of each of the reasonableness of this
amount as plaintiff's share. This same amount was fixed by
the trial court. The agreement contains the stipulation that
upon the termination of the partnership, defendant was to
convey the franchise back to plaintiff (Par. 11, Exhibit A).
The judgment of the trial court does not fix the period
within which these damages shall be paid to plaintiff. In
view of paragraph 11 of Exhibit A, we declare that
plaintiff's share of 15 per cent of the net profits shall
continue to be paid while defendant uses the franchise from
the Mission Dry Corporation.
With the modification above indicated, the judgment
appealed from is hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes,
Jugo and Bautista Angelo, JJ., concur.

Evangelista v Abad-Santos (51 S 416) {1973}

G.R. No. L-31684 June 28, 1973
EVANGELISTA
&
CO.,
DOMINGO
C.
EVANGELISTA, JR., CONCHITA B. NAVARRO and
LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.
Leonardo Abola for petitioners.
Baisas, Alberto & Associates for respondent.

MAKALINTAL, J.:
On October 9, 1954 a co-partnership was formed under the
name of "Evangelista & Co." On June 7, 1955 the Articles
of Co-partnership was amended as to include herein
respondent, Estrella Abad Santos, as industrial partner, with
herein petitioners Domingo C. Evangelista, Jr., Leonardo
Atienza Abad Santos and Conchita P. Navarro, the original
capitalist partners, remaining in that capacity, with a
contribution of P17,500 each. The amended Articles
provided, inter alia, that "the contribution of Estrella Abad
Santos consists of her industry being an industrial partner",
and that the profits and losses "shall be divided and
distributed among the partners ... in the proportion of 70%
for the first three partners, Domingo C. Evangelista, Jr.,
Conchita P. Navarro and Leonardo Atienza Abad Santos to
be divided among them equally; and 30% for the fourth
partner Estrella Abad Santos."
On December 17, 1963 herein respondent filed suit against
the three other partners in the Court of First Instance of
Manila, alleging that the partnership, which was also made a
party-defendant, had been paying dividends to the partners
except to her; and that notwithstanding her demands the

defendants had refused and continued to refuse and let her

examine the partnership books or to give her information
regarding the partnership affairs to pay her any share in the
dividends declared by the partnership. She therefore prayed
that the defendants be ordered to render accounting to her of
the partnership business and to pay her corresponding share
in the partnership profits after such accounting, plus
attorney's fees and costs.
The defendants, in their answer, denied ever having
declared dividends or distributed profits of the partnership;
denied likewise that the plaintiff ever demanded that she be
allowed to examine the partnership books; and byway of
affirmative defense alleged that the amended Articles of Copartnership did not express the true agreement of the parties,
which was that the plaintiff was not an industrial partner;
that she did not in fact contribute industry to the
partnership; and that her share of 30% was to be based on
the profits which might be realized by the partnership only
until full payment of the loan which it had obtained in
December, 1955 from the Rehabilitation Finance
Corporation in the sum of P30,000, for which the plaintiff
had signed a promisory note as co-maker and mortgaged her
property as security.
The parties are in agreement that the main issue in this case
is "whether the plaintiff-appellee (respondent here) is an
industrial partner as claimed by her or merely a profit sharer
entitled to 30% of the net profits that may be realized by the
partnership from June 7, 1955 until the mortgage loan from
the Rehabilitation Finance Corporation shall be fully paid,
as claimed by appellants (herein petitioners)." On that issue
the Court of First Instance found for the plaintiff and
rendered judgement "declaring her an industrial partner of
Evangelista & Co.; ordering the defendants to render an
accounting of the business operations of the (said)
partnership ... from June 7, 1955; to pay the plaintiff such
amounts as may be due as her share in the partnership
profits and/or dividends after such an accounting has been
properly made; to pay plaintiff attorney's fees in the sum of
P2,000.00 and the costs of this suit."

The defendants appealed to the Court of Appeals, which

thereafter affirmed judgments of the court a quo.
In the petition before Us the petitioners have assigned the
following errors:
I. The Court of Appeals erred in the
finding that the respondent is an
industrial partner of Evangelista & Co.,
notwithstanding the admitted fact that
since 1954 and until after promulgation
of the decision of the appellate court the
said respondent was one of the judges of
the City Court of Manila, and despite its
findings that respondent had been paid
for services allegedly contributed by her
to the partnership. In this connection the
Court of Appeals erred:
(A) In finding that
the
"amended
Articles of Copartnership,"
Exhibit
"A"
is
conclusive evidence
that respondent was
in fact made an
industrial partner of
Evangelista & Co.
(B) In not finding
that a portion of
respondent's
testimony quoted in
the decision proves
that said respondent
did not bind herself
to contribute her
industry, and she
could not, and in
fact did not, because
she was one of the

judges of the City

Court of Manila
since 1954.
(C) In finding that
respondent did not
in fact contribute
her industry, despite
the appellate court's
own finding that she
has been paid for
the
services
allegedly rendered
by her, as well as
for the loans of
money made by her
to the partnership.
II. The lower court erred in not finding
that in any event the respondent was
lawfully excluded from, and deprived
of, her alleged share, interests and
participation, as an alleged industrial
partner, in the partnership Evangelista
& Co., and its profits or net income.
III. The Court of Appeals erred in
affirming in toto the decision of the trial
court whereby respondent was declared
an industrial partner of the petitioner,
and petitioners were ordered to render
an accounting of the business operation
of the partnership from June 7, 1955,
and to pay the respondent her alleged
share in the net profits of the partnership
plus the sum of P2,000.00 as attorney's
fees and the costs of the suit, instead of
dismissing respondent's complaint, with
costs, against the respondent.
It is quite obvious that the questions raised in the first
assigned errors refer to the facts as found by the Court of

Appeals. The evidence presented by the parties as the trial

in support of their respective positions on the issue of
whether or not the respondent was an industrial partner was
thoroughly analyzed by the Court of Appeals on its
decision, to the extent of reproducing verbatim therein the
lengthy testimony of the witnesses.
It is not the function of the Supreme Court to analyze or
weigh such evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been
commited by the lower court. It should be observed, in this
regard, that the Court of Appeals did not hold that the
Articles of Co-partnership, identified in the record as
Exhibit "A", was conclusive evidence that the respondent
was an industrial partner of the said company, but
considered it together with other factors, consisting of both
testimonial and documentary evidences, in arriving at the
factual conclusion expressed in the decision.
The findings of the Court of Appeals on the various points
raised in the first assignment of error are hereunder
reproduced if only to demonstrate that the same were made
after a through analysis of then evidence, and hence are
beyond this Court's power of review.
The aforequoted findings of the lower
Court are assailed under Appellants'
first assigned error, wherein it is pointed
out that "Appellee's documentary
evidence does not conclusively prove
that appellee was in fact admitted by
appellants as industrial partner of
Evangelista & Co." and that "The
grounds relied upon by the lower Court
are untenable" (Pages 21 and 26,
Appellant's Brief).
The first point refers to Exhibit A, B, C,
K, K-1, J, N and S, appellants'
complaint being that "In finding that the
appellee is an industrial partner of
appellant Evangelista & Co., herein

referred to as the partnership the

lower court relied mainly on the
appellee's
documentary
evidence,
entirely
disregarding
facts
and
circumstances
established
by
appellants" evidence which contradict
the said finding' (Page 21, Appellants'
Brief). The lower court could not have
done otherwise but rely on the exhibits
just mentioned, first, because appellants
have admitted their genuineness and due
execution, hence they were admitted
without objection by the lower court
when appellee rested her case and,
secondly the said exhibits indubitably
show the appellee is an industrial
partner
of
appellant
company.
Appellants are virtually estopped from
attempting to detract from the probative
force of the said exhibits because they
all bear the imprint of their knowledge
and consent, and there is no credible
showing that they ever protested against
or opposed their contents prior of the
filing of their answer to appellee's
complaint. As a matter of fact, all the
appellant Evangelista, Jr., would have
us believe as against the cumulative
force
of
appellee's
aforesaid
documentary evidence is the
appellee's Exhibit "A", as confirmed
and corroborated by the other exhibits
already mentioned, does not express the
true intent and agreement of the parties
thereto, the real understanding between
them being the appellee would be
merely a profit sharer entitled to 30% of
the net profits that may be realized
between the partners from June 7, 1955,
until the mortgage loan of P30,000.00 to
be obtained from the RFC shall have
been fully paid. This version, however,
is discredited not only by the aforesaid

documentary evidence brought forward

by the appellee, but also by the fact that
from June 7, 1955 up to the filing of
their answer to the complaint on
February 8, 1964 or a period of over
eight (8) years appellants did nothing
to correct the alleged false agreement of
the parties contained in Exhibit "A". It
is thus reasonable to suppose that, had
appellee not filed the present action,
appellants would not have advanced this
obvious afterthought that Exhibit "A"
does not express the true intent and
agreement of the parties thereto.
At pages 32-33 of appellants' brief, they
also make much of the argument that
'there is an overriding fact which proves
that the parties to the Amended Articles
of Partnership, Exhibit "A", did not
contemplate to make the appellee
Estrella Abad Santos, an industrial
partner of Evangelista & Co. It is an
admitted fact that since before the
execution of the amended articles of
partnership, Exhibit "A", the appellee
Estrella Abad Santos has been, and up
to the present time still is, one of the
judges of the City Court of Manila,
devoting all her time to the performance
of the duties of her public office. This
fact proves beyond peradventure that it
was never contemplated between the
parties, for she could not lawfully
contribute her full time and industry
which is the obligation of an industrial
partner pursuant to Art. 1789 of the
Civil Code.
The Court of Appeals then proceeded to consider appellee's
testimony on this point, quoting it in the decision, and then
concluded as follows:

One cannot read appellee's testimony

just quoted without gaining the very
definite impression that, even as she
was and still is a Judge of the City Court
of Manila, she has rendered services for
appellants without which they would
not have had the wherewithal to operate
the business for which appellant
company was organized. Article 1767
of the New Civil Code which provides
that "By contract of partnership two or
more persons bind themselves, to
contribute money, property, or industry
to a common fund, with the intention of
dividing the profits among themselves,
'does not specify the kind of industry
that a partner may thus contribute,
hence the said services may legitimately
be considered as appellee's contribution
to the common fund. Another article of
the same Code relied upon appellants
reads:
'ART. 1789. An
industrial
partner
cannot engage in
business
for
himself, unless the
partnership
expressly permits
him to do so; and if
he should do so, the
capitalist partners
may either exclude
him from the firm
or avail themselves
of
the benefits
which he may have
obtained
in
violation of this
provision, with a
right to damages in
either case.'

It is not disputed that the provision

against the industrial partner engaging
in business for himself seeks to prevent
any conflict of interest between the
industrial partner and the partnership,
and to insure faithful compliance by
said partner with this prestation. There
is no pretense, however, even on the
part of the appellee is engaged in any
business antagonistic to that of appellant
company, since being a Judge of one of
the branches of the City Court of Manila
can hardly be characterized as a
business. That appellee has faithfully
complied with her prestation with
respect to appellants is clearly shown by
the fact that it was only after filing of
the complaint in this case and the
answer thereto appellants exercised
their right of exclusion under the codal
art just mentioned by alleging in their
Supplemental Answer dated June 29,
1964 or after around nine (9) years
from June 7, 1955 subsequent to the
filing of defendants' answer to the
complaint, defendants reached an
agreement whereby the herein plaintiff
been excluded from, and deprived of,
her alleged share, interests or
participation, as an alleged industrial
partner, in the defendant partnership
and/or in its net profits or income, on
the ground plaintiff has never
contributed her industry to the
partnership, instead she has been and
still is a judge of the City Court
(formerly Municipal Court) of the City
of Manila, devoting her time to
performance of her duties as such judge
and enjoying the privilege and
emoluments appertaining to the said
office, aside from teaching in law
school in Manila, without the express

consent of the herein defendants'

(Record On Appeal, pp. 24-25). Having
always knows as a appellee as a City
judge even before she joined appellant
company on June 7, 1955 as an
industrial partner, why did it take
appellants many yearn before excluding
her from said company as aforequoted
allegations? And how can they reconcile
such exclusive with their main theory
that appellee has never been such a
partner because "The real agreement
evidenced by Exhibit "A" was to grant
the appellee a share of 30% of the net
profits which the appellant partnership
may realize from June 7, 1955, until the
mortgage of P30,000.00 obtained from
the Rehabilitation Finance Corporal
shall have been fully paid." (Appellants
Brief, p. 38).

(2) If the right exists under the terms of

any agreement;
(3) As provided by article 1807;
(4) Whenever other circumstance render
it just and reasonable.
We find no reason in this case to depart from the rule which
limits this Court's appellate jurisdiction to reviewing only
errors of law, accepting as conclusive the factual findings of
the lower court upon its own assessment of the evidence.
The judgment appealed from is affirmed, with costs.
Zaldivar, Castro, Fernando, Teehankee,
Makasiar, Antonio and Esguerra, JJ., concur.

Barredo,

this order and the judgment he excepted and has brought

here the evidence on which the court below based its
finding. We have examined the evidence and are of the
opinion that said finding, so far as the existence of the
copartnership to September 1, 1901, is concerned, is plainly
and manifestly against the evidence.
We reach this conclusion chiefly from the documents
written by the defendant and sent to the plaintiff. It is not
contradicted that the plaintiff demanded by letter of the
defendant a settlement of their accounts. These demands the
defendant answered with the following letter:
MY DEAR BOY: I am working at these accounts.
Perhaps I will have them ready tomorrow
morning. But I have no money, unless Mr. Spitz
comes on one of these boats, when we will have
funds.
Yours, FLORENTINO RALLOS.

What has gone before persuades us to

hold with the lower Court that appellee
is an industrial partner of appellant
company, with the right to demand for a
formal accounting and to receive her
share in the net profit that may result
from such an accounting, which right
appellants take exception under their
second assigned error. Our said holding
is based on the following article of the
New Civil Code:
'ART. 1899. Any
partner shall have
the right to a formal
account
as
to
partnership affairs:
(1) If he is wrongfully excluded from
the partnership business or possession
of its property by his co-partners;

Duterte v Rallos (2 P 509)

G.R. No. L-1147

September 24, 1903

ESCOLASTICO DUTERTE Y ROSALES, plaintiffappellant,

vs.
FLORENTINO RALLOS, defendant-appellee.
Walton J. Wood and Segundo Singson, for appellant.
Early and White, for appellee.
WILLARD, J.:
The plaintiff-appellant claimed that he, the defendant, and
one Castro were partners in the management of a cockpit.
The defendant denied this. The court found that no such
partnership existed and ordered judgment for the defendant.
The plaintiff moved for a new trial, which was denied. To

April 13, 1902.

On May 7 the defendant wrote another letter to the plaintiff
which is in part as follows:
CEBU, May 7, 1902.
Seor Don Escolastico Duterte.
DEAR BOY: In your letter which I received this
afternoon, you designate me as a little less than
embezzler. I have in my possession the money of
no one but myself. If I have not called you an
embezzler or something worse on account of all
that you have done and are doing with me, reflect
whether you have reason to write me in the
manner you do. I have done you a favor in
admitting you into the cockpit partnership, as the
only manner in which I might collect what you

owe me. I think you have made a mistake, and I

will frankly refresh your memory. You are
indebted to me clearly one thousand pesos,
advanced for your former market contract.

The defendant, after denying that the plaintiff was his

partner, testified, among other things, as follows:

In the preceding year, the defendant sent to the plaintiff

statements of the business for the months of June, July, and
August. They are in legal effect the same. The one for July
is as follows:
Receipts of the cockpit of this city during the entire month of July
Expenses
Cuotas
Rent, 6 days
Present to Biloy

The profits were divided. A portion was given to

two friends, Seores Duterte and Castro, but not
as partners. A portion was given to Seor Duterte
solely because he was a friend who aided and
encouraged the cockpit. I did not have an
agreement with them. As a private individual, he
had no duty to perform, except when he had to
preside at the cockpit. I am not aware that they, or
either of them,$520.622
rendered other services. I did not
tell them the reason why I gave them a share. I
paid them for my pleasure, as friends, Duterte had
no legal interest.
$300.00
Seor Duterte had not authority to employ any
60.00
person in the cockpit; this function was exercised
solely by Seor Isabelo Alburo, since I gave
20.00
Seor Duterte a portion only as a friend.

380.000
Castro, the other supposed partner, and a witness for the
defendant, denied that140.622
he was such a partner, but his
testimony is in part as follows:
========
One-third
Ticoy owes for seats

Ticoy's net share

Ticoy stands for the plaintiff.
That the plaintiff rendered services in the management of
the cockpit, and that the defendant paid him money on
account of the cockpit, is undisputed.

46.873what the profit was, but, as I

I do not remember
have said, Seor Rallos sent me $20 or $30. I did
31.200 I did not receive money
not keep any account.
monthly, but on Mondays Seor Rallos would
send me some15.673
money. Seor Rallos began to send
me money from 20 to 30 pesos, and this money
30.000
was what obtained
on the preceding Sunday in the
cockpit. I think Seor Rallos sent it to me as a
present for the45.673
reason that he could not be present
at the cockpit. I am not a servant or employee of
the cockpit. I have not any conversation with
Seor Rallos with reference to I am not a servant
or employee of the cockpit. I have not the
business. When Seor Rallos sent me that money
he sent me no letter. He sent it to me by a
messenger. I think that Seor Rallos sent me that
money because I went to the cockpit and helped

the president on account of the former. Seor

Rallos asked me to go to the cockpit. Yes, I have
had a conversation with Seor Rallos. In this
conversation Seor Rallos said nothing to me
about money. Seor Rallos asked me to go to the
cockpit to aid the president. It is not true, as I
went to the cockpit only to do him a favor.
We have, then, the testimony of the plaintiff that he made a
verbal contract of partnership with the defendant for this
business, uncontradicted evidence that he performed
services in connection with it; that the defendant paid him
the money on account thereof and sent him accounts for
three months showing his interest to be one-third of the
profits in addition to the $5 each day, and wrote him a letter
in which he said that he admitted the plaintiff into the
partnership in order to collect what the plaintiff owed him
on another transaction.
The reason which the defendant gives for paying the
plaintiff money is not credible.
We see no way of explaining the accounts submitted by the
defendant to plaintiff on any theory other than that there
was a partnership between them up to September 1, 1901, at
least. The letter of the defendant, in which he says that he
admitted the plaintiff into the partnership, can be explained
on no other theory.
That there was an agreement to share the profits is clearly
proved by the accounts submitted. The plaintiff testified that
the profits and losses were to be shared equally. But even
omitting this testimony, the case is covered by article 1689
of the Civil Code, which provides that, in the absence of
agreement as to the losses, they shall be shared as the gains
are.
Article 1668 of the Civil Code is not applicable to the case.
No real estate was contributed by any member. The
partnership did not become the owner of the cockpit. It is

10

undisputed that this was owned by the defendant and that

the partnership paid him ten dollars a day for the use of it.

Estanislao, Jr. v CA (160 S 830) {1988}

managing the bussiness with petitioner from May 3, 1966

up to February 16, 1967.

G.R. No. L-49982 April 27, 1988

Neither can the judgment be sustained on the ground stated
by the court in its decision and relied upon by counsel for
the appellee here, namely, that Castro should have been
joined as a party to the suit. One of the grounds for
demurrer mentioned in section 91 of the Code of Civil
Procedure is "that there is a defect or misjoinder of parties
plaintiff or defendants." No demurrer was interposed on this
or in any other ground, and by the terms of section 93 of the
same Code, by omitting to demur on this ground the
defendant waived the objection which he now makes.

ELIGIO
ESTANISLAO,
JR., petitioner,
vs.
THE HONORABLE COURT OF APPEALS,
REMEDIOS ESTANISLAO, EMILIO and LEOCADIO
SANTIAGO,respondents.
Agustin O. Benitez for petitioner.
Benjamin C. Yatco for private respondents.

The finding of fact by the court below, that there was no

partnership, at least to September 1, 1901, was plainly and
manifestly against the evidence, and for that reason a new
trial of this case must be had. In this new trial, if the
evidence is the same as upon the first trial, the plaintiff will
be entitled to an accounting, at least to September 1, 1901,
and for such further term as the proof upon the new trial
shows, in the opinion of the court below, that the
partnership existed; that accounting can be had in this suit
and a final judgment rendered for the plaintiff if any balance
appears in his favor. No second or other suit will be
necessary.
The judgment of the court below is reversed and the case
remanded for a new trial, with the costs of this instance
against the appellee, and after the expiration of twenty days,
reckoned from the date of this decision, judgment shall be
rendered accordingly, and the case is returned to the court
below for compliance therewith.
Arellano, C.J., Torres, Cooper, Mapa and McDonough,
JJ., concur.

GANCAYCO, J.:
By this petition for certiorari the Court is asked to determine
if a partnership exists between members of the same family
arising from their joint ownership of certain properties.
Petitioner and private respondents are brothers and sisters
who are co-owners of certain lots at the corner of Annapolis
and Aurora Blvd., QuezonCity which were then being
leased to the Shell Company of the Philippines Limited
(SHELL). They agreed to open and operate a gas station
thereat to be known as Estanislao Shell Service Station with
an initial investment of P 15,000.00 to be taken from the
advance rentals due to them from SHELL for the occupancy
of the said lots owned in common by them. A joint affidavit
was executed by them on April 11, 1966 which was
prepared byAtty. Democrito Angeles 1 They agreed to help
their brother, petitioner herein, by allowing him to operate
and manage the gasoline service station of the family. They
negotiated with SHELL. For practical purposes and in order
not to run counter to the company's policy of appointing
only one dealer, it was agreed that petitioner would apply
for the dealership. Respondent Remedios helped in

On May 26, 1966, the parties herein entered into an

Additional Cash Pledge Agreement with SHELL wherein it
was reiterated that the P 15,000.00 advance rental shall be
deposited with SHELL to cover advances of fuel to
petitioner as dealer with a proviso that said agreement
"cancels and supersedes the Joint Affidavit dated 11 April
1966 executed by the co-owners." 2
For sometime, the petitioner submitted financial statements
regarding the operation of the business to private
respondents, but therafter petitioner failed to render
subsequent accounting. Hence through Atty. Angeles, a
demand was made on petitioner to render an accounting of
the profits.
The financial report of December 31, 1968 shows that the
business was able to make a profit of P 87,293.79 and that
by the year ending 1969, a profit of P 150,000.00 was
realized. 3
Thus, on August 25, 1970 private respondents filed a
complaint in the Court of First Instance of Rizal against
petitioner praying among others that the latter be ordered:
1. to execute a public document
embodying all the provisions of the
partnership agreement entered into
between plaintiffs and defendant as
provided in Article 1771 of the New
Civil Code;
2. to render a formal accounting of the
business operation covering the period
from May 6, 1966 up to December 21,
1968 and from January 1, 1969 up to the
time the order is issued and that the
same be subject to proper audit;

11

3. to pay the plaintiffs their lawful

shares and participation in the net
profits of the business in an amount of
no less than P l50,000.00 with interest at
the rate of 1% per month from date of
demand until full payment thereof for
the entire duration of the business; and
4. to pay the plaintiffs the amount of P
10,000.00 as attorney's fees and costs of
the suit (pp. 13-14 Record on Appeal.)
After trial on the merits, on October 15, 1975, Hon. Lino
Anover who was then the temporary presiding judge of
Branch IV of the trial court, rendered judgment dismissing
the complaint and counterclaim and ordering private
respondents to pay petitioner P 3,000.00 attorney's fee and
costs. Private respondent filed a motion for reconsideration
of the decision. On December 10, 1975, Hon. Ricardo
Tensuan who was the newly appointed presiding judge of
the same branch, set aside the aforesaid derision and
rendered another decision in favor of said respondents.
The dispositive part thereof reads as follows:

time this order is issued, the same to be

subject to examination and audit by the
plaintiff,
(3) Ordering the defendant to pay
plaintiffs their lawful shares and
participation in the net profits of the
business in the amount of P 150,000.00,
with interest thereon at the rate of One
(1%) Per Cent per month from date of
demand until full payment thereof;
(4) Ordering the defendant to pay the
plaintiffs the sum of P 5,000.00 by way
of attorney's fees of plaintiffs' counsel;
as well as the costs of suit. (pp. 161162. Record on Appeal).
Petitioner then interposed an appeal to the Court of Appeals
enumerating seven (7) errors allegedly committed by the
trial court. In due course, a decision was rendered by the
Court of Appeals on November 28,1978 affirming in
toto the decision of the lower court with costs against
petitioner. *

WHEREFORE, the Decision of this

Court dated October 14, 1975 is hereby
reconsidered and a new judgment is
hereby rendered in favor of the
plaintiffs and as against the defendant:

A motion for reconsideration of said decision filed by

petitioner was denied on January 30, 1979. Not satisfied
therewith, the petitioner now comes to this court by way of
this petition for certiorari alleging that the respondent court
erred:

(1) Ordering the defendant to execute a

public instrument embodying all the
provisions of the partnership agreement
entered into between plaintiffs and
defendant as provided for in Article
1771, Civil Code of the Philippines;

1. In interpreting the legal import of the

Joint Affidavit (Exh. 'A') vis-a-vis the
Additional Cash Pledge Agreement
(Exhs. "B-2","6", and "L"); and

(2) Ordering the defendant to render a

formal accounting of the business
operation from April 1969 up to the

2. In declaring that a partnership was

established by and among the petitioner
and the private respondents as regards
the ownership and or operation of the
gasoline service station business.

Petitioner relies heavily on the provisions of the Joint

Affidavit of April 11, 1966 (Exhibit A) and the Additional
Cash Pledge Agreement of May 20, 1966 (Exhibit 6) which
are herein reproduced(a) The joint Affidavit of April 11, 1966, Exhibit A reads:
(1) That we are the Lessors of two
parcels of land fully describe in
Transfer Certificates of Title Nos.
45071 and 71244 of the Register of
Deeds of Quezon City, in favor of the
LESSEE - SHELL COMPANY OF
THE PHILIPPINES LIMITED a
corporation duly licensed to do business
in the Philippines;
(2) That we have requested the said
SHELL
COMPANY
OF
THE
PHILIPPINE
LIMITED advanced
rentals in the total amount of FIFTEEN
THOUSAND PESOS (P l5,000.00)
Philippine Currency, so that we can use
the said amount to augment our capital
investment in the operation of that
gasoline station constructed ,by the said
company on our two lots aforesaid by
virtue of an outstanding Lease
Agreement we have entered into with
the said company;
(3) That the and SHELL COMPANY
OF THE PHILIPPINE LIMITED out of
its benevolence and desire to help us in
aumenting our capital investment in the
operation of the said gasoline station,
has agreed to give us the said amount of
P 15,000.00, which amount will partake
the nature of ADVANCED RENTALS;

12

(4) That we have freely and voluntarily

agreed that upon receipt of the said
amount of FIFTEEN THOUSAND
PESOS (P l6,000.00) from he SHELL
COMPANY OF THE PHILIPPINES
LIMITED,
the
said
sum
as
ADVANCED RENTALS to us be
applied as monthly rentals for the sai
two lots under our Lease Agreement
starting on the 25th of May, 1966 until
such time that the said of P 15,000.00
be applicable, which time to our
estimate and one-half months from May
25, 1966 or until the 10th of October,
1966 more or less;
(5) That we have likewise agreed
among ourselves that the SHELL
COMPANY OF THE PHILIPPINES
LIMITED execute an instrument for us
to sign embodying our conformity that
the said amount that it will generously
grant us as requested be applied as
ADVANCED RENTALS; and
(6) FURTHER AFFIANTS SAYETH
NOT.,
(b) The Additional Cash Pledge Agreement of May
20,1966, Exhibit 6, is as follows:
WHEREAS, under the lease Agreement
dated 13th November, 1963 (identified
as doc. Nos. 491 & 1407, Page Nos. 99
& 66, Book Nos. V & III, Series of
1963 in the Notarial Registers of
Notaries Public Rosauro Marquez, and
R.D. Liwanag, respectively) executed in
favour of SHELL by the herein COOWNERS
and
another
Lease
Agreement dated 19th March 1964 . . .
also executed in favour of SHELL by

CO-OWNERS Remedios and MARIA

ESTANISLAO for the lease of
adjoining portions of two parcels of
land at Aurora Blvd./ Annapolis,
Quezon City, the CO OWNERS
RECEIVE a total monthly rental of
PESOS THREE THOUSAND THREE
HUNDRED EIGHTY TWO AND
29/100 (P 3,382.29), Philippine
Currency;
WHEREAS,
CO-OWNER
Eligio
Estanislao Jr. is the Dealer of the Shell
Station constructed on the leased land,
and as Dealer under the Cash Pledge
Agreement dated llth May 1966, he
deposited to SHELL in cash the amount
of PESOS TEN THOUSAND (P
10,000), Philippine Currency, to secure
his purchase on credit of Shell
petroleum products; . . .
WHEREAS, said DEALER, in his
desire, to be granted an increased the
limit up to P 25,000, has secured the
conformity of his CO-OWNERS to
waive and assign to SHELL the total
monthly rentals due to all of them to
accumulate the equivalent amount of P
15,000, commencing 24th May 1966,
this P 15,000 shall be treated as
additional cash deposit to SHELL under
the same terms and conditions of the
aforementioned Cash Pledge Agreement
dated llth May 1966.
NOW, THEREFORE, for and in
consideration
of
the
foregoing
premises,and the mutual covenants
among the CO-OWNERS herein and
SHELL, said parties have agreed and
hereby agree as follows:

l. The CO-OWNERS dohere by waive

in favor of DEALER the monthly
rentals due to all CO-OWNERS,
collectively, under the above describe
two Lease Agreements, one dated 13th
November 1963 and the other dated
19th March 1964 to enable DEALER to
increase his existing cash deposit to
SHELL, from P 10,000 to P 25,000, for
such purpose, the SHELL COOWNERS and DEALER hereby
irrevocably assign to SHELL the
monthly rental of P 3,382.29 payable to
them respectively as they fall due,
monthly, commencing 24th May 1966,
until such time that the monthly rentals
accumulated, shall be equal to P l5,000.
2. The above stated monthly rentals
accumulated shall be treated as
additional cash deposit by DEALER to
SHELL, thereby in increasing his credit
limit from P 10,000 to P 25,000. This
agreement, therefore, cancels and
supersedes the Joint affidavit dated 11
April 1966 executed by the COOWNERS.
3. Effective upon the signing of this
agreement, SHELL agrees to allow
DEALER to purchase from SHELL
petroleum products, on credit, up to the
amount of P 25,000.
4. This increase in the credit shall also
be subject to the same terms and
conditions of the above-mentioned Cash
Pledge Agreement dated llth May 1966.
(Exhs. "B-2," "L," and "6"; emphasis
supplied)

13

In the aforesaid Joint Affidavit of April 11, 1966 (Exhibit

A), it is clearly stipulated by the parties that the P 15,000.00
advance rental due to them from SHELL shall augment their
"capital investment" in the operation of the gasoline station,
which advance rentals shall be credited as rentals from May
25, 1966 up to four and one-half months or until 10 October
1966, more or less covering said P 15,000.00.
In the subsequent document entitled "Additional Cash
Pledge Agreement" above reproduced (Exhibit 6), the
private respondents and petitioners assigned to SHELL the
monthly rentals due them commencing the 24th of May
1966 until such time that the monthly rentals accumulated
equal P 15,000.00 which private respondents agree to be a
cash deposit of petitioner in favor of SHELL to increase his
credit limit as dealer. As above-stated it provided therein
that "This agreement, therefore, cancels and supersedes the
Joint Affidavit dated 11 April 1966 executed by the COOWNERS."
Petitioner contends that because of the said stipulation
cancelling and superseding that previous Joint Affidavit,
whatever partnership agreement there was in said previous
agreement had thereby been abrogated. We find no merit in
this argument. Said cancelling provision was necessary for
the Joint Affidavit speaks of P 15,000.00 advance rentals
starting May 25, 1966 while the latter agreement also refers
to advance rentals of the same amount starting May 24,
1966. There is, therefore, a duplication of reference to the P
15,000.00 hence the need to provide in the subsequent
document that it "cancels and supersedes" the previous one.
True it is that in the latter document, it is silent as to the
statement in the Joint Affidavit that the P 15,000.00
represents the "capital investment" of the parties in the
gasoline station business and it speaks of petitioner as the
sole dealer, but this is as it should be for in the latter
document SHELL was a signatory and it would be against
its policy if in the agreement it should be stated that the
business is a partnership with private respondents and not a
sole proprietorship of petitioner.

Moreover other evidence in the record shows that there was

in fact such partnership agreement between the parties. This
is attested by the testimonies of private respondent
Remedies Estanislao and Atty. Angeles. Petitioner
submitted to private respondents periodic accounting of the
business. 4 Petitioner gave a written authority to private
respondent Remedies Estanislao, his sister, to examine and
audit the books of their "common business' aming
negosyo). 5 Respondent Remedios assisted in the running of
the business. There is no doubt that the parties hereto
formed a partnership when they bound themselves to
contribute money to a common fund with the intention of
dividing the profits among themselves. 6 The sole dealership
by the petitioner and the issuance of all government permits
and licenses in the name of petitioner was in compliance
with the afore-stated policy of SHELL and the
understanding of the parties of having only one dealer of the
SHELL products.
Further, the findings of facts of the respondent court are
conclusive in this proceeding, and its conclusion based on
the said facts are in accordancewith the applicable law.
WHEREFORE, the judgment appealed from is AFFIRMED
in toto with costs against petitioner. This decision is
immediately executory and no motion for extension of time
to file a motion for reconsideration shag beentertained.
SO ORDERED.

Moran, Jr. v CA (133 S 88)

G.R. No. L-59956 October 31, 1984
ISABELO
MORAN,
JR., petitioner,
vs.
THE HON. COURT OF APPEALS and MARIANO E.
PECSON, respondents.

GUTIERREZ, JR., J.:+.wph!1

This is a petition for review on certiorari of the decision of
the respondent Court of Appeals which ordered petitioner
Isabelo Moran, Jr. to pay damages to respondent Mariano E,
Pecson.
As found by the respondent Court of Appeals, the
undisputed facts indicate that: t.hqw
xxx xxx xxx
... on February 22, 1971 Pecson and
Moran entered into an agreement
whereby both would contribute P15,000
each for the purpose of printing 95,000
posters (featuring the delegates to the
1971 Constitutional Convention), with
Moran actually supervising the work;
that Pecson would receive a commission
of P l,000 a month starting on April 15,
1971 up to December 15, 1971; that on
December 15, 1971, a liquidation of the
accounts in the distribution and printing
of the 95,000 posters would be made,
that Pecson gave Moran P10,000 for
which the latter issued a receipt; that
only a few posters were printed; that on
or about May 28, 1971, Moran executed
in favor of Pecson a promissory note in
the amount of P20,000 payable in two
equal installments (P10,000 payable on
or before June 15, 1971 and P10,000
payable on or before June 30, 1971), the
whole sum becoming due upon default
in the payment of the first installment
on the date due, complete with the costs
of collection.

14

Private respondent Pecson filed with the Court of First

Instance of Manila an action for the recovery of a sum of
money and alleged in his complaint three (3) causes of
action, namely: (1) on the alleged partnership agreement,
the return of his contribution of P10,000.00, payment of his
share in the profits that the partnership would have earned,
and, payment of unpaid commission; (2) on the alleged
promissory note, payment of the sum of P20,000.00; and,
(3) moral and exemplary damages and attorney's fees.
After the trial, the Court of First Instance held
that: t.hqw

rate from the filing of the complaint on

June 19, 1972, and the costs of the suit.
For insufficiency of evidence, the
counterclaim is hereby dismissed.
From this decision, both parties appealed to the respondent
Court of Appeals. The latter likewise rendered a decision
against the petitioner. The dispositive portion of the
decision reads: t.hqw
PREMISES
CONSIDERED,
the
decision appealed from is hereby SET
ASIDE, and a new one is hereby
rendered, ordering defendant-appellant
Isabelo C. Moran, Jr. to pay plaintiffappellant Mariano E. Pecson:

From the evidence presented it is clear

in the mind of the court that by virtue of
the partnership agreement entered into
by the parties-plaintiff and defendant
the plaintiff did contribute P10,000.00,
and another sum of P7,000.00 for the
Voice of the Veteran or Delegate
Magazine. Of the expected 95,000
copies of the posters, the defendant was
able to print 2,000 copies only
authorized of which, however, were
sold at P5.00 each. Nothing more was
done after this and it can be said that the
venture did not really get off the
ground. On the other hand, the plaintiff
failed to give his full contribution of
P15,000.00. Thus, each party is entitled
to rescind the contract which right is
implied in reciprocal obligations under
Article 1385 of the Civil Code
whereunder 'rescission creates the
obligation to return the things which
were the object of the contract ...
WHEREFORE, the court hereby
renders judgment ordering defendant
Isabelo C. Moran, Jr. to return to
plaintiff Mariano E. Pecson the sum of
P17,000.00, with interest at the legal

(a) Forty-seven thousand five hundred

(P47,500) (the amount that could have
accrued to Pecson under their
agreement);
(b) Eight thousand (P8,000), (the
commission for eight months);
(c) Seven thousand (P7,000) (as a return
of Pecson's investment for the Veteran's
Project);
(d) Legal interest on (a), (b) and (c)
from the date the complaint was filed
(up to the time payment is made)
The petitioner contends that the respondent Court of
Appeals decided questions of substance in a way not in
accord with law and with Supreme Court decisions when it
committed the following errors:

THE
HONORABLE
COURT
OF
APPEALS
GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT
MARIANO E. PECSON IN THE SUM OF P47,500 AS
THE SUPPOSED EXPECTED PROFITS DUE HIM.
II
THE
HONORABLE
COURT
OF
APPEALS
GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT
MARIANO E. PECSON IN THE SUM OF P8,000, AS
SUPPOSED COMMISSION IN THE PARTNERSHIP
ARISING OUT OF PECSON'S INVESTMENT.
III
THE
HONORABLE
COURT
OF
APPEALS
GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT
MARIANO E. PECSON IN THE SUM OF P7,000 AS A
SUPPOSED RETURN OF INVESTMENT IN A
MAGAZINE VENTURE.
IV
ASSUMING
WITHOUT
ADMITTING
THAT
PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT
EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED
BY PECSON FROM MORAN.
V
THE
HONORABLE
COURT
OF
APPEALS
GRIEVOUSLY ERRED IN NOT GRANTING THE
PETITIONER'S COMPULSORY COUNTERCLAIM FOR
DAMAGES.

15

The first question raised in this petition refers to the award

of P47,500.00 as the private respondent's share in the
unrealized profits of the partnership. The petitioner
contends that the award is highly speculative. The petitioner
maintains that the respondent court did not take into account
the great risks involved in the business undertaking.
We agree with the petitioner that the award of speculative
damages has no basis in fact and law.
There is no dispute over the nature of the agreement
between the petitioner and the private respondent. It is a
contract of partnership. The latter in his complaint alleged
that he was induced by the petitioner to enter into a
partnership with him under the following terms and
conditions: t.hqw
1. That the partnership will print colored
posters of the delegates to the
Constitutional Convention;
2. That they will invest the amount of
Fifteen Thousand Pesos (P15,000.00)
each;
3. That they will print Ninety Five
Thousand (95,000) copies of the said
posters;
4. That plaintiff will receive a
commission of One Thousand Pesos
(P1,000.00) a month starting April 15,
1971 up to December 15, 1971;
5. That upon the termination of the
partnership on December 15, 1971, a
liquidation of the account pertaining to
the distribution and printing of the said
95,000 posters shall be made.

The petitioner on the other hand admitted in his answer the

existence of the partnership.
The rule is, when a partner who has undertaken to
contribute a sum of money fails to do so, he becomes a
debtor of the partnership for whatever he may have
promised to contribute (Art. 1786, Civil Code) and for
interests and damages from the time he should have
complied with his obligation (Art. 1788, Civil Code). Thus
in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200
of the Civil Code of the Philippines, we allowed a total of
P200,000.00 compensatory damages in favor of the appellee
because the appellant therein was remiss in his obligations
as a partner and as prime contractor of the construction
projects in question. This case was decided on a particular
set of facts. We awarded compensatory damages in
the Uy case because there was a finding that the
constructing business is a profitable one and that the UP
construction company derived some profits from its
contractors in the construction of roads and bridges despite
its deficient capital." Besides, there was evidence to show
that the partnership made some profits during the periods
from July 2, 1956 to December 31, 1957 and from January
1, 1958 up to September 30, 1959. The profits on two
government contracts worth P2,327,335.76 were not
speculative. In the instant case, there is no evidence
whatsoever that the partnership between the petitioner and
the private respondent would have been a profitable venture.
In fact, it was a failure doomed from the start. There is
therefore no basis for the award of speculative damages in
favor of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his
full contribution while Uy contributed much more than what
was expected of him. In this case, however, there was
mutual breach. Private respondent failed to give his entire
contribution in the amount of P15,000.00. He contributed
only P10,000.00. The petitioner likewise failed to give any
of the amount expected of him. He further failed to comply
with the agreement to print 95,000 copies of the posters.
Instead, he printed only 2,000 copies.

Article 1797 of the Civil Code provides: t.hqw

The losses and profits shall be
distributed in conformity with the
agreement. If only the share of each
partner in the profits has been agreed
upon, the share of each in the losses
shall be in the same proportion.
Being a contract of partnership, each partner must share in
the profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in
the absence of fraud, the other partner cannot claim a right
to recover the highly speculative profits. It is a rare business
venture guaranteed to give 100% profits. In this case, on an
investment of P15,000.00, the respondent was supposed to
earn a guaranteed P1,000.00 a month for eight months and
around P142,500.00 on 95,000 posters costing P2.00 each
but 2,000 of which were sold at P5.00 each. The fantastic
nature of expected profits is obvious. We have to take
various factors into account. The failure of the Commission
on Elections to proclaim all the 320 candidates of the
Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt
that it would be a losing venture to go on with the printing
of the agreed 95,000 copies of the posters. Hidden risks in
any business venture have to be considered.
It does not follow however that the private respondent is not
entitled to recover any amount from the petitioner. The
records show that the private respondent gave P10,000.00 to
the petitioner. The latter used this amount for the printing of
2,000 posters at a cost of P2.00 per poster or a total printing
cost of P4,000.00. The records further show that the 2,000
copies were sold at P5.00 each. The gross income therefore
was P10,000.00. Deducting the printing costs of P4,000.00
from the gross income of P10,000.00 and with no evidence
on the cost of distribution, the net profits amount to only
P6,000.00. This net profit of P6,000.00 should be divided
between the petitioner and the private respondent. And since
only P4,000.00 was undesirable by the petitioner in printing

16

the 2,000 copies, the remaining P6,000.00 should therefore

be returned to the private respondent.
Relative to the second alleged error, the petitioner submits
that the award of P8,000.00 as Pecson's supposed
commission has no justifiable basis in law.
Again, we agree with the petitioner.
The partnership agreement stipulated that the petitioner
would give the private respondent a monthly commission of
Pl,000.00 from April 15, 1971 to December 15, 1971 for a
total of eight (8) monthly commissions. The agreement does
not state the basis of the commission. The payment of the
commission could only have been predicated on relatively
extravagant profits. The parties could not have intended the
giving of a commission inspite of loss or failure of the
venture. Since the venture was a failure, the private
respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that
the respondent Court of Appeals erred in holding him liable
to the private respondent in the sum of P7,000.00 as a
supposed return of investment in a magazine venture.
In awarding P7,000.00 to the private respondent as his
supposed return of investment in the "Voice of the
Veterans" magazine venture, the respondent court ruled
that: t.hqw
xxx xxx xxx
... Moran admittedly signed the
promissory note of P20,000 in favor of
Pecson. Moran does not question the
due execution of said note. Must Moran
therefore pay the amount of P20,000?
The evidence indicates that the P20,000
was assigned by Moran to cover the
following: t.hqw

(
a
)

i
v
e
n

P
7
,
0
0
0

t
h
e
a
m
o
u
n
t
o
f
t
h
e
P
N
B
c
h
e
c
k
g

b
y
P
e
c
s
o
n
t
o
M
o
r
a
n
r
e
p
r
e
s
e
n
t
i
n
g
P
e
c
s
o
n

17

'
s
i
n
v
e
s
t
m
e
n
t
i
n
M
o
r
a
n
'
s
o
t
h
e
r
p
r
o
j
e
c
t
(
t
h
e

p
u
b
l
i
c
a
t
i
o
n
a
n
d
p
r
i
n
t
i
n
g
o
f
t
h
e

t
h
e
V
e
t
e
r
a
n
s
'
)
;
(
b
)
P
1
0
,
0
0
0

t
o

'
V
o
i
c
e

c
o
v
e
r

o
f

t
h
e

18

r
e
t
u
r
n

e
c
t

o
f

t
h
e

P
e
c
s
o
n
'
s
c
o
n
t
r
i
b
u
t
i
o
n
i
n
t
h
e
p
r
o
j

o
f

P
o
s
t
e
r
s
;
(
c
)
P
3
,
0
0
0

r
e
p
r
e
s
e
n
t
i

n
g
P
e
c
s
o
n
'
s
c
o
m
m
i
s
s
i
o
n
f
o
r
t
h
r
e
e
m
o
n
t
h
s
(
A
p

19

r
i
l
,
M
a
y
,
J
u
n
e
,
1
9
7
1
)
.
Of said P20,000 Moran has to pay
P7,000 (as a return of Pecson's
investment for the Veterans' project, for
this project never left the ground) ...
As a rule, the findings of facts of the Court of Appeals are
final and conclusive and cannot be reviewed on appeal to
this Court (Amigo v. Teves, 96 Phil. 252), provided they are
borne out by the record or are based on substantial evidence
(Alsua-Betts v. Court of Appeals, 92 SCRA 332). However,
this rule admits of certain exceptions. Thus, in Carolina
Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97
SCRA 734), we held that this Court retains the power to
review and rectify the findings of fact of the Court of
Appeals when (1) the conclusion is a finding grounded
entirely on speculation, surmises and conjectures; (2) when
the inference made is manifestly mistaken absurd and
impossible; (3) where there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts;
and (5) when the court, in making its findings, went beyond
the issues of the case and the same are contrary to the
admissions of both the appellant and the appellee.

In this case, there is misapprehension of facts. The evidence

of the private respondent himself shows that his investment
in the "Voice of Veterans" project amounted to only
P3,000.00. The remaining P4,000.00 was the amount of
profit that the private respondent expected to receive.
The records show the following exhibits- t.hqw
E Xerox copy of PNB Manager's
Check No. 234265 dated March 22,
1971 in favor of defendant. Defendant
admitted the authenticity of this check
and of his receipt of the proceeds
thereof (t.s.n., pp. 3-4, Nov. 29, 1972).
This exhibit is being offered for the
purpose of showing plaintiff's capital
investment in the printing of the "Voice
of the Veterans" for which he was
promised a fixed profit of P8,000. This
investment of P6,000.00 and the
promised profit of P8,000 are covered
by defendant's promissory note for
P14,000 dated March 31, 1971 marked
by defendant as Exhibit 2 (t.s.n., pp. 2021, Nov. 29, 1972), and by plaintiff as
Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment
thereby proportionately reducing the
promised profit to P4,000. With the
balance of P3,000 (capital) and P4,000
(promised profit), defendant signed and
executed the promissory note for P7,000
marked Exhibit 3 for the defendant and
Exhibit M for plaintiff. Of this P7,000,
defendant paid P4,000 representing full
return of the capital investment and
P1,000 partial payment of the promised
profit. The P3,000 balance of the
promised profit was made part
consideration of the P20,000 promissory
note (t.s.n., pp. 22-24, Nov. 29, 1972). It
is, therefore, being presented to show

the consideration for the P20,000

promissory note.
F Xerox copy of PNB Manager's
check dated May 29, 1971 for P7,000 in
favor of defendant. The authenticity of
the check and his receipt of the proceeds
thereof were admitted by the defendant
(t.s.n., pp. 3-4, Nov. 29, 1972). This P
7,000 is part consideration, and in cash,
of the P20,000 promissory note (t.s.n.,
p. 25, Nov. 29, 1972), and it is being
presented to show the consideration for
the P20,000 note and the existence and
validity of the obligation.
xxx xxx xxx
L-Book entitled "Voice of the Veterans"
which is being offered for the purpose
of showing the subject matter of the
other partnership agreement and in
which plaintiff invested the P6,000
(Exhibit E) which, together with the
promised profit of P8,000 made up for
the consideration of the P14,000
promissory note (Exhibit 2; Exhibit P).
As explained in connection with Exhibit
E. the P3,000 balance of the promised
profit was later made part consideration
of the P20,000 promissory note.
M-Promissory note for P7,000 dated
March 30, 1971. This is also defendant's
Exhibit E. This document is being
offered for the purpose of further
showing the transaction as explained in
connection with Exhibits E and L.
N-Receipt of plaintiff dated March 30,
1971 for the return of his P3,000 out of

20

his capital investment of P6,000 (Exh.

E) in the P14,000 promissory note (Exh.
2; P). This is also defendant's Exhibit 4.
This document is being offered in
support of plaintiff's explanation in
connection with Exhibits E, L, and M to
show the transaction mentioned therein.

printing
of
"Voice
of
Veterans".

the
the

promissory
Exhibit
represent?

Q What is
"Voice
of
Veterans",
Pecson?

this
the
Mr.

A It represents the
P6,000.00
cash
which I gave to Mr.
Moran,
as
evidenced by the
Philippine National
Bank
Manager's
check
and
the
P8,000.00
profit
assured me by Mr.
Moran which I will
derive from the
printing of this
"Voice
of
the
Veterans" book.

xxx xxx xxx

P-Promissory note for P14,000.00. This
is also defendant's Exhibit 2. It is being
offered for the purpose of showing the
transaction as explained in connection
with Exhibits E, L, M, and N above.
Explaining the above-quoted exhibits, respondent Pecson
testified that: t.hqw
Q During the pretrial of this case,
Mr. Pecson, the
defendant presented
a promissory note in
the
amount
of
P14,000.00 which
has been marked as
Exhibit 2. Do you
know
this
promissory note?
A Yes, sir.
Q What is this
promissory note, in
connection
with
your
transaction
with the defendant?
A This promissory
note is for the

A
It
is
a
book.t.hqw
(
T
.
S
.
N
.
,
p
.
1
9
,
N
o
v
.
2
9
,
1
9
7
2
)
Q And what does
the
amount
of
P14,000.00
indicated in the

note,
2,

Q You said that the

P6,000.00 of this
P14,000.00
is
covered
by,
a
Manager's check. I
show you Exhibit E,
is this the Manager's
check
that
mentioned?
A Yes, sir.
Q What happened to
this promissory note
of
P14,000.00
which you said
represented
P6,000.00 of your
investment
and
P8,000.00 promised
profits?

21

A Latter, Mr. Moran

returned to me
P3,000.00
which
represented one-half
(1/2)
of
the
P6,000.00 capital I
gave to him.
Q As a consequence
of the return by Mr.
Moran of one-half
(1/2)
of
the
P6,000.00
capital
you gave to him,
what happened to
the promised profit
of P8,000.00?
A It was reduced to
one-half (1/2) which
is P4,000.00.
Q Was there any
document executed
by Mr. Moran in
connection with the
Balance
of
P3,000.00 of your
capital investment
and the P4,000.00
promised profits?
A Yes, sir, he
executed
a
promissory note.
Q I show you a
promissory note in
the
amount
of
P7,000.00
dated
March 30, 1971

which for purposes

of Identification I
request the same to
be
marked
as
Exhibit M. . .
Court t.hqw
M
a
r
k
i
t
a
s
E
x
h
i
b
i
t
M
.
Q (continuing) is
this the promissory
note which you said
was executed by
Mr.
Moran
in
connection
with
your
transaction
regarding
the
printing
of
the
"Voice
of
the
Veterans"?

A Yes, sir. (T.S.N.,

pp. 20-22, Nov. 29,
1972).
Q What happened to
this promissory note
executed by Mr.
Moran, Mr. Pecson?
A Mr. Moran paid
me P4,000.00 out of
the P7,000.00 as
shown
by
the
promissory note.
Q Was there a
receipt issued by
you covering this
payment
of
P4,000.00 in favor
of Mr. Moran?
A Yes, sir.
(T.S.N., p. 23, Nov.
29, 1972).
Q You stated that
Mr. Moran paid the
amount
of
P4,000.00
on
account
of
the
P7,000.00 covered
by the promissory
note, Exhibit M.
What does this
P4,000.00 covered
by
Exhibit
N
represent?

22

A This P4,000.00
represents
the
P3,000.00 which he
has returned of my
P6,000.00
capital
investment and the
P1,000.00
represents
partial
payment of the
P4,000.00
profit
that was promised
to me by Mr.
Moran.
Q
And
what
happened to the
balance
of
P3,000.00 under the
promissory
note,
Exhibit M?
A The balance of
P3,000.00 and the
rest of the profit
was applied as part
of the consideration
of the promissory
note of P20,000.00.
(T.S.N., pp. 23-24, Nov. 29, 1972).
The respondent court erred when it concluded that the
project never left the ground because the project did take
place. Only it failed. It was the private respondent himself
who presented a copy of the book entitled "Voice of the
Veterans" in the lower court as Exhibit "L". Therefore, it
would be error to state that the project never took place and
on this basis decree the return of the private respondent's
investment.

As already mentioned, there are risks in any business

venture and the failure of the undertaking cannot entirely be
blamed on the managing partner alone, specially if the latter
exercised his best business judgment, which seems to be
true in this case. In view of the foregoing, there is no reason
to pass upon the fourth and fifth assignments of errors
raised by the petitioner. We likewise find no valid basis for
the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of
the respondent Court of Appeals (now Intermediate
Appellate Court) is hereby SET ASIDE and a new one is
rendered ordering the petitioner Isabelo Moran, Jr., to pay
private respondent Mariano Pecson SIX THOUSAND
(P6,000.00) PESOS representing the amount of the private
respondent's contribution to the partnership but which
remained unused; and THREE THOUSAND (P3,000.00)
PESOS representing one half (1/2) of the net profits gained
by the partnership in the sale of the two thousand (2,000)
copies of the posters, with interests at the legal rate on both
amounts from the date the complaint was filed until full
payment is made.

The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered
partnership or joint venture for income tax purposes is the
issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land
from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque.
The first two parcels of land were sold by petitioners in
1968 toMarenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes
and Maria Samson on March 19,1970. Petitioners realized a
net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00
in the sale made in 1970. The corresponding capital gains
taxes were paid by petitioners in 1973 and 1974 by availing
of the tax amnesties granted in the said years.

SO ORDERED.1wph1.t

Pascual v CIR (166 S 560)

G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P.
DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for
petitioners.

However, in a letter dated March 31, 1979 of then Acting

BIR Commissioner Efren I. Plana, petitioners were assessed
and required to pay a total amount of P107,101.70 as
alleged deficiency corporate income taxes for the years
1968 and 1970.
Petitioners protested the said assessment in a letter of June
26, 1979 asserting that they had availed of tax amnesties
way back in 1974.
In a reply of August 22, 1979, respondent Commissioner
informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code 1 that the unregistered
partnership was subject to corporate income tax as

23

distinguished from profits derived from the partnership by

them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended,
by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent
Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of
March 30, 1987, 2 affirmed the decision and action taken by
respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated
in Evangelista 3 an unregistered partnership was in fact
formed by petitioners which like a corporation was subject
to corporate income tax distinct from that imposed on the
partners.
In a separate dissenting opinion, Associate Judge Constante
Roaquin stated that considering the circumstances of this
case, although there might in fact be a co-ownership
between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered
partnership which made "hem liable for corporate income
tax under the Tax Code.

OPPOSITION THERETO
UPON THE PETITIONERS.

RESTS

B. IN MAKING A FINDING, SOLELY

ON THE BASIS OF ISOLATED SALE
TRANSACTIONS,
THAT
AN
UNREGISTERED
PARTNERSHIP
EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY
LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION
THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT
CASE IS SIMILAR TO THE
EVANGELISTA
CASE
AND
THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA
CASE.

A.
IN
HOLDING
AS
PRESUMPTIVELY CORRECT THE
DETERMINATION
OF
THE
RESPONDENT
COMMISSIONER,
TO
THE
EFFECT
THAT
PETITIONERS
FORMED
AN
UNREGISTERED
PARTNERSHIP
SUBJECT TO CORPORATE INCOME
TAX, AND THAT THE BURDEN OF
OFFERING
EVIDENCE
IN

In resolving the issue, this Court held as follows:

The issue in this case is whether
petitioners are subject to the tax on
corporations provided for in section 24
of Commonwealth Act No. 466,
otherwise known as the National
Internal Revenue Code, as well as to the
residence tax for corporations and the
real estate dealers' fixed tax. With
respect to the tax on corporations, the
issue hinges on the meaning of the
terms corporation and partnership as
used in sections 24 and 84 of said Code,
the pertinent parts of which read:

The basis of the subject decision of the respondent court is

the ruling of this Court in Evangelista. 4

Sec. 24. Rate of the tax on

corporations.There shall be levied,
assessed, collected, and paid annually
upon the total net income received in
the preceding taxable year from all
sources by every corporation organized
in, or existing under the laws of the
Philippines, no matter how created or
organized but not including duly
registered
general
co-partnerships
(companies collectives), a tax upon such
income equal to the sum of the
following: ...

In the said case, petitioners borrowed a sum of money from

their father which together with their own personal funds
they used in buying several real properties. They appointed
their brother to manage their properties with full power to
lease, collect, rent, issue receipts, etc. They had the real
properties rented or leased to various tenants for several
years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the

Sec. 84(b). The term "corporation"

includes partnerships, no matter how
created or organized, joint-stock
companies, joint accounts (cuentas en
participation), associations or insurance
companies, but does not include duly
registered
general
co-partnerships
(companies colectivas).

D. IN RULING THAT THE TAX

AMNESTY DID NOT RELIEVE THE
PETITIONERS FROM PAYMENT OF
OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY.
(pp. 12-13, Rollo.)
The petition is meritorious.

Hence, this petition wherein petitioners invoke as basis

thereof the following alleged errors of the respondent court:

payment of income tax on a corporation, among others,

from them.

24

Article 1767 of the Civil Code of the

Philippines provides:
By the contract of partnership two or
more persons bind themselves to
contribute money, property, or industry
to a common fund, with the intention of
dividing the profits among themselves.
Pursuant to this article, the essential
elements of a partnership are two,
namely: (a) an agreement to contribute
money, property or industry to a
common fund; and (b) intent to divide
the profits among the contracting
parties.
The
first
element
is
undoubtedly present in the case at bar,
for, admittedly, petitioners have agreed
to, and did, contribute money and
property to a common fund. Hence, the
issue narrows down to their intent in
acting as they did. Upon consideration
of all the facts and circumstances
surrounding the case, we are fully
satisfied that their purpose was to
engage in real estate transactions for
monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something
they found already in existence. It was
not a property inherited by them pro
indiviso. They created it purposely.
What is more they jointly borrowed a
substantial portion thereof in order to
establish said common fund.
2. They invested the same, not merely in
one transaction, but in a series of
transactions. On February 2, 1943, they
bought a lot for P100,000.00. On April
3, 1944, they purchased 21 lots for

P18,000.00. This was soon followed, on

April 23, 1944, by the acquisition of
another real estate for P108,825.00.
Five (5) days later (April 28, 1944),
they
got
a
fourth
lot
for
P237,234.14. The number of lots (24)
acquired and transcations undertaken,
as well as the brief interregnum
between each, particularly the last three
purchases, is strongly indicative of a
pattern or common design that was not
limited to the conservation and
preservation of the aforementioned
common fund or even of the property
acquired by petitioners in February,
1943. In other words, one cannot but
perceive a character of habituality
peculiar to business transactions
engaged in for purposes of gain.
3. The aforesaid lots were not devoted
to residential purposes or to other
personal uses, of petitioners herein. The
properties were leased separately to
several persons, who, from 1945 to
1948 inclusive, paid the total sum of
P70,068.30 by way of rentals.
Seemingly, the lots are still being so let,
for petitioners do not even suggest that
there has been any change in the
utilization thereof.
4. Since August, 1945, the properties
have been under the management of one
person, namely, Simeon Evangelists,
with full power to lease, to collect rents,
to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and
deposit notes and checks. Thus, the
affairs relative to said properties have
been handled as if the same belonged to

a corporation or business enterprise

operated for profit.
5. The foregoing conditions have existed
for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the
first property was acquired, and over
twelve (12) years, since Simeon
Evangelists became the manager.
6. Petitioners have not testified or
introduced any evidence, either on their
purpose in creating the set up already
adverted to, or on the causes for its
continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not
suffice to establish the intent necessary
to constitute a partnership, the collective
effect of these circumstances is such as
to leave no room for doubt on the
existence of said intent in petitioners
herein. Only one or two of the
aforementioned circumstances were
present in the cases cited by petitioners
herein, and, hence, those cases are not
in point. 5
In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner
and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation
of the common fund or even the properties acquired by

25

them. The character of habituality peculiar to business

transactions engaged in for the purpose of gain was
present.
In the instant case, petitioners bought two (2) parcels of land
in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three
(3) parcels of land from one seller. It was only 1968 when
they sold the two (2) parcels of land after which they did not
make any additional or new purchase. The remaining three
(3) parcels were sold by them in 1970. The transactions
were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not
present.
In Evangelista, the properties were leased out to tenants for
several years. The business was under the management of
one of the partners. Such condition existed for over fifteen
(15) years. None of the circumstances are present in the case
at bar. The co-ownership started only in 1965 and ended in
1970.
Thus, in the concurring opinion of Mr. Justice Angelo
Bautista in Evangelista he said:
I wish however to make the following
observation Article 1769 of the new
Civil Code lays down the rule for
determining when a transaction should
be deemed a partnership or a coownership. Said article paragraphs 2
and 3, provides;
(2) Co-ownership or co-possession does
not itself establish a partnership,
whether such co-owners or copossessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not
of itself establish a partnership, whether

or not the persons sharing them have a

joint or common right or interest in any
property from which the returns are
derived;
From the above it appears that the fact
that those who agree to form a coownership share or do not share any
profits made by the use of the property
held in common does not convert their
venture into a partnership. Or the
sharing of the gross returns does not of
itself establish a partnership whether or
not the persons sharing therein have a
joint or common right or interest in the
property. This only means that, aside
from the circumstance of profit, the
presence of other elements constituting
partnership is necessary, such as the
clear intent to form a partnership, the
existence of a juridical personality
different from that of the individual
partners, and the freedom to transfer or
assign any interest in the property by
one with the consent of the
others (Padilla, Civil Code of the
Philippines Annotated, Vol. I, 1953 ed.,
pp. 635-636)
It is evident that an isolated transaction
whereby two or more persons contribute
funds to buy certain real estate for
profit in the absence of other
circumstances showing a contrary
intention cannot be considered a
partnership.
Persons who contribute property or
funds for a common enterprise and
agree to share the gross returns of that
enterprise in proportion to their
contribution, but who severally retain

the title to their respective contribution,

are not thereby rendered partners. They
have no common stock or capital, and
no community of interest as principal
proprietors in the business itself which
the proceeds derived. (Elements of the
Law of Partnership by Flord D.
Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does
not constitute a co-partnership in respect
thereto; nor does an agreement to share
the profits and losses on the sale of land
create a partnership; the parties are only
tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed.,
1157.)
Where plaintiff, his brother, and another
agreed to become owners of a single
tract of realty, holding as tenants in
common, and to divide the profits of
disposing of it, the brother and the other
not being entitled to share in plaintiffs
commission, no partnership existed as
between the three parties, whatever their
relation may have been as to third
parties. (Magee vs. Magee 123 N.E.
673, 233 Mass. 341.)
In order to constitute a partnership
inter sese there must be: (a) An intent to
form the same; (b) generally
participating in both profits and losses;
(c) and such a community of interest, as
far as third persons are concerned as
enables each party to make contract,
manage the business, and dispose of the
whole property.-Municipal Paving Co.
vs. Herring 150 P. 1067, 50 III 470.)

26

The common ownership of property

does not itself create a partnership
between the owners, though they may
use it for the purpose of making gains;
and they may, without becoming
partners, agree among themselves as to
the management, and use of such
property and the application of the
proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App.
14.) 6
The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There
must be a clear intent to form a partnership, the existence of
a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the
whole property.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the
respondent commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a
distinct personality nor with assets that can be held liable
for said deficiency corporate income tax, then petitioners
can be held individually liable as partners for this unpaid
obligation of the partnership p. 7 However, as petitioners
have availed of the benefits of tax amnesty as individual

taxpayers in these transactions, they are thereby relieved of

any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the
decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and
another decision is hereby rendered relieving petitioners of
the corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.

Ang Pue Co. v Sec. of Commerce (5 S 645) {1962}

G.R. No. L-17295

It appears that on May 1, 1953, Ang Pue and Tan Siong,

both Chinese citizens, organized the partnership Ang Pue &
Company for a term of five years from May 1, 1953,
extendible by their mutual consent. The purpose of the
partnership was "to maintain the business of general
merchandising, buying and selling at wholesale and retail,
particularly of lumber, hardware and other construction
materials for commerce, either native or foreign." The
corresponding articles of partnership (Exhibit B) were
registered in the Office of the Securities & Exchange
Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to
regulate the retail business. It provided, among other things,
that, after its enactment, a partnership not wholly formed by
Filipinos could continue to engage in the retail business
until the expiration of its term.

July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY
OF
COMMERCE
AND
INDUSTRY, defendant-appellee.
Felicisimo
E.
Escaran
for
plaintiffs-appellants.
Office of the Solicitor General for defendant-appellee.

On April 15, 1958 prior to the expiration of the five-year

term of the partnership Ang Pue & Company, but after the
enactment of the Republic Act 1180, the partners already
mentioned amended the original articles of part ownership
(Exhibit B) so as to extend the term of life of the partnership
to another five years. When the amended articles were
presented for registration in the Office of the Securities &
Exchange Commission on April 16, 1958, registration was
refused upon the ground that the extension was in violation
of the aforesaid Act.

DIZON, J.:
Action for declaratory relief filed in the Court of First
Instance of Iloilo by Ang Pue & Company, Ang Pue and
Tan Siong against the Secretary of Commerce and Industry
to secure judgment "declaring that plaintiffs could extend
for five years the term of the partnership pursuant to the
provisions of plaintiffs' Amendment to the Article of Copartnership."
The answer filed by the defendant alleged, in substance, that
the extension for another five years of the term of the
plaintiffs' partnership would be in violation of the
provisions of Republic Act No. 1180.

From the decision of the lower court dismissing the action,

with costs, the plaintiffs interposed this appeal.
The question before us is too clear to require an extended
discussion. To organize a corporation or a partnership that
could claim a juridical personality of its own and transact
business as such, is not a matter of absolute right but a
privilege which may be enjoyed only under such terms as
the State may deem necessary to impose. That the State,
through Congress, and in the manner provided by law, had
the right to enact Republic Act No. 1180 and to provide
therein that only Filipinos and concerns wholly owned by
Filipinos may engage in the retail business can not be

27

seriously disputed. That this provision was clearly intended

to apply to partnership already existing at the time of the
enactment of the law is clearly showing by its provision
giving them the right to continue engaging in their retail
business until the expiration of their term or life.
To argue that because the original articles of partnership
provided that the partners could extend the term of the
partnership, the provisions of Republic Act 1180 cannot be
adversely affect appellants herein, is to erroneously assume
that the aforesaid provision constitute a property right of
which the partners can not be deprived without due process
or without their consent. The agreement contain therein
must be deemed subject to the law existing at the time when
the partners came to agree regarding the extension. In the
present case, as already stated, when the partners amended
the articles of partnership, the provisions of Republic Act
1180 were already in force, and there can be not the
slightest doubt that the right claimed by appellants to extend
the original term of their partnership to another five years
would be in violation of the clear intent and purpose of the
law aforesaid.
WHEREFORE, the judgment appealed from is affirmed,
with costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera,
Paredes, Regala and Makalintal, JJ., concur.
Bautista Angelo and Reyes, J.B.L., JJ., took no part.

Arbes v Polistico (53 P 489) {1929}

G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees,

vs.
VICENTE POLISTICO, ET AL., defendants-appellants.

Marcelino Lontok and Manuel dela Rosa for appellants.

Sumulong & Lavides for appellees.

Interest received...........................
Miscellaneous...............................

VILLAMOR, J.:
This is an action to bring about liquidation of the funds and
property of the association called "Turnuhan Polistico &
Co." The plaintiffs were members or shareholders, and the
defendants were designated as president-treasurer, directors
and secretary of said association.

Expenses:
Premiums to members.......................
Loans on real-estate.......................

It is well to remember that this case is now brought before

the consideration of this court for the second time. The first
one was when the same plaintiffs appeared from the order
of the court below sustaining the defendant's demurrer, and
requiring the former to amend their complaint within a
period, so as to include all the members of "Turnuhan
Polistico & Co.," either as plaintiffs or as a defendants. This
court held then that in an action against the officers of a
voluntary association to wind up its affairs and enforce an
accounting for money and property in their possessions, it is
not necessary that all members of the association be made
parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.)
The case having been remanded to the court of origin, both
parties amend, respectively, their complaint and their
answer, and by agreement of the parties, the court appointed
Amadeo R. Quintos, of the Insular Auditor's Office,
commissioner to examine all the books, documents, and
accounts of "Turnuhan Polistico & Co.," and to receive
whatever evidence the parties might desire to present.
The commissioner rendered his report, which is attached to
the record, with the following resume:
Income:
Member's shares............................
Credits paid................................

Loans on promissory notes..............

Salaries....................................
Miscellaneous...............................

Cash on hand........................................
The defendants objected to the commissioner's report, but
the trial court, having examined the reasons for the
objection, found the same sufficiently explained in the
report and the evidence, and accepting it, rendered
judgment, holding that the association "Turnuhan Polistico
& Co." is unlawful, and sentencing the defendants jointly
and severally to return the amount of P24,607.80, as well as
the documents showing the uncollected credits of the
association, to the plaintiffs in this case, and to the rest of
the members of the said association represented by said
plaintiffs, with costs against the defendants.
The defendants assigned several errors as grounds for their
appeal, but we believe they can all be reduced to two points,
to wit:
(1) That not all persons having an interest in this
97,263.70
association are included as plaintiffs or defendants; (2) that
the objection
6,196.55to the commissioner's report should have been
admitted by the court below.

28

As to the first point, the decision on the case of Borlasa vs.

Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy
efforts of the attorney of the defendants, we are of opinion
that, the trial court having examined all the evidence
touching the grounds for the objection and having found
that they had been explained away in the commissioner's
report, the conclusion reached by the court below, accepting
and adopting the findings of fact contained in said report,
and especially those referring to the disposition of the
association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil.,
516), it was held that the findings of facts made by a referee
appointed under the provisions of section 135 of the Code
of Civil Procedure stand upon the same basis, when
approved by the Court, as findings made by the judge
himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil.,
474), the court held: "Under section 140 of the Code of
Civil Procedure it is made the duty of the court to render
judgment in accordance with the report of the referee unless
the court shall unless for cause shown set aside the report or
recommit it to the referee. This provision places upon the
litigant parties of the duty of discovering and exhibiting to
the court any error that may be contained therein." The
appellants stated the grounds for their objection. The trial
examined the evidence and the commissioner's report, and
accepted the findings of fact made in the report. We find no
convincing arguments on the appellant's brief to justify a
reversal of the trial court's conclusion admitting the
commissioner's findings.
There is no question that "Turnuhan Polistico & Co." is an
unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but
the appellants allege that because it is so, some charitable
institution to whom the partnership funds may be ordered to
be turned over, should be included, as a party defendant.
The appellants refer to article 1666 of the Civil Code, which
provides:

A partnership must have a lawful object, and must

be established for the common benefit of the
partners.
When the dissolution of an unlawful partnership is
decreed, the profits shall be given to charitable
institutions of the domicile of the partnership, or,
in default of such, to those of the province.
Appellant's contention on this point is untenable. According
to said article, no charitable institution is a necessary party
in the present case of determination of the rights of the
parties. The action which may arise from said article, in the
case of unlawful partnership, is that for the recovery of the
amounts paid by the member from those in charge of the
administration of said partnership, and it is not necessary for
the said parties to base their action to the existence of the
partnership, but on the fact that of having contributed some
money to the partnership capital. And hence, the charitable
institution of the domicile of the partnership, and in the
default thereof, those of the province are not necessary
parties in this case. The article cited above permits no action
for the purpose of obtaining the earnings made by the
unlawful partnership, during its existence as result of the
business in which it was engaged, because for the purpose,
as Manresa remarks, the partner will have to base his action
upon the partnership contract, which is to annul and without
legal existence by reason of its unlawful object; and it is self
evident that what does not exist cannot be a cause of action.
Hence, paragraph 2 of the same article provides that when
the dissolution of the unlawful partnership is decreed, the
profits cannot inure to the benefit of the partners, but must
be given to some charitable institution.
We deem in pertinent to quote Manresa's commentaries on
article 1666 at length, as a clear explanation of the scope
and spirit of the provision of the Civil Code which we are
concerned. Commenting on said article Manresa, among
other things says:
When the subscriptions of the members have been
paid to the management of the partnership, and

employed by the latter in transactions consistent

with the purposes of the partnership may the
former demand the return of the reimbursement
thereof from the manager or administrator
withholding them?
Apropos of this, it is asserted: If the partnership
has no valid existence, if it is considered
juridically non-existent, the contract entered into
can have no legal effect; and in that case, how can
it give rise to an action in favor of the partners to
judicially demand from the manager or the
administrator of the partnership capital, each one's
contribution?
The authors discuss this point at great length, but
Ricci decides the matter quite clearly, dispelling
all doubts thereon. He holds that the partner who
limits himself to demanding only the amount
contributed by him need not resort to the
partnership contract on which to base his action.
And he adds in explanation that the partner makes
his contribution, which passes to the managing
partner for the purpose of carrying on the business
or industry which is the object of the partnership;
or in other words, to breathe the breath of life into
a partnership contract with an objection forbidden
by law. And as said contrast does not exist in the
eyes of the law, the purpose from which the
contribution was made has not come into
existence, and the administrator of the partnership
holding said contribution retains what belongs to
others, without any consideration; for which
reason he is not bound to return it and he who has
paid in his share is entitled to recover it.
But this is not the case with regard to profits
earned in the course of the partnership, because
they do not constitute or represent the partner's
contribution but are the result of the industry,
business or speculation which is the object of the
partnership, and therefor, in order to demand the

29

proportional part of the said profits, the partner

would have to base his action on the contract
which is null and void, since this partition or
distribution of the profits is one of the juridical
effects thereof. Wherefore considering this
contract asnon-existent, by reason of its illicit
object, it cannot give rise to the necessary action,
which must be the basis of the judicial complaint.
Furthermore, it would be immoral and unjust for
the law to permit a profit from an industry
prohibited by it.
Hence the distinction made in the second
paragraph of this article of this Code, providing
that the profits obtained by unlawful means shall
not enrich the partners, but shall upon the
dissolution of the partnership, be given to the
charitable institutions of the domicile of the
partnership, or, in default of such, to those of the
province.
This is a new rule, unprecedented by our law,
introduced to supply an obvious deficiency of the
former law, which did not describe the purpose to
which those profits denied the partners were to be
applied, nor state what to be done with them.
The profits are so applied, and not the
contributions, because this would be an excessive
and unjust sanction for, as we have seen, there is
no reason, in such a case, for depriving the partner
of the portion of the capital that he contributed,
the circumstances of the two cases being entirely
different.
Our Code does not state whether, upon the
dissolution of the unlawful partnership, the
amounts contributed are to be returned by the
partners, because it only deals with the disposition
of the profits; but the fact that said contributions
are not included in the disposal prescribed profits,
shows that in consequences of said exclusion, the

general law must be followed, and hence the

partners should reimburse the amount of their
respective contributions. Any other solution is
immoral, and the law will not consent to the latter
remaining in the possession of the manager or
administrator who has refused to return them, by
denying to the partners the action to demand
them. (Manresa, Commentaries on the Spanish
Civil Code, vol. XI, pp. 262-264)
The judgment appealed from, being in accordance with law,
should be, as it is hereby, affirmed with costs against the
appellants; provided, however, the defendants shall pay the
legal interest on the sum of P24,607.80 from the date of the
decision of the court, and provided, further, that the
defendants shall deposit this sum of money and other
documents evidencing uncollected credits in the office of
the clerk of the trial court, in order that said court may
distribute them among the members of said association,
upon being duly identified in the manner that it may deem
proper. So ordered.
Avancea, C.J., Johnson, Street, Johns, Romualdez, and
Villa-Real, JJ., concur.

Deluao v Casteel (26 S 475) {1968}

G.R. No. L-21906

December 24, 1968

INOCENCIA
DELUAO
and
FELIPE
DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir
plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.

CASTRO, J.:
This is an appeal from the order of May 2, 1956, the
decision of May 4, 1956 and the order of May 21, 1956, all
of the Court of First Instance of Davao, in civil case 629.
The basic action is for specific performance, and damages
resulting from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a
big tract of swampy land in the then Sitio of Malalag (now
the Municipality of Malalag), Municipality of Padada,
Davao. No action was taken thereon by the authorities
concerned. During the Japanese occupation, he filed another
fishpond application for the same area, but because of the
conditions then prevailing, it was not acted upon either. On
December 12, 1945 he filed a third fishpond application for
the same area, which, after a survey, was found to contain
178.76 hectares. Upon investigation conducted by a
representative of the Bureau of Forestry, it was discovered
that the area applied for was still needed for firewood
production. Hence on May 13, 1946 this third application
was disapproved.
Despite the said rejection, Casteel did not lose interest. He
filed a motion for reconsideration. While this motion was
pending resolution, he was advised by the district forester of
Davao City that no further action would be taken on his
motion, unless he filed a new application for the area
concerned. So he filed on May 27, 1947 his fishpond
application 1717.
Meanwhile, several applications were submitted by other
persons for portions of the area covered by Casteel's
application.
On May 20, 1946 Leoncio Aradillos filed his fishpond
application 1202 covering 10 hectares of land found inside
the area applied for by Casteel; he was later granted
fishpond permit F-289-C covering 9.3 hectares certified as
available for fishpond purposes by the Bureau of Forestry.

30

Victor D. Carpio filed on August 8, 1946 his fishpond

application 762 over a portion of the land applied for by
Casteel. Alejandro Cacam's fishpond application 1276, filed
on December 26, 1946, was given due course on December
9, 1947 with the issuance to him of fishpond permit F-539C to develop 30 hectares of land comprising a portion of the
area applied for by Casteel, upon certification of the Bureau
of Forestry that the area was likewise available for fishpond
purposes. On November 17, 1948 Felipe Deluao filed his
own fishpond application for the area covered by Casteel's
application.
Because of the threat poised upon his position by the above
applicants who entered upon and spread themselves within
the area, Casteel realized the urgent necessity of expanding
his occupation thereof by constructing dikes and cultivating
marketable fishes, in order to prevent old and new squatters
from usurping the land. But lacking financial resources at
that time, he sought financial aid from his uncle Felipe
Deluao who then extended loans totalling more or less
P27,000 with which to finance the needed improvements on
the fishpond. Hence, a wide productive fishpond was built.
Moreover, upon learning that portions of the area applied
for by him were already occupied by rival applicants,
Casteel immediately filed the corresponding protests.
Consequently, two administrative cases ensued involving
the area in question, to wit: DANR Case 353, entitled "Fp.
Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel,
applicant-appellant versus Fp. A. No. 763, Victorio D.
Carpio, applicant-appellant"; and DANR Case 353-B,
entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor
Casteel, applicant-protestant versus Fp. Permit No. 289-C,
Leoncio Aradillos, Fp. Permit No. 539-C, Alejandro Cacam,
Permittees-Respondents."
However, despite the finding made in the investigation of
the above administrative cases that Casteel had already
introduced improvements on portions of the area applied for
by him in the form of dikes, fishpond gates, clearings, etc.,
the Director of Fisheries nevertheless rejected Casteel's
application on October 25, 1949, required him to remove all

the improvements which he had introduced on the land, and

ordered that the land be leased through public auction.
Failing to secure a favorable resolution of his motion for
reconsideration of the Director's order, Casteel appealed to
the Secretary of Agriculture and Natural Resources.

That this contract was the result of a verbal

agreement entered into between the Parties
sometime in the month of November, 1947, with
all the above-mentioned conditions enumerated;
...

In the interregnum, some more incidents occurred. To avoid

repetition, they will be taken up in our discussion of the
appellant's third assignment of error.

On the same date the above contract was entered into,

Inocencia Deluao executed a special power of attorney in
favor of Jesus Donesa, extending to the latter the authority
"To represent me in the administration of the fishpond at
Malalag, Municipality of Padada, Province of Davao,
Philippines, which has been applied for fishpond permit by
Nicanor Casteel, but rejected by the Bureau of Fisheries,
and to supervise, demand, receive, and collect the value of
the fish that is being periodically realized from it...."

On November 25, 1949 Inocencia Deluao (wife of Felipe

Deluao) as party of the first part, and Nicanor Casteel as
party of the second part, executed a contract
denominated a "contract of service" the salient
provisions of which are as follows:
That the Party of the First Part in consideration of
the mutual covenants and agreements made herein
to the Party of the Second Part, hereby enter into a
contract of service, whereby the Party of the First
Part hires and employs the Party of the Second
Part on the following terms and conditions, to wit:
That the Party of the First Part will finance as she
has hereby financed the sum of TWENTY
SEVEN THOUSAND PESOS (P27,000.00),
Philippine Currency, to the Party of the Second
Part who renders only his services for the
construction and improvements of a fishpond at
Barrio Malalag, Municipality of Padada, Province
of Davao, Philippines;
That the Party of the Second Part will be the
Manager and sole buyer of all the produce of the
fish that will be produced from said fishpond;
That the Party of the First Part will be the
administrator of the same she having financed the
construction and improvement of said fishpond;

On November 29, 1949 the Director of Fisheries rejected

the application filed by Felipe Deluao on November 17,
1948. Unfazed by this rejection, Deluao reiterated his claim
over the same area in the two administrative cases (DANR
Cases 353 and 353-B) and asked for reinvestigation of the
application of Nicanor Casteel over the subject fishpond.
However, by letter dated March 15, 1950 sent to the
Secretary of Commerce and Agriculture and Natural
Resources (now Secretary of Agriculture and Natural
Resources),
Deluao
withdrew his
petition
for
reinvestigation.
On September 15, 1950 the Secretary of Agriculture and
Natural Resources issued a decision in DANR Case 353, the
dispositive portion of which reads as follows:
In view of all the foregoing considerations, Fp. A.
No. 661 (now Fp. A. No. 1717) of Nicanor
Casteel should be, as hereby it is, reinstated and
given due course for the area indicated in the
sketch drawn at the back of the last page hereof;
and Fp. A. No. 762 of Victorio D. Carpio shall
remain rejected.

31

On the same date, the same official issued a decision in

DANR Case 353-B, the dispositive portion stating as
follows:
WHEREFORE, Fishpond Permit No. F-289-C of
Leoncio Aradillos and Fishpond Permit No. F539-C of Alejandro Cacam, should be, as they are
hereby cancelled and revoked; Nicanor Casteel is
required to pay the improvements introduced
thereon by said permittees in accordance with the
terms and dispositions contained elsewhere in this
decision....
Sometime in January 1951 Nicanor Casteel forbade
Inocencia Deluao from further administering the fishpond,
and ejected the latter's representative (encargado), Jesus
Donesa, from the premises.
Alleging violation of the contract of service (exhibit A)
entered into between Inocencia Deluao and Nicanor Casteel,
Felipe Deluao and Inocencia Deluao on April 3, 1951 filed
an action in the Court of First Instance of Davao for specific
performance and damages against Nicanor Casteel and Juan
Depra (who, they alleged, instigated Casteel to violate his
contract), praying inter alia, (a) that Casteel be ordered to
respect and abide by the terms and conditions of said
contract and that Inocencia Deluao be allowed to continue
administering the said fishpond and collecting the proceeds
from the sale of the fishes caught from time to time; and (b)
that the defendants be ordered to pay jointly and severally to
plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for
the issuance of a preliminary injunction, praying among
other things, that during the pendency of the case and upon
their filling the requisite bond as may be fixed by the court,
a preliminary injunction be issued to restrain Casteel from
doing the acts complained of, and that after trial the said
injunction be made permanent. The lower court on April 26,
1951 granted the motion, and, two days later, it issued a
preliminary mandatory injunction addressed to Casteel, the
dispositive portion of which reads as follows:

POR EL PRESENTE, queda usted ordenado que,

hasta nueva orden, usted, el demandado y todos
usu abogados, agentes, mandatarios y demas
personas que obren en su ayuda, desista de
impedir a la demandante Inocencia R. Deluao que
continue administrando personalmente la
pesqueria objeto de esta causa y que la misma
continue recibiendo los productos de la venta de
los pescados provenientes de dicha pesqueria, y
que, asimismo, se prohibe a dicho demandado
Nicanor Casteel a desahuciar mediante fuerza al
encargado de los demandantes llamado Jesus
Donesa de la pesqueria objeto de la demanda de
autos.
On May 10, 1951 Casteel filed a motion to dissolve the
injunction, alleging among others, that he was the owner,
lawful applicant and occupant of the fishpond in question.
This motion, opposed by the plaintiffs on June 15, 1951,
was denied by the lower court in its order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with
counterclaim, amended on January 8, 1952, denying the
material averments of the plaintiffs' complaint. A reply to
the defendants' amended answer was filed by the plaintiffs
on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to
dismiss the complaint as to him. On June 4, 1951 the
plaintiffs opposed his motion.
The defendants filed on October 3, 1951 a joint motion to
dismiss on the ground that the plaintiffs' complaint failed to
state a claim upon which relief may be granted. The motion,
opposed by the plaintiffs on October 12, 1951, was denied
for lack of merit by the lower court in its order of October
22, 1951. The defendants' motion for reconsideration filed
on October 31, 1951 suffered the same fate when it was
likewise denied by the lower court in its order of November
12, 1951.

After the issues were joined, the case was set for trial. Then
came a series of postponements. The lower court (Branch I,
presided by Judge Enrique A. Fernandez) finally issued on
March 21, 1956 an order in open court, reading as follows: .
Upon petition of plaintiffs, without any objection
on the part of defendants, the hearing of this case
is hereby transferred to May 2 and 3, 1956 at 8:30
o'clock in the morning.
This case was filed on April 3, 1951 and under
any circumstance this Court will not entertain any
other transfer of hearing of this case and if the
parties will not be ready on that day set for
hearing, the court will take the necessary steps for
the final determination of this case. (emphasis
supplied)
On April 25, 1956 the defendants' counsel received a notice
of hearing dated April 21, 1956, issued by the office of the
Clerk of Court (thru the special deputy Clerk of Court) of
the Court of First Instance of Davao, setting the hearing of
the case for May 2 and 3, 1956 before Judge Amador
Gomez of Branch II. The defendants, thru counsel, on April
26, 1956 filed a motion for postponement. Acting on this
motion, the lower court (Branch II, presided by Judge
Gomez) issued an order dated April 27, 1956, quoted as
follows:
This is a motion for postponement of the hearing
of this case set for May 2 and 3, 1956. The motion
is filed by the counsel for the defendants and has
the conformity of the counsel for the plaintiffs.
An examination of the records of this case shows
that this case was initiated as early as April 1951
and that the same has been under advisement of
the Honorable Enrique A. Fernandez, Presiding
Judge of Branch No. I, since September 24, 1953,
and that various incidents have already been
considered and resolved by Judge Fernandez on

32

various occasions. The last order issued by Judge

Fernandez on this case was issued on March 21,
1956, wherein he definitely states that the Court
will not entertain any further postponement of the
hearing of this case.

concepto de danos a contar de la fecha de la

expiracion de los 30 dias de la promulgacion de
esta decision hasta que entregue la posesion y
administracion de la porcion del "fishpond" en
conflicto;

CONSIDERING ALL THE FOREGOING, the

Court believes that the consideration and
termination of any incident referring to this case
should be referred back to Branch I, so that the
same may be disposed of therein. (emphasis
supplied)

(d) Condena al demandado a pagar a la

demandante la suma de P2,000.00 valor de los
pescado beneficiados, mas los intereses legales de
la fecha de la incoacion de la demanda de autos
hasta el completo pago de la obligacion principal;

A copy of the abovequoted order was served on the

defendants' counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956,
the lower court (Branch I, with Judge Fernandez presiding),
when informed about the defendants' motion for
postponement filed on April 26, 1956, issued an order
reiterating its previous order handed down in open court on
March 21, 1956 and directing the plaintiffs to introduce
their evidence ex parte, there being no appearance on the
part of the defendants or their counsel. On the basis of the
plaintiffs' evidence, a decision was rendered on May 4,
1956 the dispositive portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a
favor de los demandantes y en contra del
demandado Nicanor Casteel:
(a) Declara permanente el interdicto prohibitorio
expedido contra el demandado;
(b) Ordena al demandado entregue la demandante
la posesion y administracion de la mitad () del
"fishpond" en cuestion con todas las mejoras
existentes dentro de la misma;
(c) Condena al demandado a pagar a la
demandante la suma de P200.00 mensualmente en

(e) Condena al demandado a pagar a la

demandante la suma de P2,000.00, por gastos
incurridos por aquella durante la pendencia de
esta causa;
(f) Condena al demandado a pagar a la
demandante, en concepto de honorarios, la suma
de P2,000.00;
(g) Ordena el sobreseimiento de esta demanda,
por insuficiencia de pruebas, en tanto en cuanto se
refiere al demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion
de los demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the
foregoing decision, alleging, inter alia, lack of knowledge
of the order of the court a quo setting the case for trial. The
petition, however, was denied by the lower court in its order
of May 21, 1956, the pertinent portion of which reads as
follows:
The duty of Atty. Ruiz, was not to inquire from
the Clerk of Court whether the trial of this case
has been transferred or not, but to inquire from the

presiding Judge, particularly because his motion

asking the transfer of this case was not set for
hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this
Court dated March 21, 1956, which reads as
follows:
Upon petition of the plaintiff without
any objection on the part of the
defendants, the hearing of this case is
hereby transferred to May 2 and 3,
1956, at 8:30 o'clock in the morning.
This case was filed on April 3, 1951,
and under any circumstance this Court
will not entertain any other transfer of
the hearing of this case, and if the
parties will not be ready on the day set
for hearing, the Court will take
necessary steps for the final disposition
of this case.
In view of the order above-quoted, the Court will
not accede to any transfer of this case and the duty
of Atty. Ruiz is no other than to be present in the
Sala of this Court and to call the attention of the
same to the existence of his motion for transfer.
Petition for relief from judgment filed by Atty.
Ruiz in behalf of the defendant, not well taken,
the same is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the
Court of Appeals which certified the case to us for final
determination on the ground that it involves only questions
of law.
Casteel raises the following issues:

33

(1) Whether the lower court committed gross

abuse of discretion when it ordered reception of
the appellees' evidence in the absence of the
appellant at the trial on May 2, 1956, thus
depriving the appellant of his day in court and of
his property without due process of law;
(2) Whether the lower court committed grave
abuse of discretion when it denied the verified
petition for relief from judgment filed by the
appellant on May 11, 1956 in accordance with
Rule 38, Rules of Court; and
(3) Whether the lower court erred in ordering the
issuance ex parte of a writ of preliminary
injunction against defendant-appellant, and in not
dismissing appellees' complaint.
1. The first and second issues must be resolved against the
appellant.

pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the

Rules of Court.
Much less had the clerk of court the authority to interfere
with the order of the court or to transfer the cage from one
sala to another without authority or order from the court
where the case originated and was being tried. He had
neither the duty nor prerogative to re-assign the trial of the
case to a different branch of the same court. His duty as
such clerk of court, in so far as the incident in question was
concerned, was simply to prepare the trial calendar. And
this duty devolved upon the clerk of court and not upon the
"special deputy clerk of court" who purportedly signed the
notice of hearing.
It is of no moment that the motion for postponement had the
conformity of the appellees' counsel. The postponement of
hearings does not depend upon agreement of the parties, but
upon the court's discretion.3

The record indisputably shows that in the order given in

open court on March 21, 1956, the lower court set the case
for hearing on May 2 and 3, 1956 at 8:30 o'clock in the
morning and empathically stated that, since the case had
been pending since April 3, 1951, it would not entertain any
further motion for transfer of the scheduled hearing.

The record further discloses that Casteel was represented by

a total of 12 lawyers, none of whom had ever withdrawn as
counsel. Notice to Atty. Ruiz of the order dated March 21,
1956 intransferably setting the case for hearing for May 2
and 3, 1956, was sufficient notice to all the appellant's
eleven other counsel of record. This is a well-settled rule in
our jurisdiction.4

An order given in open court is presumed received by the

parties on the very date and time of promulgation,1 and
amounts to a legal notification for all legal purposes.2 The
order of March 21, 1956, given in open court, was a valid
notice to the parties, and the notice of hearing dated April
21, 1956 or one month thereafter, was a superfluity.
Moreover, as between the order of March 21, 1956, duly
promulgated by the lower court, thru Judge Fernandez, and
the notice of hearing signed by a "special deputy clerk of
court" setting the hearing in another branch of the same
court, the former's order was the one legally binding. This is
because the incidents of postponements and adjournments
are controlled by the court and not by the clerk of court,

It was the duty of Atty. Ruiz, or of the other lawyers of

record, not excluding the appellant himself, to appear before
Judge Fernandez on the scheduled dates of hearing Parties
and their lawyers have no right to presume that their
motions for postponement will be granted.5 For indeed, the
appellant and his 12 lawyers cannot pretend ignorance of
the recorded fact that since September 24, 1953 until the
trial held on May 2, 1956, the case was under the
advisement of Judge Fernandez who presided over Branch I.
There was, therefore, no necessity to "re-assign" the same to
Branch II because Judge Fernandez had exclusive control of
said case, unless he was legally inhibited to try the case
and he was not.

There is truth in the appellant's contention that it is the duty

of the clerk of court not of the Court to prepare the
trial calendar. But the assignment or reassignment of cases
already pending in one sala to another sala, and the setting
of the date of trial after the trial calendar has been prepared,
fall within the exclusive control of the presiding judge.
The appellant does not deny the appellees' claim that on
May 2 and 3, 1956, the office of the clerk of court of the
Court of First Instance of Davao was located directly below
Branch I. If the appellant and his counsel had exercised due
diligence, there was no impediment to their going upstairs
to the second storey of the Court of First Instance building
in Davao on May 2, 1956 and checking if the case was
scheduled for hearing in the said sala. The appellant after all
admits that on May 2, 1956 his counsel went to the office of
the clerk of court.
The appellant's statement that parties as a matter of right are
entitled to notice of trial, is correct. But he was properly
accorded this right. He was notified in open court on March
21, 1956 that the case was definitely and intransferably set
for hearing on May 2 and 3, 1956 before Branch I. He
cannot argue that, pursuant to the doctrine in Siochi vs.
Tirona,6 his counsel was entitled to a timely notice of the
denial of his motion for postponement. In the cited case the
motion for postponement was the first one filed by the
defendant; in the case at bar, there had already been a series
of postponements. Unlike the case at bar, the Siochi case
was not intransferably set for hearing. Finally, whereas the
cited case did not spend for a long time, the case at bar was
only finally and intransferably set for hearing on March 21,
1956 after almost five years had elapsed from the filing
of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record
that they lacked ample time to prepare for trial is
unacceptable because between March 21, 1956 and May 2,
1956, they had one month and ten days to do so. In effect,
the appellant had waived his right to appear at the trial and
therefore he cannot be heard to complain that he has been
deprived of his property without due process of

34

law.7 Verily, the constitutional requirements of due process

have been fulfilled in this case: the lower court is a
competent court; it lawfully acquired jurisdiction over the
person of the defendant (appellant) and the subject matter of
the action; the defendant (appellant) was given an
opportunity to be heard; and judgment was rendered upon
lawful hearing.8
2. Finally, the appellant contends that the lower court
incurred an error in ordering the issuance ex parte of a writ
of preliminary injunction against him, and in not dismissing
the appellee's complaint. We find this contention
meritorious.
Apparently, the court a quo relied on exhibit A the socalled "contract of service" and the appellees' contention
that it created a contract of co-ownership and partnership
between Inocencia Deluao and the appellant over the
fishpond in question.
Too well-settled to require any citation of authority is the
rule that everyone is conclusively presumed to know the
law. It must be assumed, conformably to such rule, that the
parties entered into the so-called "contract of service"
cognizant of the mandatory and prohibitory laws governing
the filing of applications for fishpond permits. And since
they were aware of the said laws, it must likewise be
assumed in fairness to the parties that they did not
intend to violate them. This view must perforce negate the
appellees' allegation that exhibit A created a contract of coownership between the parties over the disputed fishpond.
Were we to admit the establishment of a co-ownership
violative of the prohibitory laws which will hereafter be
discussed, we shall be compelled to declare altogether the
nullity of the contract. This would certainly not serve the
cause of equity and justice, considering that rights and
obligations have already arisen between the parties. We
shall therefore construe the contract as one of partnership,
divided into two parts namely, a contract of partnership
to exploit the fishpond pending its award to either Felipe
Deluao or Nicanor Casteel, and a contract of partnership to

divide the fishpond between them after such award. The

first is valid, the second illegal.
It is well to note that when the appellee Inocencia Deluao
and the appellant entered into the so-called "contract of
service" on November 25, 1949, there were two pending
applications over the fishpond. One was Casteel's which
was appealed by him to the Secretary of Agriculture and
Natural Resources after it was disallowed by the Director of
Fisheries on October 25, 1949. The other was Felipe
Deluao's application over the same area which was likewise
rejected by the Director of Fisheries on November 29, 1949,
refiled by Deluao and later on withdrawn by him by letter
dated March 15, 1950 to the Secretary of Agriculture and
Natural Resources. Clearly, although the fishpond was then
in the possession of Casteel, neither he nor, Felipe Deluao
was the holder of a fishpond permit over the area. But be
that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's
appeal or the approval of Deluao's application over the same
area whichever event happened first. No law, rule or
regulation prohibited them from doing so. Thus, rather than
let the fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the
initial intention of the parties was not to form a coownership but to establish a partnership Inocencia
Deluao as capitalist partner and Casteel as industrial partner
the ultimate undertaking of which was to divide into two
equal parts such portion of the fishpond as might have been
developed by the amount extended by the plaintiffsappellees, with the further provision that Casteel should
reimburse the expenses incurred by the appellees over onehalf of the fishpond that would pertain to him. This can be
gleaned, among others, from the letter of Casteel to Felipe
Deluao on November 15, 1949, which states, inter alia:
... [W]ith respect to your allowing me to use your
money, same will redound to your benefit
because you are the ones interested in half of the
work we have done so far, besides I did not insist
on our being partners in my fishpond permit, but

it was you "Tatay" Eping the one who wanted that

we be partners and it so happened that we became
partners because I am poor, but in the midst of
my poverty it never occurred to me to be unfair to
you. Therefore so that each of us may be secured,
let us have a document prepared to the effect that
we are partners in the fishpond that we caused to
be made here in Balasinon, but it does not mean
that you will treat me as one of your "Bantay"
(caretaker) on wage basis but not earning wages
at all, while the truth is that we are partners. In
the event that you are not amenable to my
proposition and consider me as "Bantay"
(caretaker) instead, do not blame me if I withdraw
all my cases and be left without even a little and
you
likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a
document be drawn evidencing their partnership, the
appellee Inocencia Deluao and the appellant executed
exhibit A which, although denominated a "contract of
service," was actually the memorandum of their partnership
agreement. That it was not a contract of the services of the
appellant, was admitted by the appellees themselves in their
letter10 to Casteel dated December 19, 1949 wherein they
stated that they did not employ him in his (Casteel's) claim
but because he used their money in developing and
improving the fishpond, his right must be divided between
them. Of course, although exhibit A did not specify any
wage or share appertaining to the appellant as industrial
partner, he was so entitled this being one of the
conditions he specified for the execution of the document of
partnership.11
Further exchanges of letters between the parties reveal the
continuing intent to divide the fishpond. In a letter,12dated
March 24, 1950, the appellant suggested that they divide the
fishpond and the remaining capital, and offered to pay the
Deluaos a yearly installment of P3,000 presumably as
reimbursement for the expenses of the appellees for the
development and improvement of the one-half that would

35

pertain to the appellant. Two days later, the appellee Felipe

Deluao replied,13expressing his concurrence in the
appellant's suggestion and advising the latter to ask for a
reconsideration of the order of the Director of Fisheries
disapproving his (appellant's) application, so that if a
favorable decision was secured, then they would divide the
area.
Apparently relying on the partnership agreement, the
appellee Felipe Deluao saw no further need to maintain his
petition for the reinvestigation of Casteel's application. Thus
by letter14 dated March 15, 1950 addressed to the Secretary
of Agriculture and Natural Resources, he withdrew his
petition on the alleged ground that he was no longer
interested in the area, but stated however that he wanted his
interest to be protected and his capital to be reimbursed by
the highest bidder.
The arrangement under the so-called "contract of service"
continued until the decisions both dated September 15, 1950
were issued by the Secretary of Agriculture and Natural
Resources in DANR Cases 353 and 353-B. This
development, by itself, brought about the dissolution of the
partnership. Moreover, subsequent events likewise reveal
the intent of both parties to terminate the partnership
because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the
causes for the dissolution of a partnership, "... any event
which makes it unlawful for the business of the partnership
to be carried on or for the members to carry it on in
partnership." The approval of the appellant's fishpond
application by the decisions in DANR Cases 353 and 353-B
brought to the fore several provisions of law which made
the continuation of the partnership unlawful and therefore
caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder
of a fishpond permit (the permittee) from transferring or
subletting the fishpond granted to him, without the previous
consent or approval of the Secretary of Agriculture and
Natural Resources.15 To the same effect is Condition No. 3

of the fishpond permit which states that "The permittee shall

not transfer or sublet all or any area herein granted or any
rights acquired therein without the previous consent and
approval of this Office." Parenthetically, we must observe
that in DANR Case 353-B, the permit granted to one of the
parties therein, Leoncio Aradillos, was cancelled not solely
for the reason that his permit covered a portion of the area
included in the appellant's prior fishpond application, but
also because, upon investigation, it was ascertained thru the
admission of Aradillos himself that due to lack of capital, he
allowed one Lino Estepa to develop with the latter's capital
the area covered by his fishpond permit F-289-C with the
understanding that he (Aradillos) would be given a share in
the produce thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the
Public Land Act, likewise provides that
The lessee shall not assign, encumber, or sublet
his rights without the consent of the Secretary of
Agriculture and Commerce, and the violation of
this condition shall avoid the contract; Provided,
That assignment, encumbrance, or subletting for
purposes of speculation shall not be permitted in
any case:Provided, further, That nothing
contained in this section shall be understood or
construed to permit the assignment, encumbrance,
or subletting of lands leased under this Act, or
under any previous Act, to persons, corporations,
or associations which under this Act, are not
authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the
Secretary of Agriculture and Natural Resources issued in
August 1937, prohibits a transfer or sublease unless first
approved by the Director of Lands and under such terms
and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and
improvement may be allowed. If the permittee
or lessee had, unless otherwise specifically
provided, held the permit or lease and actually

operated and made improvements on the area for

at least one year, he/she may request permission
to sub-lease or transfer the area and improvements
under certain conditions.
(a) Transfer subject to approval. A sub-lease
or transfer shall only be valid when first approved
by the Director under such terms and conditions
as may be prescribed, otherwise it shall be null
and void. A transfer not previously approved or
reported shall be considered sufficient cause for
the cancellation of the permit or lease and
forfeiture of the bond and for granting the area to
a qualified applicant or bidder, as provided in
subsection (r) of Sec. 33 of this Order.
Since the partnership had for its object the division into two
equal parts of the fishpond between the appellees and the
appellant after it shall have been awarded to the latter, and
therefore it envisaged the unauthorized transfer of one-half
thereof to parties other than the applicant Casteel, it was
dissolved by the approval of his application and the award
to him of the fishpond. The approval was an event which
made it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership.
The appellees, however, argue that in approving the
appellant's application, the Secretary of Agriculture and
Natural Resources likewise recognized and/or confirmed
their property right to one-half of the fishpond by virtue of
the contract of service, exhibit A. But the untenability of
this argument would readily surface if one were to consider
that the Secretary of Agriculture and Natural Resources did
not do so for the simple reason that he does not possess the
authority to violate the aforementioned prohibitory laws nor
to exempt anyone from their operation.
However, assuming in gratia argumenti that the approval of
Casteel's application, coupled with the foregoing
prohibitory laws, was not enough to cause the
dissolution ipso facto of their partnership, succeeding events

36

reveal the intent of both parties to terminate the partnership

by refusing to share the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee
Inocencia Deluao, expressing his desire to divide the
fishpond so that he could administer his own share, such
division to be subject to the approval of the Secretary of
Agriculture and Natural Resources. By letter dated
December 29, 1950,18 the appellee Felipe Deluao demurred
to Casteel's proposition because there were allegedly no
appropriate grounds to support the same and, moreover, the
conflict over the fishpond had not been finally resolved.
19

The appellant wrote on January 4, 1951 a last letter to the

appellee Felipe Deluao wherein the former expressed his
determination to administer the fishpond himself because
the decision of the Government was in his favor and the
only reason why administration had been granted to the
Deluaos was because he was indebted to them. In the same
letter, the appellant forbade Felipe Deluao from sending the
couple's encargado, Jesus Donesa, to the fishpond. In reply
thereto, Felipe Deluao wrote a letter20 dated January 5, 1951
in which he reiterated his refusal to grant the administration
of the fishpond to the appellant, stating as a ground his
belief "that only the competent agencies of the government
are in a better position to render any equitable arrangement
relative to the present case; hence, any action we may
privately take may not meet the procedure of legal order."
Inasmuch as the erstwhile partners articulated in the
aforecited letters their respective resolutions not to share the
fishpond with each other in direct violation of the
undertaking for which they have established their
partnership each must be deemed to have expressly
withdrawn from the partnership, thereby causing its
dissolution pursuant to art. 1830(2) of the Civil Code which
provides, inter alia, that dissolution is caused "by the
express will of any partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural
Resources possesses executive and administrative powers
with regard to the survey, classification, lease, sale or any

other form of concession or disposition and management of

the lands of the public domain, and, more specifically, with
regard to the grant or withholding of licenses, permits,
leases and contracts over portions of the public domain to
be utilized as fishponds.21, Thus, we held in Pajo, et al. vs.
Ago, et al. (L-15414, June 30, 1960), and reiterated
in Ganitano vs. Secretary of Agriculture and Natural
Resources,
et
al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of
Agriculture and Commerce (Natural Resources)
by law regarding the disposition of public lands
such as granting of licenses, permits, leases, and
contracts, or approving, rejecting, reinstating, or
cancelling applications, or deciding conflicting
applications, are all executive and administrative
in nature. It is a well-recognized principle that
purely administrative and discretionary functions
may not be interfered with by the courts (Coloso
v. Board of Accountancy, G.R. No. L-5750, April
20, 1953). In general, courts have no supervising
power over the proceedings and action of the
administrative departments of the government.
This is generally true with respect to acts
involving the exercise of judgment or discretion,
and findings of fact. (54 Am. Jur. 558-559)
Findings of fact by an administrative board or
official, following a hearing, are binding upon the
courts and will not be disturbed except where the
board or official has gone beyond his statutory
authority, exercised unconstitutional powers or
clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion... (emphasis
supplied)
In the case at bar, the Secretary of Agriculture and Natural
Resources gave due course to the appellant's fishpond
application 1717 and awarded to him the possession of the
area in question. In view of the finality of the Secretary's
decision in DANR Cases 353 and 353-B, and considering
the absence of any proof that the said official exceeded his

statutory authority, exercised unconstitutional powers, or

acted with arbitrariness and in disregard of his duty, or with
grave abuse of discretion, we can do no less than respect
and maintain unfettered his official acts in the premises. It is
a salutary rule that the judicial department should not dictate
to the executive department what to do with regard to the
administration and disposition of the public domain which
the law has entrusted to its care and administration. Indeed,
courts cannot superimpose their discretion on that of the
land department and compel the latter to do an act which
involves the exercise of judgment and discretion.22
Therefore, with the view that we take of this case, and even
assuming that the injunction was properly issued because
present all the requisite grounds for its issuance, its
continuation, and, worse, its declaration as permanent, was
improper in the face of the knowledge later acquired by the
lower court that it was the appellant's application over the
fishpond which was given due course. After the Secretary of
Agriculture and Natural Resources approved the appellant's
application, he became to all intents and purposes the legal
permittee of the area with the corresponding right to
possess, occupy and enjoy the same. Consequently, the
lower court erred in issuing the preliminary mandatory
injunction. We cannot overemphasize that an injunction
should not be granted to take property out of the possession
and control of one party and place it in the hands of another
whose title has not been clearly established by law.23
However, pursuant to our holding that there was a
partnership between the parties for the exploitation of the
fishpond before it was awarded to Casteel, this case should
be remanded to the lower court for the reception of evidence
relative to an accounting from November 25, 1949 to
September 15, 1950, in order for the court to determine (a)
the profits realized by the partnership, (b) the share (in the
profits) of Casteel as industrial partner, (e) the share (in the
profits) of Deluao as capitalist partner, and (d) whether the
amounts totalling about P27,000 advanced by Deluao to
Casteel for the development and improvement of the
fishpond have already been liquidated. Besides, since the
appellee Inocencia Deluao continued in possession and

37

enjoyment of the fishpond even after it was awarded to

Casteel, she did so no longer in the concept of a capitalist
partner but merely as creditor of the appellant, and
therefore, she must likewise submit in the lower court an
accounting of the proceeds of the sales of all the fishes
harvested from the fishpond from September 16, 1950 until
Casteel shall have been finally given the possession and
enjoyment of the same. In the event that the appellee Deluao
has received more than her lawful credit of P27,000 (or
whatever amounts have been advanced to Casteel), plus 6%
interest thereon per annum, then she should reimburse the
excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set
aside. Another judgment is hereby rendered: (1) dissolving
the injunction issued against the appellant, (2) placing the
latter back in possession of the fishpond in litigation, and
(3) remanding this case to the court of origin for the
reception of evidence relative to the accounting that the
parties must perforce render in the premises, at the
termination of which the court shall render judgment
accordingly. The appellant's counterclaim is dismissed. No
pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur.

BALDWIN
YOUNG
CRUZ, respondents.

and

AVELINO

V.

G.R. No. 75951 December 15, 1989

SANITARY
WARES
MANUFACTURING
CORPORATION, ERNESTO R. LAGDAMEO,
ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL
A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE
COURT
OF
APPEALS,
WOLFGANG
AURBACH,
JOHN
GRIFFIN,
DAVID
P.
WHITTINGHAM,
CHARLES
CHAMSAY
and
LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO
E.
SALAZAR, petitioner,
vs.
SANITARY
WARES
MANUFACTURING
CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG, AVELINO V. CRUZ and the
COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.

Aurbach v Sanitary Wares Mfg Corp. (180 S 130) {1989}

G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM
and
CHARLES
CHAMSAY, petitioners,
vs.
SANITARY
WARES
MANUFACTURING
CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E.

Salazar.

and directed that in all subsequent elections for directors of

Sanitary Wares Manufacturing Corporation (Saniwares),
American Standard Inc. (ASI) cannot nominate more than
three (3) directors; that the Filipino stockholders shall not
interfere in ASI's choice of its three (3) nominees; that, on
the other hand, the Filipino stockholders can nominate only
six (6) candidates and in the event they cannot agree on the
six (6) nominees, they shall vote only among themselves to
determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference
from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was
incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr.
Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion
plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an
Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate
in the ownership of an enterprise which would engage
primarily in the business of manufacturing in the
Philippines and selling here and abroad vitreous china and
sanitary wares. The parties agreed that the business
operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation
shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the
issues in these cases on the nomination and election of the
directors of the corporation:

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the
amended decision of the Court of Appeals in CA-G.R. SP
Nos. 05604 and 05617 which set aside the earlier decision
dated June 5, 1986, of the then Intermediate Appellate Court

3. Articles of Incorporation
(a) The Articles of Incorporation of the
Corporation shall be substantially in the
form annexed hereto as Exhibit A and,

38

insofar as permitted under Philippine

law, shall specifically provide for
(1)
Cumulative
voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation
shall be vested in a Board of Directors,
which shall consist of nine individuals.
As long as American-Standard shall
own at least 30% of the outstanding
stock of the Corporation, three of the
nine directors shall be designated by
American-Standard, and the other six
shall be designated by the other
stockholders of the Corporation. (pp. 51
& 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions
designed to protect it as a minority group, including the
grant of veto powers over a number of corporate acts and
the right to designate certain officers, such as a member of
the Executive Committee whose vote was required for
important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%.
The corporation was also registered with the Board of
Investments for availment of incentives with the condition
that at least 60% of the capital stock of the corporation shall
be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino
investors and the American corporation prospered.
Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between
the two groups. According to the Filipino group, a basic
disagreement was due to their desire to expand the export

operations of the company to which ASI objected as it

apparently had other subsidiaries of joint joint venture
groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders'
meeting was held. The meeting was presided by Baldwin
Young. The minutes were taken by the Secretary, Avelino
Cruz. After disposing of the preliminary items in the
agenda, the stockholders then proceeded to the election of
the members of the board of directors. The ASI group
nominated three persons namely; Wolfgang Aurbach, John
Griffin and David P. Whittingham. The Philippine investors
nominated six, namely; Ernesto Lagdameo, Sr., Raul A.
Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then nominated
Mr. Luciano E. Salazar, who in turn nominated Mr. Charles
Chamsay. The chairman, Baldwin Young ruled the last two
nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the
past annual stockholders' meetings to nominate only nine
persons as nominees for the nine-member board of
directors, and the legal advice of Saniwares' legal counsel.
The following events then, transpired:
... There were protests against the action
of the Chairman and heated arguments
ensued. An appeal was made by the ASI
representative to the body of
stockholders present that a vote be taken
on the ruling of the Chairman. The
Chairman, Baldwin Young, declared the
appeal out of order and no vote on the
ruling was taken. The Chairman then
instructed the Corporate Secretary to
cast all the votes present and
represented by proxy equally for the 6
nominees of the Philippine Investors
and the 3 nominees of ASI, thus
effectively excluding the 2 additional
persons nominated, namely, Luciano E.
Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the
decision of the Chairman and
announced that all votes accruing to

ASI shares, a total of 1,329,695 (p. 27,

Rollo, AC-G.R. SP No. 05617) were
being cumulatively voted for the three
ASI nominees and Charles Chamsay,
and instructed the Secretary to so vote.
Luciano E. Salazar and other proxy
holders announced that all the votes
owned by and or represented by them
467,197 shares (p. 27, Rollo, AC-G.R.
SP No. 05617) were being voted
cumulatively in favor of Luciano E.
Salazar. The Chairman, Baldwin
Young, nevertheless instructed the
Secretary to cast all votes equally in
favor of the three ASI nominees,
namely, Wolfgang Aurbach, John
Griffin and David Whittingham and the
six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo,
Sr., Raul Boncan, Ernesto Lagdameo,
Jr., Enrique Lagdameo, George F. Lee,
and Baldwin Young. The Secretary then
certified for the election of the
following Wolfgang Aurbach, John
Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee,
Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to
recess the meeting which was duly
seconded. There was also a motion to
adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was
accepted by the Chairman, Baldwin
Young, who announced that the motion
was carried and declared the meeting
adjourned.
Protests
against
the
adjournment were registered and having
been ignored, Mr. Jaqua the ASI
representative, stated that the meeting
was not adjourned but only recessed and
that the meeting would be reconvened
in the next room. The Chairman then

39

threatened to have the stockholders who

did not agree to the decision of the
Chairman on the casting of votes bodily
thrown out. The ASI Group, Luciano E.
Salazar
and other
stockholders,
allegedly representing 53 or 54% of the
shares of Saniwares, decided to
continue the meeting at the elevator
lobby of the American Standard
Building. The continued meeting was
presided by Luciano E. Salazar, while
Andres Gatmaitan acted as Secretary.
On the basis of the cumulative votes
cast earlier in the meeting, the ASI
Group nominated its four nominees;
Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay.
Luciano E. Salazar voted for himself,
thus the said five directors were
certified as elected directors by the
Acting Secretary, Andres Gatmaitan,
with the explanation that there was a tie
among the other six (6) nominees for
the four (4) remaining positions of
directors and that the body decided not
to break the tie. (pp. 37-39, Rollo of
75975-76)
These incidents triggered off the filing of separate petitions
by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for
preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo and George F. Lee against Luciano
Salazar and Charles Chamsay. The case was denominated as
SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang
Aurbach, John Griffin, David Whittingham, Luciano E.
Salazar and Charles Chamsay against the group of Young
and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No.
2718. Both sets of parties except for Avelino Cruz claimed
to be the legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a

hearing officer who rendered a decision upholding the
election of the Lagdameo Group and dismissing the quo
warranto petition of Salazar and Chamsay. The ASI Group
and Salazar appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals
with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles
Chamsay (docketed as AC-G.R. SP No. 05604) and by
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617).
The petitions were consolidated and the appellate court in
its decision ordered the remand of the case to the Securities
and Exchange Commission with the directive that a new
stockholders' meeting of Saniwares be ordered convoked as
soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees
Lagdameo Group) the appellate court (Court of Appeals)
rendered the questioned amended decision. Petitioners
Wolfgang Aurbach, John Griffin, David P. Whittingham
and Charles Chamsay in G.R. No. 75875 assign the
following errors:
I. THE COURT OF APPEALS, IN
EFFECT, UPHELD THE ALLEGED
ELECTION
OF
PRIVATE
RESPONDENTS AS MEMBERS OF
THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT
THERE WAS NO ELECTION AT
ALL.
II. THE COURT OF APPEALS
PROHIBITS THE STOCKHOLDERS
FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED
BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING
PETITIONERS
AND
THE
CORPORATION THEY REPRESENT

OF THEIR PROPERTY RIGHTS

WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS
IMPOSES
CONDITIONS
AND
READS PROVISIONS INTO THE
AGREEMENT OF THE PARTIES
WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO.
(p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails
the amended decision on the following grounds:
11.1.
ThatAmendedDecisionwouldsanctionth
eCA'sdisregard of binding contractual
agreements entered into by stockholders
and the replacement of the conditions of
such agreements with terms never
contemplated by the stockholders but
merely dictated by the CA .
11.2. The Amended decision would
likewise sanction the deprivation of the
property rights of stockholders without
due process of law in order that a
favored group of stockholders may be
illegally benefitted and guaranteed a
continuing monopoly of the control of a
corporation. (pp. 14-15, Rollo-7597576)
On the other hand, the petitioners in G.R. No. 75951
contend that:
I
THE AMENDED DECISION OF THE
RESPONDENT COURT, WHILE
RECOGNIZING
THAT
THE

40

STOCKHOLDERS OF SANIWARES
ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE
BASIC
INTENT
OF
THE
AGREEMENT AND THE LAW.

wherein it is clearly stated that the parties' intention was to

form a corporation and not a joint venture.

(b) When there is an intrinsic ambiguity

in the writing.

They specifically mention number 16 under Miscellaneous

Provisions which states:

Contrary to ASI Group's stand, the Lagdameo and Young

Group pleaded in their Reply and Answer to Counterclaim
in SEC Case No. 2417 that the Agreement failed to express
the true intent of the parties, to wit:

II

xxx xxx xxx

THE AMENDED DECISION DOES

NOT
CATEGORICALLY
RULE
THAT
PRIVATE PETITIONERS
HEREIN
WERE
THE
DULY
ELECTED DIRECTORS DURING
THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF
SANTWARES. (P. 24, Rollo-75951)

c) nothing herein contained shall be

construed to constitute any of the parties
hereto partners or joint venturers in
respect of any transaction hereunder.
(At P. 66, Rollo-GR No. 75875)

The issues raised in the petitions are interrelated, hence,

they are discussed jointly.
The main issue hinges on who were the duly elected
directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer
this question the following factors should be determined: (1)
the nature of the business established by the parties whether
it was a joint venture or a corporation and (2) whether or not
the ASI Group may vote their additional 10% equity during
elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract
have thereby established among themselves a joint venture
or some other relation depends upon their actual intention
which is determined in accordance with the rules governing
the interpretation and construction of contracts. (Terminal
Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F
Supp 678; Universal Sales Corp. v. California Press Mfg.
Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76)
contend that the actual intention of the parties should be
viewed strictly on the "Agreement" dated August 15,1962

They object to the admission of other evidence which tends

to show that the parties' agreement was to establish a joint
venture presented by the Lagdameo and Young Group on
the ground that it contravenes the parol evidence rule under
section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never
pleaded in their pleading that the "Agreement" failed to
express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When
the terms of an agreement have been
reduced to writing, it is to be considered
as containing all such terms, and
therefore, there can be, between the
parties and their successors in interest,
no evidence of the terms of the
agreement other than the contents of the
writing, except in the following cases:
(a) Where a mistake or imperfection of
the writing, or its failure to express the
true intent and agreement of the parties
or the validity of the agreement is put in
issue by the pleadings.

xxx xxx xxx

4. While certain provisions of the
Agreement would make it appear that
the parties thereto disclaim being
partners or joint venturers such
disclaimer is directed at third parties
and is not inconsistent with, and does
not preclude, the existence of two
distinct groups of stockholders in
Saniwares one of which (the Philippine
Investors) shall constitute the majority,
and the other ASI shall constitute the
minority stockholder. In any event, the
evident intention of the Philippine
Investors and ASI in entering into the
Agreement is to enter into ajoint venture
enterprise, and if some words in the
Agreement appear to be contrary to the
evident intention of the parties, the latter
shall prevail over the former (Art. 1370,
New Civil Code). The various
stipulations of a contract shall be
interpreted together attributing to the
doubtful ones that sense which may
result from all of them taken jointly
(Art. 1374, New Civil Code). Moreover,
in order to judge the intention of the
contracting
parties,
their
contemporaneous and subsequent acts
shall be principally considered. (Art.
1371, New Civil Code). (Part I, Original
Records, SEC Case No. 2417)

41

It has been ruled:

In an action at law, where there is
evidence tending to prove that the
parties joined their efforts in furtherance
of an enterprise for their joint profit, the
question whether they intended by their
agreement to create a joint adventure, or
to assume some other relation is a
question of fact for the jury. (Binder v.
Kessler v 200 App. Div. 40,192 N Y S
653; Pyroa v. Brownfield (Tex. Civ. A.)
238 SW 725; Hoge v. George, 27 Wyo,
423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions
of the Agreement as well as the testimonial evidence
presented by the Lagdameo and Young Group shows that
the parties agreed to establish a joint venture and not a
corporation. The history of the organization of Saniwares
and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not
with an ordinary corporation. As stated by the SEC:

contractually entitled to designate a

member of the Executive Committee
and the vote of this member is required
for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75%
super-majority vote for the amendment
of the articles and by-laws of Saniwares
[Sec. 3 (a) (iv) and (b) (iii)]. ASI is also
given the right to designate the
president and plant manager [Sec. 5
(6)]. The Agreement further provides
that the sales policy of Saniwares shall
be that which is normally followed by
ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products
otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under
the Agreement, ASI agreed to provide
technology and know-how to Saniwares
and the latter paid royalties for the
same. (At p. 2).
xxx xxx xxx

According to the unrebutted testimony

of Mr. Baldwin Young, he negotiated
the Agreement with ASI in behalf of the
Philippine nationals. He testified that
ASI agreed to accept the role of
minority vis-a-vis the Philippine
National group of investors, on the
condition that the Agreement should
contain provisions to protect ASI as the
minority.
An examination of the Agreement
shows that certain provisions were
included to protect the interests of ASI
as the minority. For example, the vote
of 7 out of 9 directors is required in
certain enumerated corporate acts [Sec.
3 (b) (ii) (a) of the Agreement]. ASI is

It is pertinent to note that the provisions

of the Agreement requiring a 7 out of 9
votes of the board of directors for
certain actions, in effect gave ASI
(which designates 3 directors under the
Agreement) an effective veto power.
Furthermore, the grant to ASI of the
right to designate certain officers of the
corporation; the super-majority voting
requirements for amendments of the
articles and by-laws; and most
significantly to the issues of tms case,
the provision that ASI shall designate 3
out of the 9 directors and the other
stockholders shall designate the other 6,
clearly indicate that there are two
distinct groups in Saniwares, namely

ASI, which owns 40% of the capital

stock and the Philippine National
stockholders who own the balance of
60%, and that 2) ASI is given certain
protections as the minority stockholder.
Premises considered, we believe that
under the Agreement there are two
groups of stockholders who established
a corporation with provisions for a
special contractual relationship between
the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated"
and not "nominated" or "elected" in the selection of the nine
directors on a six to three ratio. Each group is assured of a
fixed number of directors in the board.
Moreover, ASI in its communications referred to the
enterprise as joint venture. Baldwin Young also testified
that Section 16(c) of the Agreement that "Nothing herein
contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any
transaction hereunder" was merely to obviate the possibility
of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop
the industrial and manufacturing capacities of a local firm
are constrained to seek the technology and marketing
assistance of huge multinational corporations of the
developed world. Arrangements are formalized where a
foreign group becomes a minority owner of a firm in
exchange for its manufacturing expertise, use of its brand
names, and other such assistance. However, there is always
a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters,
so to speak. Or the covetousness may come later. As the
Philippine firm enlarges its operations and becomes

42

profitable, the foreign group undermines the local majority

ownership and actively tries to completely or predominantly
take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least.
To the extent that such subversive actions can be lawfully
prevented, the courts should extend protection especially in
industries where constitutional and legal requirements
reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the
Court of Appeal
In fact, the Philippine Corporation Code
itself
recognizes
the right
of
stockholders to enter into agreements
regarding the exercise of their voting
rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx
2. An agreement between two or more
stockholders, if in writing and signed by
the parties thereto, may provide that in
exercising any voting rights, the shares
held by them shall be voted as therein
provided, or as they may agree, or as
determined in accordance with a
procedure agreed upon by them.
Appellants contend that the above
provision is included in the Corporation
Code's chapter on close corporations
and Saniwares cannot be a close
corporation because it has 95
stockholders.
Firstly,
although
Saniwares had 95 stockholders at the
time of the disputed stockholders
meeting, these 95 stockholders are not
separate from each other but are

divisible into groups representing a

single Identifiable interest. For example,
ASI, its nominees and lawyers count for
13 of the 95 stockholders. The
YoungYutivo family count for another
13 stockholders, the Chamsay family
for 8 stockholders, the Santos family for
9 stockholders, the Dy family for 7
stockholders, etc. If the members of one
family and/or business or interest group
are considered as one (which, it is
respectfully submitted, they should be
for purposes of determining how closely
held Saniwares is there were as of 8
March 1983, practically only 17
stockholders of Saniwares. (Please refer
to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11
December 1984 and Annex "A"
thereof).
Secondly, even assuming that Saniwares
is technically not a close corporation
because it has more than 20
stockholders, the undeniable fact is that
it is a close-held corporation. Surely,
appellants cannot honestly claim that
Saniwares is a public issue or a widely
held corporation.
In the United States, many courts have
taken a realistic approach to joint
venture corporations and have not
rigidly applied principles of corporation
law designed primarily for public issue
corporations. These courts have
indicated that express arrangements
between corporate joint ventures should
be construed with less emphasis on the
ordinary rules of law usually applied to
corporate entities and with more
consideration given to the nature of the

agreement between the joint venturers

(Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines
Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast
Line Ry; 240 N.C. 495,.82 S.E. 2d 771;
Deboy v. Harris, 207 Md., 212,113 A
2d 903; Hathway v. Porter Royalty
Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S.
262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p.
680,1958). These American cases dealt
with legal questions as to the extent to
which the requirements arising from the
corporate form of joint venture
corporations should control, and the
courts ruled that substantial justice lay
with those litigants who relied on the
joint venture agreement rather than the
litigants who relied on the orthodox
principles of corporation law.
As correctly held by the SEC Hearing
Officer:
It is said that participants in a joint
venture, in organizing the joint venture
deviate from the traditional pattern of
corporation management. A noted
authority has pointed out that just as in
close
corporations,
shareholders'
agreements in joint venture corporations
often contain provisions which do one
or more of the following: (1) require
greater than majority vote for
shareholder and director action; (2) give
certain shareholders or groups of
shareholders power to select a specified
number of directors; (3) give to the
shareholders control over the selection

43

and retention of employees; and (4) set

up a procedure for the settlement of
disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section
1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the
Corporation Code does not necessarily
imply that agreements regarding the
exercise of voting rights are allowed
only in close corporations. As Campos
and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting
agreements in particular. Does this
provision necessarily imply that these
agreements can be valid only in close
corporations as defined by the Code?
Suppose that a corporation has twenty
five stockholders, and therefore cannot
qualify as a close corporation under
section 96, can some of them enter into
an agreement to vote as a unit in the
election of directors? It is submitted that
there is no reason for denying
stockholders of corporations other than
close ones the right to enter into not
voting or pooling agreements to protect
their interests, as long as they do not
intend to commit any wrong, or fraud
on the other stockholders not parties to
the agreement. Of course, voting or
pooling agreements are perhaps more
useful and more often resorted to in
close corporations. But they may also be
found necessary even in widely held
corporations. Moreover, since the Code
limits the legal meaning of close
corporations to those which comply
with the requisites laid down by section
96, it is entirely possible that a

corporation which is in fact a close

corporation will not come within the
definition. In such case, its stockholders
should not be precluded from entering
into contracts like voting agreements if
these are otherwise valid. (Campos &
Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of
the Agreement relating to the
designation or nomination of directors
restricts the right of the Agreement's
signatories to vote for directors, such
contractual provision, as correctly held
by the SEC, is valid and binding upon
the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group
may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals
correctly stated:
As in other joint venture companies, the
extent of ASI's participation in the
management of the corporation is
spelled out in the Agreement. Section
5(a) hereof says that three of the nine
directors shall be designated by ASI and
the remaining six by the other
stockholders,
i.e.,
the
Filipino
stockholders. This allocation of board
seats is obviously in consonance with
the minority position of ASI.
Having entered into a well-defined
contractual relationship, it is imperative
that the parties should honor and adhere
to their respective rights and obligations
thereunder. Appellants seem to contend
that any allocation of board seats, even
in joint venture corporations, are null

and void to the extent that such may

interfere with the stockholder's rights to
cumulative voting as provided in
Section 24 of the Corporation Code.
This Court should not be prepared to
hold that any agreement which curtails
in any way cumulative voting should be
struck down, even if such agreement has
been freely entered into by experienced
businessmen and do not prejudice those
who are not parties thereto. It may well
be that it would be more cogent to hold,
as the Securities and Exchange
Commission has held in the decision
appealed from, that cumulative voting
rights may be voluntarily waived by
stockholders who enter into special
relationships with each other to pursue
and implement specific purposes, as in
joint venture relationships between
foreign and local stockholders, so long
as such agreements do not adversely
affect third parties.
In any event, it is believed that we are
not here called upon to make a general
rule on this question. Rather, all that
needs to be done is to give life and
effect to the particular contractual rights
and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established
minority position of ASI and the
contractual allocation of board seats
Cannot be disregarded. On the other
hand, the rights of the stockholders to
cumulative voting should also be
protected.
In our decision sought to be
reconsidered, we opted to uphold the

44

second over the first. Upon further

reflection, we feel that the proper and
just solution to give due consideration
to both factors suggests itself quite
clearly. This Court should recognize
and uphold the division of the
stockholders into two groups, and at the
same time uphold the right of the
stockholders within each group to
cumulative voting in the process of
determining who the group's nominees
would be. In practical terms, as
suggested by appellant Luciano E.
Salazar himself, this means that if the
Filipino stockholders cannot agree who
their six nominees will be, a vote would
have to be taken among the Filipino
stockholders only. During this voting,
each Filipino stockholder can cumulate
his votes. ASI, however, should not be
allowed to interfere in the voting within
the Filipino group. Otherwise, ASI
would be able to designate more than
the three directors it is allowed to
designate under the Agreement, and
may even be able to get a majority of
the board seats, a result which is clearly
contrary to the contractual intent of the
parties.
Such a ruling will give effect to both the
allocation of the board seats and the
stockholder's right to cumulative voting.
Moreover, this ruling will also give due
consideration to the issue raised by the
appellees on possible violation or
circumvention of the Anti-Dummy Law
(Com. Act No. 108, as amended) and
the nationalization requirements of the
Constitution and the laws if ASI is
allowed to nominate more than three
directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their

theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation
Code which gives the stockholders of a corporation the right
to cumulate their votes in electing directors. Petitioner
Salazar adds that this right if granted to the ASI Group
would not necessarily mean a violation of the Anti-Dummy
Act (Commonwealth Act 108, as amended). He cites section
2-a thereof which provides:
And provided finally that the election of
aliens as members of the board of
directors or governing body of
corporations or associations engaging in
partially nationalized activities shall be
allowed in proportion to their allowable
participation or share in the capital of
such entities. (amendments introduced
by Presidential Decree 715, section 1,
promulgated May 28, 1975)
The ASI Group's argument is correct within the context of
Section 24 of the Corporation Code. The point of query,
however, is whether or not that provision is applicable to a
joint venture with clearly defined agreements:
The legal concept of ajoint venture is of
common law origin. It has no precise
legal definition but it has been generally
understood to mean an organization
formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811
[1920]) It is in fact hardly
distinguishable from the partnership,
since their elements are similar
community of interest in the business,
sharing of profits and losses, and a
mutual right of control. Blackner v. Mc
Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal.
2d. 183, 288 P. 2d. 12 289 P. 2d. 242

[1955]). The main distinction cited by

most opinions in common law
jurisdictions is that the partnership
contemplates a general business with
some degree of continuity, while the
joint venture is formed for the execution
of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann 116
Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266
Fed. 811 [1920]). This observation is
not entirely accurate in this jurisdiction,
since under the Civil Code, a
partnership may be particular or
universal, and a particular partnership
may have for its object a specific
undertaking. (Art. 1783, Civil Code). It
would seem therefore that under
Philippine law, a joint venture is a form
of partnership and should thus be
governed by the law of partnerships.
The Supreme Court has however
recognized a distinction between these
two business forms, and has held that
although a corporation cannot enter into
a partnership contract, it may however
engage in a joint venture with others.
(At p. 12, Tuazon v. Bolanos, 95 Phil.
906 [1954]) (Campos and LopezCampos Comments, Notes and Selected
Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and
operations of contracts generally apply to a contract of joint
venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS
556).
Bearing these principles in mind, the correct view would be
that the resolution of the question of whether or not the ASI
Group may vote their additional equity lies in the agreement
of the parties.

45

Necessarily, the appellate court was correct in upholding the

agreement of the parties as regards the allocation of director
seats under Section 5 (a) of the "Agreement," and the right
of each group of stockholders to cumulative voting in the
process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out
by SEC, Section 5 (a) of the Agreement relates to the
manner of nominating the members of the board of directors
while Section 3 (a) (1) relates to the manner of voting for
these nominees.
This is the proper interpretation of the Agreement of the
parties as regards the election of members of the board of
directors.
To allow the ASI Group to vote their additional equity to
help elect even a Filipino director who would be beholden
to them would obliterate their minority status as agreed
upon by the parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed
to interfere in the voting within the
Filipino group. Otherwise, ASI would
be able to designate more than the three
directors it is allowed to designate under
the Agreement, and may even be able to
get a majority of the board seats, a result
which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the
allocation of the board seats and the
stockholder's right to cumulative voting.
Moreover, this ruling will also give due
consideration to the issue raised by the
appellees on possible violation or
circumvention of the Anti-Dummy Law
(Com. Act No. 108, as amended) and
the nationalization requirements of the
Constitution and the laws if ASI is
allowed to nominate more than three
directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual

intent of the parties is the consideration as regards the
possible domination by the foreign investors of the
enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the AntiDummy Act. In this regard, petitioner Salazar's position is
that the Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in the capital of
the entity. It is to be noted, however, that the same law also
limits the election of aliens as members of the board of
directors in proportion to their allowance participation of
said entity. In the instant case, the foreign Group ASI was
limited to designate three directors. This is the allowable
participation of the ASI Group. Hence, in future dealings,
this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board
of directors there are provisions already agreed upon and
embodied in the parties' Agreement to protect the interests
arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing
Officer and SEC which were impliedly affirmed by the
appellate court declaring Messrs. Wolfgang Aurbach, John
Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected
directors of Saniwares at the March 8,1983 annual
stockholders' meeting.
On the other hand, the Lagdameo and Young Group
(petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the
enterprise as ruled by the appellate court and submits that
the six (6) directors allotted the Filipino stockholders should
be selected by consensus pursuant to section 5 (a) of the
Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."
They also stress the possibility that the ASI Group might
take control of the enterprise if the Filipino stockholders are

allowed to select their nominees separately and not as a

common slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word
designates in the allocation of board directors should not be
interpreted in isolation. This should be construed in relation
to section 3 (a) (1) of the Agreement. As we stated earlier,
section 3(a) (1) relates to the manner of voting for these
nominees which is cumulative voting while section 5(a)
relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed
to this procedure, hence, they cannot now impugn its
legality.
The insinuation that the ASI Group may be able to control
the enterprise under the cumulative voting procedure
cannot, however, be ignored. The validity of the cumulative
voting procedure is dependent on the directors thus elected
being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the
management of Saniwares. The joint venture character of
the enterprise must always be taken into account, so long as
the company exists under its original agreement.
Cumulative voting may not be used as a device to enable
ASI to achieve stealthily or indirectly what they cannot
accomplish openly. There are substantial safeguards in the
Agreement which are intended to preserve the majority
status of the Filipino investors as well as to maintain the
minority status of the foreign investors group as earlier
discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and
G.R. No. 75875 are DISMISSED and the petition in G.R.
No. 75951 is partly GRANTED. The amended decision of
the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach John Griffin, David Whittingham
Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George
F. Lee are declared as the duly elected directors of
Saniwares at the March 8,1983 annual stockholders'
meeting. In all other respects, the questioned decision is

46

AFFIRMED. Costs against the petitioners in G.R. Nos.

75975-76 and G.R. No. 75875.
SO ORDERED.

Evangelista v CIR (102 P 140) {1957}

G.R. No. L-9996

1. That the petitioners borrowed from their father

the sum of P59,1400.00 which amount together
with their personal monies was used by them for
the purpose of buying real properties,.
2. That on February 2, 1943, they bought from
Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon
from the sum of P100,000.00; this property has an
assessed value of P57,517.00 as of 1948;

7. That after having bought the above-mentioned

real properties the petitioners had the same rented
or leases to various tenants;
8. That from the month of March, 1945 up to an
including December, 1945, the total amount
collected as rents on their real properties was
P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental
income of P5,948.33;

October 15, 1957

EUFEMIA
EVANGELISTA,
MANUELA
EVANGELISTA, and FRANCISCA EVANGELISTA,
petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant
Solicitor General Esmeraldo Umali and Solicitor Felicisimo
R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela
Evangelista and Francisca Evangelista, for review of a
decision of the Court of Tax Appeals, the dispositive part of
which reads:
FOR ALL THE FOREGOING, we hold that the
petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years
1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total
amount of P6,878.34, which is hereby affirmed
and the petition for review filed by petitioner is
hereby dismissed with costs against petitioners.

3. That on April 3, 1944 they purchased from

Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including
improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as
of 1948;
4. That on April 28, 1944 they purchased from the
Insular Investments Inc., a lot of 4,353 sq. m.
including improvements thereon for P108,825.00.
This property has an assessed value of P4,983.00
as of 1948;
5. That on April 28, 1944 they bought form Mrs.
Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This
property has an assessed value of P59,140.00 as
of 1948;
6. That in a document dated August 16, 1945,
they appointed their brother Simeon Evangelista
to 'manage their properties with full power to
lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits
against the defaulting tenants; to sign all letters,
contracts, etc., for and in their behalf, and to
endorse and deposit all notes and checks for them;

9. That on 1946, they realized a gross rental

income of in the sum of P24,786.30, out of which
amount was deducted in the sum of P16,288.27
for expenses thereby leaving them a net rental
income of P7,498.13;
10. That in 1948, they realized a gross rental
income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses,
thereby leaving them a net rental income of
P12,615.35.
It further appears that on September 24, 1954 respondent
Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as
follows:
INCOME TAXES
1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

It appears from the stipulation submitted by the parties:

47

1949
Total including surcharge and compromise
REAL ESTATE DEALER'S FIXED TAX
1946
1947
1948
1949
Total including penalty
RESIDENCE TAXES OF CORPORATION

reversed, and that they be absolved from the payment of the

1,575.90
taxes in question, with costs against the respondent.
P6,157.09
After appropriate proceedings, the Court of Tax Appeals the
above-mentioned decision for the respondent, and a petition
for reconsideration and new trial having been subsequently
denied, the case is now before Us for review at the instance
P37.50 of the petitioners.
150.00 The issue in this case whether petitioners are subject to the
tax on corporations provided for in section 24 of
150.00 Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence
150.00 tax for corporations and the real estate dealers fixed tax.
With respect to the tax on corporations, the issue hinges on
the meaning of the terms "corporation" and "partnership," as
P527.00
used in section 24 and 84 of said Code, the pertinent parts of
which read:

1945

P38.75

1946

38.75

1947

38.75

SEC. 24. Rate of tax on corporations.There

shall be levied, assessed, collected, and paid
annually upon the total net income received in the
preceding taxable year from all sources by every
corporation organized in, or existing under the
laws of the Philippines, no matter how created or
organized but not including duly registered
general co-partnerships (compaias colectivas), a
tax upon such income equal to the sum of the
following: . . .

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were

delivered to petitioners on December 3, 1954, whereupon
they instituted the present case in the Court of Tax Appeals,
with a prayer that "the decision of the respondent contained
in his letter of demand dated September 24, 1954" be

SEC. 84 (b). The term 'corporation' includes

partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion),
associations
or
insurance
companies, but does not include duly registered
general copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more
persons bind themselves to contribute money,

properly, or industry to a common fund, with the

intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a
partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties.
The first element is undoubtedly present in the case at bar,
for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence,
the issue narrows down to their intent in acting as they did.
Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves,
because:
1. Said common fund was not something they
found already in existence. It was not property
inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish
said common fund.
2. They invested the same, not merely not merely
in one transaction, but in a series of transactions.
On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21
lots for P18,000.00. This was soon followed on
April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April
28, 1944), they got a fourth lot for P237,234.14.
The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum
between each, particularly the last three
purchases, is strongly indicative of a pattern or
common design that was not limited to the
conservation
and
preservation
of
the
aforementioned common fund or even of the
property acquired by the petitioners in February,
1943. In other words, one cannot but perceive a

48

character of habitually peculiar to business

transactions engaged in the purpose of gain.

circumstances were present in the cases cited by petitioners

herein, and, hence, those cases are not in point.

3. The aforesaid lots were not devoted to

residential purposes, or to other personal uses, of
petitioners herein. The properties were leased
separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30
by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest
that there has been any change in the utilization
thereof.

Petitioners insist, however, that they are mere co-owners,

not copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that
of its members, did not come into existence, and some of
the characteristics of partnerships are lacking in the case at
bar. This pretense was correctly rejected by the Court of
Tax Appeals.

4. Since August, 1945, the properties have been

under the management of one person, namely
Simeon Evangelista, with full power to lease, to
collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the
same belonged to a corporation or business and
enterprise operated for profit.
5. The foregoing conditions have existed for more
than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired,
and over twelve (12) years, since Simeon
Evangelista became the manager.
6. Petitioners have not testified or introduced any
evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its
continued existence. They did not even try to offer
an explanation therefor.
Although, taken singly, they might not suffice to establish
the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave
no room for doubt on the existence of said intent in
petitioners herein. Only one or two of the aforementioned

To begin with, the tax in question is one imposed upon

"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore,
to organizations which are not necessarily "partnerships", in
the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely
one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said
Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity
with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of
the tax on corporations. Again, pursuant to said section
84(b), the term "corporation" includes, among other, joint
accounts,
(cuentas
en
participation)"
and
"associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly registered
general copartnerships" which are possessed of the
aforementioned personality have been expressly
excluded by law (sections 24 and 84 [b] from the
connotation of the term "corporation" It may not be amiss to
add that petitioners' allegation to the effect that their
liability in connection with the leasing of the lots above

referred to, under the management of one person even if

true, on which we express no opinion tends
to increase the similarity between the nature of their venture
and that corporations, and is, therefore, an additional
argument in favor of the imposition of said tax on
corporations.
Under the Internal Revenue Laws of the United States,
"corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance
companies." However, the term "association" is not used in
the aforementioned laws.
. . . in any narrow or technical sense. It includes
any organization, created for the transaction of
designed affairs, or the attainment of some object,
which
like
a
corporation,
continues
notwithstanding that its members or participants
change, and the affairs of which, like corporate
affairs, are conducted by a single individual, a
committee, a board, or some other group, acting in
a representative capacity. It is immaterial whether
such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock
corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and
'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange
operating through an attorney in fact, a
partnership association, and any other type of
organization (by whatever name known) which is
not, within the meaning of the Code, a trust or an
estate, or a partnership. (7A Mertens Law of
Federal Income Taxation, p. 788; emphasis
supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership,
under the term 'partnership 'it includes not only a

49

partnership as known at common law but, as well,

a syndicate, group, pool, joint venture or other
unincorporated organizations which carries on
any business financial operation, or venture, and
which is not, within the meaning of the Code, a
trust, estate, or a corporation. . . (7A Merten's Law
of Federal Income taxation, p. 789; emphasis
supplied.)
The term 'partnership' includes a syndicate, group,
pool, joint venture or other unincorporated
organization, through or by means of which any
business, financial operation, or venture is
carried on, . . .. ( 8 Merten's Law of Federal
Income Taxation, p. 562 Note 63; emphasis
supplied.) .
For purposes of the tax on corporations, our National
Internal Revenue Code, includes these partnerships with
the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute
a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of
Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation,
no matter how created or organized, whether
domestic or resident foreign, engaged in or doing
business in the Philippines shall pay an annual
residence tax of five pesos and an annual
additional tax which in no case, shall exceed one
thousand pesos, in accordance with the following
schedule: . . .
The term 'corporation' as used in this Act includes
joint-stock company, partnership, joint account
(cuentas en participacion), association or

insurance company, no matter how created or

organized. (emphasis supplied.)

Fortis v Guiterrez (6 P 100)

G.R. No. L-2484

Considering that the pertinent part of this provision is

analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and
that the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act
No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes
with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually
engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals
of said properties from June 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax
provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in
the
business
of
buying,
selling,
exchanging, leasing, or renting property or his
own account as principal and holding himself out
as a full or part time dealer in real estate or as an
owner of rental property or properties rented or
offered to rent for an aggregate amount of three
thousand pesos or more a year. . . (emphasis
supplied.)
Wherefore, the appealed decision of the Court of Tax
appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L.,
Endencia and Felix, JJ., concur.

April 11, 1906

JOHN
FORTIS, plaintiff-appellee,
vs.
GUTIERREZ HERMANOS, defendants-appellants.
Hartigan, Rohde and Gutierrez,
W. A. Kincaid, for appellee.

for

appellants.

WILLARD, J.:
Plaintiff, an employee of defendants during the years 1900,
1901, and 1902, brought this action to recover a balance due
him as salary for the year 1902. He alleged that he was
entitled, as salary, to 5 per cent of the net profits of the
business of the defendants for said year. The complaint also
contained a cause of action for the sum of 600 pesos, money
expended by plaintiff for the defendants during the year
1903. The court below, in its judgment, found that the
contract had been made as claimed by the plaintiff; that 5
per cent of the net profits of the business for the year 1902
amounted to 26,378.68 pesos, Mexican currency; that the
plaintiff had received on account of such salary 12,811.75
pesos, Mexican currency, and ordered judgment against the
defendants for the sum 13,566.93 pesos, Mexican currency,
with interest thereon from December 31, 1904. The court
also ordered judgment against the defendants for the 600
pesos mentioned in the complaint, and intereat thereon. The
total judgment rendered against the defendants in favor of
the plaintiff, reduced to Philippine currency, amounted to
P13,025.40. The defendants moved for a new trial, which
was denied, and they have brought the case here by bill of
exceptions.
(1) The evidence is sufifcient to support the finding of the
court below to the effect that the plaintiff worked for the
defendants during the year 1902 under a contract by which
he was to receive as compensation 5 per cent of the net
profits of the business. The contract was made on the part of

50

the defendants by Miguel Alonzo Gutierrez. By the

provisions of the articles of partnership he was made one of
the managers of the company, with full power to transact all
of the business thereof. As such manager he had authority to
make a contract of employment with the plaintiff.
(2) Before answering in the court below, the defendants
presented a motion that the complaint be made more
definite and certain. This motion was denied. To the order
denying it the defendants excepted, and they have assigned
as error such ruling of the court below. There is nothing in
the record to show that the defendants were in any way
prejudiced by this ruling of the court below. If it were error
it was error without prejudice, and not ground for reversal.
(Sec. 503, Code of Civil Procedure.)
(3) It is claimed by the appellants that the contract alleged in
the complaint made the plaintiff a copartner of the
defendants in the business which they were carrying on.
This contention can not bo sustained. It was a mere contract
of employnent. The plaintiff had no voice nor vote in the
management of the affairs of the company. The fact that the
compensation received by him was to be determined with
reference to the profits made by the defendants in their
business did not in any sense make by a partner therein. The
articles of partnership between the defendants provided that
the profits should be divided among the partners named in a
certain proportion. The contract made between the plaintiff
and the then manager of the defendant partnership did not in
any way vary or modify this provision of the articles of
partnership. The profits of the business could not be
determined until all of the expenses had been paid. A part of
the expenses to be paid for the year 1902 was the salary of
the plaintiff. That salary had to be deducted before the net
profits of the business, which were to be divided among the
partners, could be ascertained. It was undoubtedly necessary
in order to determine what the salary of the plaintiff was, to
determine what the profits of the business were, after paying
all of the expenses except his, but that determination was
not the final determination of the net profits of the business.
It was made for the purpose of fixing the basis upon which
his compensation should be determined.

(4) It was no necessary that the contract between the

plaintiff and the defendants should be made in writing.
(Thunga Chui vs. Que Bentec,1 1 Off. Gaz., 818, October 8,
1903.)

(8) For the purpose of proving what the profits of the

defendants were for the year 1902, the plaintiff presented in
evidence the ledger of defendants, which contained an entry
made on the 31st of December, 1902, as follows:

(5) It appearred that Miguel Alonzo Gutierrez, with whom

the plaintiff had made the contract, had died prior to the trial
of the action, and the defendants claim that by reasons of
the provisions of section 383, paragraph 7, of the Code of
Civil Procedure, plaintiff could not be a witness at the trial.
That paragraph provides that parties to an action against an
executor or aministrator upon a claim or demand against the
estate of a deceased person can not testify as to any matter
of fact occurring before the death of such deceased person.
This action was not brought against the administrator of
Miguel Alonzo, nor was it brought upon a claim against his
estate. It was brought against a partnership which was in
existence at the time of the trial of the action, and which
was juridical person. The fact that Miguel Alonzo had been
a partner in this company, and that his interest therein might
be affected by the result of this suit, is not sufficient to bring
the case within the provisions of the section above cited.

Perdidas y Ganancias ...................................... a

Varios Ps. 527,573.66 Utilidades liquidas
obtenidas durante el ano y que abonamos
conforme a la proporcion que hemos establecido
segun el convenio de sociedad.

(6) The plaintiff was allowed to testify against the objection

and exception of the defendants, that he had been paid as
salary for the year 1900 a part of the profits of the business.
This evidence was competent for the purpose of
corroborating the testimony of the plaintiff as to the
existence of the contract set out in the complaint.
(7) The plaintiff was allowed to testify as to the contents of
a certain letter written by Miguel Glutierrez, one of the
partners in the defendant company, to Miguel Alonzo
Gutierrez, another partner, which letter was read to plaintiff
by Miguel Alonzo. It is not necessary to inquire whether the
court committed an error in admitting this evidence. The
case already made by the plaintiff was in itself sufficient to
prove the contract without reference to this letter. The error,
if any there were, was not prejudicial, and is not ground for
revesal. (Sec. 503, Code of Civil Procedure.)

The defendant presented as a witness on, the subject of

profits Miguel Gutierrez, one of the defendants, who
testiffied, among other things, that there were no profits
during the year 1902, but, on the contrary, that the company
suffered considerable loss during that year. We do not think
the evidence of this witnees sufficiently definite and certain
to overcome the positive evidence furnished by the books of
the defendants themselves.
(9) In reference to the cause of action relating to the 600
pesos, it appears that the plaintiff left the employ of the
defendants on the 19th of Macrh, 1903; that at their request
he went to Hongkong, and was there for about two months
looking after the business of the defendants in the matter of
the repair of a certain steamship. The appellants in their
brief say that the plaintiff is entitled to no compensation for
his services thus rendered, because by the provisions of
article 1711 of the Civil Code, in the absence of an
agreement to the contrary, the contract of agency is
supposed to be gratuitous. That article i not applicable to
this case, because the amount of 600 pesos not claimed as
compensation for services but as a reimbursment for money
expended by the plaintiff in the business of the defendants.
The article of the code that is applicable is article 1728.
The judgment of the court below is affirmed, with the costs,
of this instance against the appellants. After the expiration
of twenty days from the date of this decision let final
judgment be entered herein, and ten days thereafter let the
case be remanded to the lower court for execution. So
ordered.

51

Arellano, C.J., Torres, Mapa, Johnson and Carson,

JJ., concur.

Pastor v Gaspar (2 P 592)

G.R. No. L-1256

October 23, 1903

VICENTE
W.
PASTOR, plaintiff-appellant,
vs.
MANUEL GASPAR, ET AL., defendants-appellees.
Alfredo
Chicote
for
appellant.
F. Ortigas and Hartigan, Marple and Solignac for
appellees.

WILLARD, J.:
There was no motion for a new trial in this case.
From the facts admitted by the pleadings and those found by
the court, it appears that in November, 1900, there existed in
Manila a partnership composed of Macario Nicasio and the
defendant Gaspar under the name "Nicasio and Gaspar." It
owned the steam launch Luisa, and its only business was the
relating to this launch.
Desiring to increase this business, on the 24th day of
November, 1900, a contract was made between the firm of
Nicasio and Gaspar on the one side, and on the other side
the plaintiff, the defendants Eguia, Iboleon, and Monserrat,
and one Hermoso. This contract recites that Nicasio and
Gaspar, by writing of the same date, have enlarged the
business of their partnership; have bought six lorchas, which
are named, and that, needing money with which to pay for
the lorchas and the necessary repairs thereon, the parties of
the second part have furnished them 28,000 pesos as loan,

the amount furnished by each being named. The firm of

Nicasio and Gaspar then acknowledges the receipt of these
amounts. The fifth clause of the contract is as follows:
Fifth. The partnership of Nicasio and Gaspar
undertakes to return to the said Eguia, Monserrat,
Iboleon, Pastor, and Hermoso the said total sum
of 28,000 pesos within the period of ten years
from the date of the instrument, and to guarantee
the fulfillment of said payment they pledge to said
parties the said lorchasPepay, Lola, Consuelo,
India, Niceta, and Castellana, in the sums
respectively which said parties have furnished for
the purchase and repair of said vessels, as before
stated, ceding and assigning to said parties, in like
proportions the profits and gains which may be
realized from the exploitation of said vessels; the
said vessels to be the property of said Eguia,
Monserrat, Iboleon, Pastor, and Hermoso, and of
the parties of the first part, proportionate with the
sums which the said parties have invested in said
vessels; the management of said vessels during
the time in which said debt remains unpaid to
remain with the partnership of Nicasio and
Gaspar, with the understanding that whatever may
be the result of the business of said vessels,
neither the said partnership nor the parties of the
first part shall become responsible for the
payment of said debt, except in so far as the said
vessels shall respond therefor, and in no event
shall they respond therefor with any other
property; injuries to and all losses of said lorchas
to be shared by all the parties hereto, as well as
crews' expenses and other outlays necessary for
the preservation of said vessels, in the proportion
which corresponds to each party hereto according
to his investment; the parties of the first part
binding themselves not to encumber or pledge
said vessels while said debt remains unsatisfied to
the parties of the second part.

It was provided in the seventh clause that

launch Luisa was not included in this contract.

the

It is alleged in the complaint, and not denied by the answer,

that the contract thus entered into on November 24, 1900,
was in July, 1901, dissolved and terminated, and the lorchas
sold by mutual consent.
The cause of action set forth in the complaint is that there
was actually a partnership between the parties to the
contract of November 24, and that the consent of the agent
of the plaintiff to its dissolution and the sale of the lorchas
was obtained by fraud of the defendants. The prayer of the
complaint is that the dissolution of the partnership and the
sale of the lorchas be declared null, and that the plaintiff be
restored to his rights therein, and if this can not be done that
he recover of the defendants damages in the sum of 42,500
pesos.
1. The plaintiff, who was defeated in the court below and
who has appealed, claims that the contract of November 24,
1900, created a partnership between the parties to it.
While all the court are of the opinion that the judgment
should be affirmed, we are not agreed as to the proper
construction to be put upon this document. The opinion of
the writer is that held by the court below, viz, that upon the
face of the contract the plaintiff was a creditor and not a
partner. The contract is not clearly drawn, but the following
seem to indicate that the transaction was rather a loan than a
contract of partnership: (1) In the beginning it is twice
stated positively that Nicasio and Gaspar are the only
partners and the only persons interested in the partnership of
Nicasio and Gaspar. These statements the plaintiff assented
to when he signed the document. (2) In the second
paragraph, and again in the fourth, it is stated, also,
distinctly and positively, that the money has been
furnished as a loan. (3) In the fifth paragraph, hereinbefore
quoted, Nicasio and Gaspar bind themselves to repay the
amount, something that they would not be bound to do were
the contract one of partnership. (4) In the same paragraph
Nicasio and Gaspar create in favor of the plaintiff and his

52

associates a right of pledge over the lorchas, a thing

inconsistent with the idea of partnership. this paragraph
should not be construed as transferring the ownership of the
lorchas themselves to the second parties. Although the
words "las cuales" would grammatically refer to the
preceding word "embarcaciones," yet such a construction
would be inconsistent with what has been before stated in
the same paragraph as to the pledge. (5) By the same
paragraph Nicasio and Gaspar are to be considered
consignees only as long as they do not pay the debt. This
indicates that they had a right to pay it. (6) By the last
clause of this paragraph they bind themselves not to alienate
the lorchas until they had paid the debt, indicating clearly
that by paying the debt they could do so, a thing consistent
with the idea of a partnership. (7) By the seventh paragraph
of this contract it is stated that the launch Luisa is not
included in the contract.
The claim of the plaintiff that by this document he became a
partner in the firm of Nicasio and Gaspar can not in any
event be sustained. That firm was engaged in business with
the launch Luisa. With this the plaintiff and his associates
had nothing to do.
It appears, also, from this contract that when Nicasio and
Gaspar enlarged their business they could devote
themselves not only to the launch Luisa and the six lorchas
in question but also to other craft. With such other business
the plaintiff would have nothing to do. The most that he can
claim is not that he was a partner in the firm of Nicasio and
Gaspar, but that he and his associates, in connection with
that firm, had formed another partnership to manage these
lorchas. The fact that the plaintiff was to share in the profits
and losses of the business and that Nicasio and Gaspar
should answer for the payment of the debt only with the
lorchas, and not with their own property, indicates that the
plaintiff was a partner. But these provisions are not
conclusive. This is a suit between the parties to the contract.
The rights of third persons are not concerned. Whether the
plaintiff would be a partner as to such third persons is not to
be determined. As between themselves the parties could
make any contract that pleased them, provided that it was

not illegal (art. 1255, Civil Code). They could, in making

this contract, if they chose, take some provision from the
law of partnership and others from the law of loans. Loans
with a right to receive a part of the profits in lieu of interest
are not uncommon. As between the parties, such contract is
not one of partnership.
The question on this branch of the case is whether the
contract on its face creates a partnership or not. The court
finds that the plaintiff believed that he could not be a partner
because he was a Spanish subject. There can therefore be no
doubt as to his intention in signing this contract. He did not
believe that on its face it made him a partner. If he had so
believed, he would not have signed it. If he was willing to
sign a contract which on its face made him a partner, he and
his associates would have joined with Nicasio and Gaspar in
the amended articles of partnership which they signed on
this very day, and this second document would have been
entirely unnecessary. The inference from these facts is so
strong that it can not be overcome by the fact that in
subsequent dealings the parties called themselves partners.
The plaintiff undoubtedly wished to secure, as far as he
could, the rights of a partner without making himself one.
The contract, in the opinion of the writer, was that Nicasio
and Gaspar should take the money of the other parties to the
contract, manage the business as they saw fit, pay the
investors their share of the profits as long as the business
continued, and not to sell the lorchas until they had been so
repaid. Anything more than this would have made the
investors partners according to the instrument itself, the one
thing which they were seeking to avoid. It may be added
that, in a similar contract which the plaintiff made with
Nicasio in April, 1900, he in 1902 considered himself a
creditor and made a demand on Nicasio for the payment of
the debt.
It is claimed by the plaintiff that even if the transaction was
a loan, it could not be terminated without his consent until
the expiration of the period of ten years. Article 1127 of the
Civil Code does not say that the period allowed for the
performance of an obligation is for the benefit of the

creditor as well as the debtor. It says that it shall be so

presumed unless the contrary appears. In this case the
contrary does appear in two clauses hereinbefore cited
under (5) and (6). Upon paying the loan at the end of ten
years, they would have had the undoubted right to mortgage
or sell the lorchas, and then by the mere act of payment
would have ceased to be consignees thereof. No declaration
of that kind in the contract was at all necessary. These rights
would result as a matter of law. The insertion of these
clauses can only be explained on the theory that the period
was for the benefit of the debtors alone, and that they would
be at liberty at any time, even before the expiration of ten
years, to sell the property, provided they repaid the loan.
2. It is further claimed by the plaintiff that, even if the
contract itself did not make them partners, there was a
verbal agreement that they should be partners. The court
refused to allow him to answer certain questions relating to
this matter. His exception is stated as follows in the bill of
exceptions: "The plaintiff in his first testimony attempted to
set forth the verbal agreements by virtue of which he was in
reality a partner in the firm of Nicasio and Gaspar. The
court ruled this evidence out for the reason that the name of
the plaintiff does not appear in the articles of partnership of
Nicasio and Gaspar. The plaintiff excepted to the ruling."
There are several reasons why the court was correct in its
ruling.
(1) Although the offer was to show that he was a partner in
the firm of Nicasio and Gaspar something not claimed in
the complaint it is probable that the purpose was to show
a contract of partnership between Nicasio and Gaspar on the
one hand and the plaintiff and his associates on the other.
The statements at the trial indicates this. The bill of
exceptions does not show what verbal agreements the
plaintiff, would have testified to if he had been allowed to
do so. But in his brief in this court he says:
(b) That the firm was organized verbally on said
date for a period of ten years; (c) that the rights
and obligations of the partners were set forth in

53

document No. 945 of the said date, although it

may be stated in said document that the contract
in reference was a contract of pledge.
If, as thus appears, all the rights and obligations which were
verbally agreed to were afterwards embodied in a written
instrument which was offered in evidence, the plaintiff has
not been prejudiced by not being allowed to testify that
these agreements were first made verbally. All of them
having been included in the written document, he could
testify to nothing more. If all the agreements as to the rights
and obligations of the parties were embodied in the written
contract, the additional verbal agreement that they should be
partners would be but their opinion as to the nature of the
said written contract and would add nothing to it.
(2) The parties made a verbal agreement which they
afterwards reduced to writing. Section 285 of the Code of
Civil Procedure prohibits any parol evidence as to other
terms not contained in the writing. Under this section, even
if there had been agreements other than those contained in
the instrument and inconsistent therewith, the plaintiff could
not testify to them. The plaintiff claims that this section
does not prohibit evidence as to the surrounding
circumstances. This is true, and the plaintiff was the trial
allowed to testify that he brought the lorchas himself in
Iloilo; that he was paid $500 for so doing; that $20,000 was
borrowed from the Banco Espaol -- Filipino for the
purpose of paying for them; and as to other details. There
was no intrinsic ambiguity in the contract which required
explanation. When a written contract is vague and
indefinite, it can be explained by showing what the
surrounding circumstances were (sec. 289), but not by
showing by parol what the prior agreement in fact was.
3. The court refused to receive in evidence a letter written
by Hermoso to the plaintiff, and the latter excepted. there
was no error in this ruling. The plaintiff could not prove the
facts stated in this letter in this way. He should have called
Hermoso or other persons as witnesses to do so, and given
the defendants the right to cross-examine them. (Sec. 381,
Code of Civil Procedure.)

4. The following exception appears in the record:

During the examination of Lino Eguia, he was
asked by the plaintiff to state, either by means of
the document or the answer to the complaint, who
was intrusted with the purchase of the lorchas.
The court ruled out the question and the plaintiff
excepted.
This ruling was correct for two reasons: (1) The documents
themselves showed the facts. (2) The plaintiff had already
testified without objection that he brought the lorchas in
Iloilo by direction of Nicasio and Gaspar. The refusal to
allow this witness to testify, on a matter as to which there
was no dispute, could not have prejudiced the plaintiff.
5. Nicasio was asked if the capital in Nicasio and Gaspar
which stood in his name was all his own. This question was
ruled out and the plaintiff excepted. If the question referred
to the original contract of partnership, and the plaintiff
desired to show that he had contributed money thereto, he
could not have been prejudiced by the ruling because the
witness had already testified that it was contributed in fact
by the plaintiff. This fact also appeared during the trial from
the document No. 325 of April 26, 1900, between the
witness and the plaintiff. If he wished to show that a part of
the capital standing in the name of Nicasio, in the amended
articles of partnership, was furnished by the plaintiff and
others, he was not prejudiced by the ruling, for this all
appeared from the contract of November 24, 1900, so many
times referred to. If he desired to show that Nicasio had
borrowed a part of his capital from some person not
connected with this suit, the question was immaterial and
was properly excluded. In such a case it would be no
concern of the plaintiff whose money this was.
6. The following exception appears in the record:
During the examination of the witness Joaquin
Salvador, he was asked on cross-examination by
plaintiff to state if he, as attorney in fact of the

partner Hermoso in the meetings of the partners

preliminary to the sale of the lorchas, would have
consented to the dissolution of the partnership had
he known that the partnership would be
immediately reorganized with the same lorchas
and the same partners with the exception of
Nicasio, Hermoso, and Pastor. The court ruled the
question out and the plaintiff excepted.
This ruling was correct. What Salvador would have done
was of no importance. The plaintiff's agent was allowed to
testify that he would not have given the plaintiff's consent if
he had known that the defendants intended to continue the
business.
7. The assignment of error as to the bills of Warner, Barnes
and Co. is not sustained by the bill of exceptions. It is stated
therein (fol. 25) that these documents were admitted.
8. The question as to whether the power of attorney given
by the plaintiff to Nicasio was sufficient to authorize the
latter to consent for the plaintiff to the cancellation of the
contract was not raised by any exception at the trial and is
not the subject of any assignment of error in this court.
9. The claim of the plaintiff, as has been said before, was (1)
that he was a partner, and (2) that the cancellation of the
agreement of partnership had been procured by fraud. The
judge made a finding upon the first claim, but not upon the
second; although the finding that he made was sufficient to
determine the case before him, yet he should have found
upon all the issues presented by the pleadings. But this
omission does not require a reversal of the judgment. If the
court below was right in the construction of the document, it
of course does not, for the decision would then contain facts
sufficient to justify the judgment. But even if it were not,
the same thing would result. It is a fact clearly admitted by
the pleadings, and therefore not required to be stated in the
decision, that this contract of November 24, 1900, was
canceled and the arrangement, whatever it was, dissolved.
To this dissolution the plaintiff through his agent consented.
This is alleged in the complaint, although it is there stated

54

that such consent was obtained by fraud. The facts admitted

in the pleadings and stated in the decision showing,
therefore, that the plaintiff had surrendered his rights, and
there being no finding that such surrender was obtained by
fraud, the defendants are, on such admissions and findings,
entitled to judgment. We reach this conclusion the more
willingly because a majority of the court is of the opinion
that the evidence in the case was not sufficient to show any
fraud on the part of the defendants.lawphil.net
The judgment is affirmed, with the costs of this instance
against the appellant. Judgment will be entered accordingly
twenty days after the filing of this decision.

of nullity of a deed of sale filed by private respondent

Felicidad S. Vda. de Abrogar against petitioner Alfredo N.
Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co.,
a partnership engaged in lending activities. Private
respondent and her late husband, Ruben M. Abrogar, were
the registered owners of a house and lot, covered by
Transfer Certificate of Title No. 195101, in Marikina, Metro
Manila. On April 18, 1991, private respondent, with the
consent of her late husband, and A.C. Aguila & Sons, Co.,
represented by petitioner, entered into a Memorandum of
Agreement, which provided:

Arellano, C.J., Torres, Mapa, and McDonough, JJ., concur.

Aguila v CA (319 S 246) {1999}

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.]
shall buy the above-described property from the FIRST
PARTY [Felicidad S. Vda. de Abrogar], and pursuant to
this agreement, a Deed of Absolute Sale shall be executed
by the FIRST PARTY conveying the property to the
SECOND PARTY for and in consideration of the sum of
Two Hundred Thousand Pesos (P200,000.00), Philippine
Currency;

[G.R. No. 127347. November 25, 1999]

ALFREDO
N.
AGUILA,
JR, petitioner,
vs. HONORABLE COURT OF APPEALS and
FELICIDAD
S.
VDA.
DE
ABROGAR, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the
decision[1] of the Court of Appeals, dated November 29,
1990, which reversed the decision of the Regional Trial
Court, Branch 273, Marikina, Metro Manila, dated April 11,
1995. The trial court dismissed the petition for declaration

(2) The FIRST PARTY is hereby given by the SECOND

PARTY the option to repurchase the said property within a
period of ninety (90) days from the execution of this
memorandum of agreement effective April 18, 1991, for the
amount of TWO HUNDRED THIRTY THOUSAND
PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her
option to repurchase the said property within a period of
ninety (90) days, the FIRST PARTY is obliged to deliver
peacefully the possession of the property to the SECOND
PARTY within fifteen (15) days after the expiration of the
said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges
herself not to file any lis pendens or whatever claims on the

property nor shall be cause the annotation of say claim at

the back of the title to the said property;
(5) With the execution of the deed of absolute sale, the
FIRST PARTY warrants her ownership of the property and
shall defend the rights of the SECOND PARTY against any
party whom may have any interests over the property;
(6) All expenses for documentation and other incidental
expenses shall be for the account of the FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful
possession of the property to the SECOND PARTY after
the expiration of the 15-day grace period given in paragraph
3 above, the FIRST PARTY shall pay an amount equivalent
to Five Percent of the principal amount of TWO
HUNDRED PESOS (P200.00) or P10,000.00 per month of
delay as and for rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to
repurchase the property within ninety (90) days period
above-mentioned, this memorandum of agreement shall be
deemed cancelled and the Deed of Absolute Sale, executed
by the parties shall be the final contract considered as
entered between the parties and the SECOND PARTY shall
proceed to transfer ownership of the property above
described to its name free from lines and encumbrances.[2]
On the same day, April 18, 1991, the parties likewise
executed a deed of absolute sale,[3] dated June 11, 1991,
wherein private respondent, with the consent of her late
husband, sold the subject property to A.C. Aguila & Sons,
Co., represented by petitioner, for P200,000.00. In a special
power of attorney dated the same day, April 18, 1991,
private respondent authorized petitioner to cause the
cancellation of TCT No. 195101 and the issuance of a new
certificate of title in the name of A.C. Aguila and Sons, Co.,
in the event she failed to redeem the subject property as
provided in the Memorandum of Agreement.[4]
Private respondent failed to redeem the property
within the 90-day period as provided in the Memorandum of

55

Agreement. Hence, pursuant to the special power of

attorney mentioned above, petitioner caused the cancellation
of TCT No. 195101 and the issuance of a new certificate of
title in the name of A.C. Aguila and Sons, Co.[5]
Private respondent then received a letter dated August
10, 1991 from Atty. Lamberto C. Nanquil, counsel for A.C.
Aguila & Sons, Co., demanding that she vacate the premises
within 15 days after receipt of the letter and surrender its
possession peacefully to A.C. Aguila & Sons,
Co.Otherwise, the latter would bring the appropriate action
in court.[6]
Upon the refusal of private respondent to vacate the
subject premises, A.C. Aguila & Sons, Co. filed an
ejectment case against her in the Metropolitan Trial Court,
Branch 76, Marikina, Metro Manila. In a decision, dated
April 3, 1992, the Metropolitan Trial Court ruled in favor of
A.C. Aguila & Sons, Co. on the ground that private
respondent did not redeem the subject property before the
expiration of the 90-day period provided in the
Memorandum of Agreement. Private respondent appealed
first to the Regional Trial Court, Branch 163, Pasig, Metro
Manila, then to the Court of Appeals, and later to this Court,
but she lost in all the cases.
Private respondent then filed a petition for declaration
of nullity of a deed of sale with the Regional Trial Court,
Branch 273, Marikina, Metro Manila on December 4,
1993. She alleged that the signature of her husband on the
deed of sale was a forgery because he was already dead
when the deed was supposed to have been executed on June
11, 1991.
It appears, however, that private respondent had filed
a criminal complaint for falsification against petitioner with
the Office of the Prosecutor of Quezon City which was
dismissed in a resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina
rendered its decision:
Plaintiffs claim therefore that the Deed of Absolute Sale is a
forgery because they could not personally appear before

Notary Public Lamberto C. Nanquil on June 11, 1991

because her husband, Ruben Abrogar, died on May 8, 1991
or one month and 2 days before the execution of the Deed
of Absolute Sale, while the plaintiff was still in the Quezon
City Medical Center recuperating from wounds which she
suffered at the same vehicular accident on May 8, 1991,
cannot be sustained. The Court is convinced that the three
required documents, to wit: the Memorandum of
Agreement, the Special Power of Attorney, and the Deed of
Absolute Sale were all signed by the parties on the same
date on April 18, 1991. It is a common and accepted
business practice of those engaged in money lending to
prepare an undated absolute deed of sale in loans of money
secured by real estate for various reasons, foremost of
which is the evasion of taxes and surcharges. The plaintiff
never questioned receiving the sum of P200,000.00
representing her loan from the defendant. Common sense
dictates that an established lending and realty firm like the
Aguila & Sons, Co. would not part with P200,000.00 to the
Abrogar spouses, who are virtual strangers to it, without the
simultaneous accomplishment and signing of all the
required documents, more particularly the Deed of Absolute
Sale, to protect its interest.

house of plaintiff-appellant stands. The property is inside a

subdivision/village. The property is situated in Marikina
which is already part of Metro Manila. The alleged sale took
place in 1991 when the value of the land had considerably
increased.

....

Third: The apparent vendor, plaintiff-appellant herein,

continued to pay taxes on the property sold. It is wellknown that payment of taxes accompanied by actual
possession of the land covered by the tax declaration,
constitute evidence of great weight that a person under
whose name the real taxes were declared has a claim of
right over the land.

WHEREFORE, foregoing premises considered, the case in

caption is hereby ORDERED DISMISSED, with costs
against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between
plaintiff-appellant and defendant-appellee is indubitably an
equitable mortgage. Article 1602 of the New Civil Code
finds strong application in the case at bar in the light of the
following circumstances.
First: The purchase price for the alleged sale with right to
repurchase is unusually inadequate. The property is a two
hundred forty (240) sq. m. lot. On said lot, the residential

For this property, defendant-appellee pays only a measly

P200,000.00 or P833.33 per square meter for both the land
and for the house.
Second: The disputed Memorandum of Agreement
specifically provides that plaintiff-appellant is obliged to
deliver peacefully the possession of the property to the
SECOND PARTY within fifteen (15) days after the
expiration of the said ninety (90) day grace
period. Otherwise stated, plaintiff-appellant is to retain
physical possession of the thing allegedly sold.
In fact, plaintiff-appellant retained possession of the
property sold as if they were still the absolute owners. There
was no provision for maintenance or expenses, much less
for payment of rent.

It is well-settled that the presence of even one of the

circumstances in Article 1602 of the New Civil Code is
sufficient to declare a contract of sale with right to
repurchase an equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a
price which is unusually inadequate, has retained possession
of the subject property and has continued paying the realty
taxes over the subject property, (circumstances mentioned
in par. (1) (2) and (5) of Article 1602 of the New Civil

56

Code), it must be conclusively presumed that the transaction

the parties actually entered into is an equitable mortgage,
not a sale with right to repurchase. The factors cited are in
support to the finding that the Deed of Sale/Memorandum
of Agreement with right to repurchase is in actuality an
equitable mortgage.

property. Plaintiff-appellant will pay P230,000.00 and not

P200,000.00, the P30,000.00 excess is the interest for the
loan extended. Failure of plaintiff-appellee to pay the
P230,000,00 within the ninety (90) days period, the property
shall automatically belong to defendant-appellee by virtue
of the deed of sale executed.

Moreover, it is undisputed that the deed of sale with right of

repurchase was executed by reason of the loan extended by
defendant-appellee to plaintiff-appellant. The amount of
loan being the same with the amount of the purchase price.

Clearly, the agreement entered into by the parties is in

the nature of pactum commissorium. Therefore, the deed of
sale should be declared void as we hereby so declare to be
invalid, for being violative of law.

....

....

Since the real intention of the party is to secure the payment

of debt, now deemed to be repurchase price: the transaction
shall then be considered to be an equitable mortgage.

WHEREFORE, foregoing considered, the appealed decision

is hereby REVERSED and SET ASIDE. The questioned
Deed of Sale and the cancellation of the TCT No. 195101
issued in favor of plaintiff-appellant and the issuance of
TCT No. 267073 issued in favor of defendant-appellee
pursuant to the questioned Deed of Sale is hereby declared
VOID and is hereby ANNULLED. Transfer Certificate of
Title No. 195101 of the Registry of Marikina is hereby
ordered REINSTATED. The loan in the amount of
P230,000.00 shall be paid within ninety (90) days from the
finality of this decision. In case of failure to pay the amount
of P230,000.00 from the period therein stated, the property
shall be sold at public auction to satisfy the mortgage debt
and costs and if there is an excess, the same is to be given to
the owner.

Being a mortgage, the transaction entered into by the parties

is in the nature of a pactum commissorium which is clearly
prohibited by Article 2088 of the New Civil Code. Article
2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for
pactum commissorium to exist: (1) that there should be a
pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of principal
obligation; and (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged
and mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
In this case, defendant-appellee in reality extended a
P200,000.00 loan to plaintiff-appellant secured by a
mortgage on the property of plaintiff-appellant. The loan
was payable within ninety (90) days, the period within
which
plaintiff-appellant
can
repurchase
the

Petitioner now contends that: (1) he is not the real

party in interest but A.C. Aguila & Co., against which this
case should have been brought; (2) the judgment in the
ejectment case is a bar to the filing of the complaint for
declaration of nullity of a deed of sale in this case; and (3)
the contract between A.C. Aguila & Sons, Co. and private
respondent is a pacto de retro sale and not an equitable
mortgage as held by the appellate court.
The petition is meritorious.

Rule 3, 2 of the Rules of Court of 1964, under which

the complaint in this case was filed, provided that every
action must be prosecuted and defended in the name of the
real party in interest. A real party in interest is one who
would be benefited or injured by the judgment, or who is
entitled to the avails of the suit.[7] This ruling is now
embodied in Rule 3, 2 of the 1997 Revised Rules of Civil
Procedure. Any decision rendered against a person who is
not a real party in interest in the case cannot be
executed.[8] Hence, a complaint filed against such a person
should be dismissed for failure to state a cause of action. [9]
Under Art. 1768 of the Civil Code, a partnership has a
juridical personality separate and distinct from that of each
of the partners. The partners cannot be held liable for the
obligations of the partnership unless it is shown that the
legal fiction of a different juridical personality is being used
for fraudulent, unfair, or illegal purposes.[10] In this case,
private respondent has not shown that A.C. Aguila & Sons,
Co., as a separate juridical entity, is being used for
fraudulent, unfair, or illegal purposes. Moreover, the title to
the subject property is in the name of A.C. Aguila & Sons,
Co. and the Memorandum of Agreement was executed
between private respondent, with the consent of her late
husband, and A. C. Aguila & Sons, Co., represented by
petitioner. Hence, it is the partnership, not its officers or
agents, which should be impleaded in any litigation
involving property registered in its name. A violation of this
rule will result in the dismissal of the complaint.[11] We
cannot understand why both the Regional Trial Court and
the Court of Appeals sidestepped this issue when it was
squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in
interest against whom this action should be prosecuted
makes it unnecessary to discuss the other issues raised by
him in this appeal.
WHEREFORE, the decision of the Court of Appeals
is hereby REVERSED and the complaint against petitioner
is DISMISSED.
SO ORDERED.

57

Tuason v Bolanos (95 P 106) {1954}

G.R. No. L-4935

May 28, 1954

J. M. TUASON & CO., INC., represented by it

Managing PARTNER, GREGORIA ARANETA,
INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.
Araneta
and
Araneta
Jose A. Buendia for appellant.

for

appellee.

REYES, J.:
This is an action originally brought in the Court of First
Instance of Rizal, Quezon City Branch, to recover possesion
of registered land situated in barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times with respect
to the extent and description of the land sought to be
recovered. The original complaint described the land as a
portion of a lot registered in plaintiff's name under Transfer
Certificate of Title No. 37686 of the land record of Rizal
Province and as containing an area of 13 hectares more or
less. But the complaint was amended by reducing the area
of 6 hectares, more or less, after the defendant had indicated
the plaintiff's surveyors the portion of land claimed and
occupied by him. The second amendment became necessary
and was allowed following the testimony of plaintiff's
surveyors that a portion of the area was embraced in another
certificate of title, which was plaintiff's Transfer Certificate
of Title No. 37677. And still later, in the course of trial,
after defendant's surveyor and witness, Quirino Feria, had
testified that the area occupied and claimed by defendant
was about 13 hectares, as shown in his Exhibit 1, plaintiff
again, with the leave of court, amended its complaint to
make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in

himself thru "open, continuous, exclusive and public and
notorious possession (of land in dispute) under claim of
ownership, adverse to the entire world by defendant and his
predecessor in interest" from "time in-memorial". The
answer further alleges that registration of the land in dispute
was obtained by plaintiff or its predecessors in interest thru
"fraud or error and without knowledge (of) or interest either
personal or thru publication to defendant and/or
predecessors in interest." The answer therefore prays that
the complaint be dismissed with costs and plaintiff required
to reconvey the land to defendant or pay its value.

Vl. The trial court erred in not finding that the

defendant is the true and lawful owner of the land.

After trial, the lower court rendered judgment for plaintiff,

declaring defendant to be without any right to the land in
question and ordering him to restore possession thereof to
plaintiff and to pay the latter a monthly rent of P132.62
from January, 1940, until he vacates the land, and also to
pay the costs.

As to the first assigned error, there is nothing to the

contention that the present action is not brought by the real
party in interest, that is, by J. M. Tuason and Co., Inc. What
the Rules of Court require is that an action be brought in the
name of, but not necessarily by, the real party in interest.
(Section 2, Rule 2.) In fact the practice is for an attorney-atlaw to bring the action, that is to file the complaint, in the
name of the plaintiff. That practice appears to have been
followed in this case, since the complaint is signed by the
law firm of Araneta and Araneta, "counsel for plaintiff" and
commences with the statement "comes now plaintiff,
through its undersigned counsel." It is true that the
complaint also states that the plaintiff is "represented herein
by its Managing Partner Gregorio Araneta, Inc.", another
corporation, but there is nothing against one corporation
being represented by another person, natural or juridical, in
a suit in court. The contention that Gregorio Araneta, Inc.
can not act as managing partner for plaintiff on the theory
that it is illegal for two corporations to enter into a
partnership is without merit, for the true rule is that "though
a corporation has no power to enter into a partnership, it
may nevertheless enter into a joint venture with another
where the nature of that venture is in line with the business
authorized by its charter." (Wyoming-Indiana Oil Gas
Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of
Corp., 1082.) There is nothing in the record to indicate that
the venture in which plaintiff is represented by Gregorio
Araneta, Inc. as "its managing partner" is not in line with
the corporate business of either of them.

Appealing directly to this court because of the value of the

property involved, defendant makes the following
assignment or errors:
I. The trial court erred in not dismissing the case
on the ground that the case was not brought by the
real property in interest.
II. The trial court erred in admitting the third
amended complaint.
III. The trial court erred in denying defendant's
motion to strike.
IV. The trial court erred in including in its
decision land not involved in the litigation.
V. The trial court erred in holding that the land in
dispute is covered by transfer certificates of Title
Nos. 37686 and 37677.

VII. The trial court erred in finding that the

defendant is liable to pay the plaintiff the amount
of P132.62 monthly from January, 1940, until he
vacates the premises.
VIII. The trial court erred in not ordering the
plaintiff to reconvey the land in litigation to the
defendant.

58

Errors II, III, and IV, referring to the admission of the third
amended complaint, may be answered by mere reference to
section 4 of Rule 17, Rules of Court, which sanctions such
amendment. It reads:
Sec. 4. Amendment to conform to evidence.
When issues not raised by the pleadings are tried
by express or implied consent of the parties, they
shall be treated in all respects, as if they had been
raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues
may be made upon motion of any party at my
time, even of the trial of these issues. If evidence
is objected to at the trial on the ground that it is
not within the issues made by the pleadings, the
court may allow the pleadings to be amended and
shall be so freely when the presentation of the
merits of the action will be subserved thereby and
the objecting party fails to satisfy the court that
the admission of such evidence would prejudice
him in maintaining his action or defense upon the
merits. The court may grant a continuance to
enable the objecting party to meet such evidence.
Under this provision amendment is not even necessary for
the purpose of rendering judgment on issues proved though
not alleged. Thus, commenting on the provision, Chief
Justice Moran says in this Rules of Court:
Under this section, American courts have, under
the New Federal Rules of Civil Procedure, ruled
that where the facts shown entitled plaintiff to
relief other than that asked for, no amendment to
the complaint is necessary, especially where
defendant has himself raised the point on which
recovery is based, and that the appellate court
treat the pleadings as amended to conform to the
evidence, although the pleadings were not actually
amended. (I Moran, Rules of Court, 1952 ed.,
389-390.)

Our conclusion therefore is that specification of error II, III,

and IV are without merit..
Let us now pass on the errors V and VI. Admitting, though
his attorney, at the early stage of the trial, that the land in
dispute "is that described or represented in Exhibit A and in
Exhibit B enclosed in red pencil with the name Quirino
Bolaos," defendant later changed his lawyer and also his
theory and tried to prove that the land in dispute was not
covered by plaintiff's certificate of title. The evidence,
however, is against defendant, for it clearly establishes that
plaintiff is the registered owner of lot No. 4-B-3-C, situate
in barrio Tatalon, Quezon City, with an area of 5,297,429.3
square meters, more or less, covered by transfer certificate
of title No. 37686 of the land records of Rizal province, and
of lot No. 4-B-4, situated in the same barrio, having an area
of 74,789 square meters, more or less, covered by transfer
certificate of title No. 37677 of the land records of the same
province, both lots having been originally registered on July
8, 1914 under original certificate of title No. 735. The
identity of the lots was established by the testimony of
Antonio Manahan and Magno Faustino, witnesses for
plaintiff, and the identity of the portion thereof claimed by
defendant was established by the testimony of his own
witness, Quirico Feria. The combined testimony of these
three witnesses clearly shows that the portion claimed by
defendant is made up of a part of lot 4-B-3-C and major on
portion of lot 4-B-4, and is well within the area covered by
the two transfer certificates of title already mentioned. This
fact also appears admitted in defendant's answer to the third
amended complaint.
As the land in dispute is covered by plaintiff's Torrens
certificate of title and was registered in 1914, the decree of
registration can no longer be impugned on the ground of
fraud, error or lack of notice to defendant, as more than one
year has already elapsed from the issuance and entry of the
decree. Neither court the decree be collaterally attacked by
any person claiming title to, or interest in, the land prior to
the registration proceedings. (Sorogon vs. Makalintal,1 45
Off. Gaz., 3819.) Nor could title to that land in derogation
of that of plaintiff, the registered owner, be acquired by

prescription or adverse possession. (Section 46, Act No.

496.) Adverse, notorious and continuous possession under
claim of ownership for the period fixed by law is ineffective
against a Torrens title. (Valiente vs. Judge of CFI of
Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise
settled that the right to secure possession under a decree of
registration does not prescribed. (Francisco vs. Cruz, 43
Off. Gaz., 5105, 5109-5110.) A recent decision of this Court
on this point is that rendered in the case of Jose Alcantara et
al., vs. Mariano et al., 92 Phil., 796. This disposes of the
alleged errors V and VI.
As to error VII, it is claimed that `there was no evidence to
sustain the finding that defendant should be sentenced to
pay plaintiff P132.62 monthly from January, 1940, until he
vacates the premises.' But it appears from the record that
that reasonable compensation for the use and occupation of
the premises, as stipulated at the hearing was P10 a month
for each hectare and that the area occupied by defendant
was 13.2619 hectares. The total rent to be paid for the area
occupied should therefore be P132.62 a month. It is appears
from the testimony of J. A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment had
already been filed against defendant. And it cannot be
supposed that defendant has been paying rents, for he has
been asserting all along that the premises in question 'have
always been since time immemorial in open, continuous,
exclusive and public and notorious possession and under
claim of ownership adverse to the entire world by defendant
and his predecessors in interest.' This assignment of error is
thus clearly without merit.
Error No. VIII is but a consequence of the other errors
alleged and needs for further consideration.
During the pendency of this case in this Court appellant,
thru other counsel, has filed a motion to dismiss alleging
that there is pending before the Court of First Instance of
Rizal another action between the same parties and for the
same cause and seeking to sustain that allegation with a
copy of the complaint filed in said action. But an
examination of that complaint reveals that appellant's

59

allegation is not correct, for the pretended identity of parties

and cause of action in the two suits does not appear. That
other case is one for recovery of ownership, while the
present one is for recovery of possession. And while
appellant claims that he is also involved in that order action
because it is a class suit, the complaint does not show that
such is really the case. On the contrary, it appears that the
action seeks relief for each individual plaintiff and not relief
for and on behalf of others. The motion for dismissal is
clearly without merit.
Wherefore, the judgment appealed from is affirmed, with
costs against the plaintiff.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista
Angelo, Labrador, and Concepcion, JJ., concur.

REYES, JESUS S. J. SAYOC, EDUARDO DE LOS

ANGELES,
and
JOSE
F.
BUENAVENTURA, petitioners.
RESOLUTION
MELENCIO-HERRERA, J.:+.wph!1
Two separate Petitions were filed before this Court 1) by the
surviving partners of Atty. Alexander Sycip, who died on
May 5, 1975, and 2) by the surviving partners of Atty.
Herminio Ozaeta, who died on February 14, 1976, praying
that they be allowed to continue using, in the names of their
firms, the names of partners who had passed away. In the
Court's Resolution of September 2, 1976, both Petitions
were ordered consolidated.
Petitioners base their petitions on the following arguments:

In Re: Ozaela & Sycip (92 S 1)

July 30, 1979
PETITION FOR AUTHORITY TO CONTINUE USE
OF THE FIRM NAME "SYCIP, SALAZAR,
FELICIANO,
HERNANDEZ
&
CASTILLO."
LUCIANO E.
SALAZAR,
FLORENTINO
P.
FELICIANO,
BENILDO
G.
HERNANDEZ.
GREGORIO R. CASTILLO. ALBERTO P. SAN JUAN,
JUAN C. REYES. JR., ANDRES G. GATMAITAN,
JUSTINO H. CACANINDIN, NOEL A. LAMAN,
ETHELWOLDO E. FERNANDEZ, ANGELITO C.
IMPERIO, EDUARDO R. CENIZA, TRISTAN A.
CATINDIG, ANCHETA K. TAN, and ALICE V.
PESIGAN,petitioners.
IN THE MATTER OF THE PETITION FOR
AUTHORITY TO CONTINUE USE OF THE FIRM
NAME "OZAETA, ROMULO, DE LEON, MABANTA
& REYES." RICARDO J. ROMULO, BENJAMIN M.
DE LEON, ROMAN MABANTA, JR., JOSE MA,

1. Under the law, a partnership is not prohibited from

continuing its business under a firm name which includes
the name of a deceased partner; in fact, Article 1840 of the
Civil Code explicitly sanctions the practice when it provides
in the last paragraph that: t.hqw
The use by the person or partnership
continuing the business of the
partnership name, or the name of a
deceased partner as part thereof, shall
not of itself make the individual
property of the deceased partner liable
for any debts contracted by such person
or partnership. 1
2. In regulating other professions, such as accountancy and
engineering, the legislature has authorized the adoption of
firm names without any restriction as to the use, in such
firm name, of the name of a deceased partner; 2 the
legislative authorization given to those engaged in the
practice of accountancy a profession requiring the same
degree of trust and confidence in respect of clients as that

implicit in the relationship of attorney and client to

acquire and use a trade name, strongly indicates that there is
no fundamental policy that is offended by the continued use
by a firm of professionals of a firm name which includes the
name of a deceased partner, at least where such firm name
has acquired the characteristics of a "trade name." 3
3. The Canons of Professional Ethics are not transgressed
by the continued use of the name of a deceased partner in
the firm name of a law partnership because Canon 33 of the
Canons of Professional Ethics adopted by the American Bar
Association declares that: t.hqw
... The continued use of the name of a
deceased or former partner when
permissible by local custom, is not
unethical but care should be taken that
no imposition or deception is practiced
through this use. ... 4
4. There is no possibility of imposition or deception because
the deaths of their respective deceased partners were wellpublicized in all newspapers of general circulation for
several days; the stationeries now being used by them carry
new letterheads indicating the years when their respective
deceased partners were connected with the firm; petitioners
will notify all leading national and international law
directories of the fact of their respective deceased partners'
deaths. 5
5. No local custom prohibits the continued use of a deceased
partner's name in a professional firm's name; 6 there is no
custom or usage in the Philippines, or at least in the Greater
Manila Area, which recognizes that the name of a law firm
necessarily Identifies the individual members of the firm. 7
6. The continued use of a deceased partner's name in the
firm name of law partnerships has been consistently allowed
by U.S. Courts and is an accepted practice in the legal
profession of most countries in the world. 8

60

The question involved in these Petitions first came under

consideration by this Court in 1953 when a law firm in
Cebu (the Deen case) continued its practice of including in
its firm name that of a deceased partner, C.D. Johnston. The
matter was resolved with this Court advising the firm to
desist from including in their firm designation the name of
C. D. Johnston, who has long been dead."
The same issue was raised before this Court in 1958 as an
incident in G. R. No. L-11964, entitled Register of Deeds of
Manila vs. China Banking Corporation. The law firm of
Perkins & Ponce Enrile moved to intervene asamicus
curiae. Before acting thereon, the Court, in a Resolution of
April 15, 1957, stated that it "would like to be informed
why the name of Perkins is still being used although Atty.
E. A. Perkins is already dead." In a Manifestation dated
May 21, 1957, the law firm of Perkins and Ponce
Enrile, raising substantially the same arguments as those
now being raised by petitioners, prayed that the continued
use of the firm name "Perkins & Ponce Enrile" be held
proper.

possibility of deception. Said attorneys

are accordingly advised to drop the
name "PERKINS" from their firm
name.
Petitioners herein now seek a re-examination of the policy
thus far enunciated by the Court.
The Court finds no sufficient reason to depart from the
rulings thus laid down.
A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and
Castillo" and "Ozaeta, Romulo, De Leon, Mabanta and
Reyes" are partnerships, the use in their partnership names
of the names of deceased partners will run counter to Article
1815 of the Civil Code which provides: t.hqw
Art. 1815. Every partnership shall
operate under a firm name, which may
or may not include the name of one or
more of the partners.

On June 16, 1958, this Court resolved: t.hqw

After carefully considering the reasons
given by Attorneys Alfonso Ponce
Enrile and Associates for their
continued use of the name of the
deceased E. G. Perkins, the Court found
no reason to depart from the policy it
adopted in June 1953 when it required
Attorneys Alfred P. Deen and Eddy A.
Deen of Cebu City to desist from
including in their firm designation, the
name of C. D. Johnston, deceased. The
Court believes that, in view of the
personal and confidential nature of the
relations between attorney and client,
and the high standards demanded in the
canons of professional ethics, no
practice should be allowed which even
in a remote degree could give rise to the

Those who, not being members of the

partnership, include their names in the
firm name, shall be subject to the
liability, of a partner.
It is clearly tacit in the above provision that names in a firm
name of a partnership must either be those of living partners
and. in the case of non-partners, should be living persons
who can be subjected to liability. In fact, Article 1825 of the
Civil Code prohibits a third person from including his name
in the firm name under pain of assuming the liability of a
partner. The heirs of a deceased partner in a law firm cannot
be held liable as the old members to the creditors of a firm
particularly where they are non-lawyers. Thus, Canon 34 of
the Canons of Professional Ethics "prohibits an agreement
for the payment to the widow and heirs of a deceased
lawyer of a percentage, either gross or net, of the fees
received from the future business of the deceased lawyer's
clients, both because the recipients of such division are not

lawyers and because such payments will not represent

service or responsibility on the part of the recipient. "
Accordingly, neither the widow nor the heirs can be held
liable for transactions entered into after the death of their
lawyer-predecessor. There being no benefits accruing, there
ran be no corresponding liability.
Prescinding the law, there could be practical objections to
allowing the use by law firms of the names of deceased
partners. The public relations value of the use of an old firm
name can tend to create undue advantages and
disadvantages in the practice of the profession. An able
lawyer without connections will have to make a name for
himself starting from scratch. Another able lawyer, who can
join an old firm, can initially ride on that old firm's
reputation established by deceased partners.
B. In regards to the last paragraph of Article 1840 of the
Civil Code cited by petitioners, supra, the first factor to
consider is that it is within Chapter 3 of Title IX of the Code
entitled "Dissolution and Winding Up." The Article
primarily deals with the exemption from liability in cases of
a dissolved partnership, of the individual property of the
deceased partner for debts contracted by the person or
partnership which continues the business using the
partnership name or the name of the deceased partner as
part thereof. What the law contemplates therein is a holdover situation preparatory to formal reorganization.
Secondly,
Article
1840
treats
more
of
a commercial partnership with a good will to protect rather
than of aprofessional partnership, with no saleable good will
but whose reputation depends on the personal qualifications
of its individual members. Thus, it has been held that a
saleable goodwill can exist only in a commercial
partnership and cannot arise in a professional partnership
consisting of lawyers. 9t.hqw
As a general rule, upon the dissolution
of
a commercial
partnership the
succeeding partners or parties have the
right to carry on the business under the

61

old name, in the absence of a stipulation

forbidding it, (s)ince the name of a
commercial partnership is a partnership
asset inseparable from the good will of
the firm. ... (60 Am Jur 2d, s 204, p.
115) (Emphasis supplied)
On the other hand, t.hqw
... a professional partnership the
reputation of which depends or; the
individual skill of the members, such as
partnerships of attorneys or physicians,
has no good win to be distributed as a
firm asset on its dissolution, however
intrinsically valuable such skill and
reputation may be, especially where
there is no provision in the partnership
agreement relating to good will as an
asset. ... (ibid, s 203, p. 115) (Emphasis
supplied)
C. A partnership for the practice of law cannot be likened to
partnerships formed by other professionals or for business.
For one thing, the law on accountancy specifically allows
the use of a trade name in connection with the practice of
accountancy. 10 t.hqw
A partnership for the practice of law is
not a legal entity. It is a mere
relationship or association for a
particular purpose. ... It is not a
partnership formed for the purpose of
carrying on trade or business or of
holding property." 11 Thus, it has been
stated that "the use of a nom de plume,
assumed or trade name in law practice is
improper. 12
The usual reason given for different
standards of conduct being applicable to

the practice of law from those

pertaining to business is that the law is a
profession.
Dean Pound, in his recently published
contribution to the Survey of the Legal
Profession, (The Lawyer from Antiquity
to Modern Times, p. 5) defines a
profession as "a group of men pursuing
a learned art as a common calling in the
spirit of public service, no less a
public service because it may
incidentally be a means of livelihood."
xxx xxx xxx
Primary
characteristics
which
distinguish the legal profession from
business are:
1. A duty of public service, of which the
emolument is a byproduct, and in which
one may attain the highest eminence
without making much money.
2. A relation as an "officer of court" to
the administration of justice involving
thorough sincerity, integrity, and
reliability.
3. A relation to clients in the highest
degree fiduciary.
4. A relation to colleagues at the bar
characterized by candor, fairness, and
unwillingness to resort to current
business methods of advertising and
encroachment on their practice, or
dealing directly with their clients. 13

"The right to practice law is not a natural or constitutional

right but is in the nature of a privilege or franchise. 14 It is
limited to persons of good moral character with special
qualifications duly ascertained and certified. 15 The right
does not only presuppose in its possessor integrity, legal
standing and attainment, but also the exercise of a special
privilege, highly personal and partaking of the nature of a
public trust." 16
D. Petitioners cited Canon 33 of the Canons of Professional
Ethics of the American Bar Association" in support of their
petitions.
It is true that Canon 33 does not consider as unethical the
continued use of the name of a deceased or former partner
in the firm name of a law partnership when such a practice
is permissible by local custom but the Canon warns that care
should be taken that no imposition or deception is practiced
through this use.
It must be conceded that in the Philippines, no local
custom permits or allows the continued use of a deceased or
former partner's name in the firm names of law partnerships.
Firm names, under our custom, Identify the more active
and/or more senior members or partners of the law firm. A
glimpse at the history of the firms of petitioners and of other
law firms in this country would show how their firm names
have evolved and changed from time to time as the
composition of the partnership changed. t.hqw
The continued use of a firm name after
the death of one or more of the partners
designated by it is proper only where
sustained by local custom and not
where by custom this purports to
Identify the active members. ...
There would seem to be a question,
under the working of the Canon, as to
the propriety of adding the name of a
new partner and at the same time

62

retaining that of a deceased partner who

was never a partner with the new
one. (H.S. Drinker, op. cit., supra, at pp.
207208) (Emphasis supplied).
The possibility of deception upon the public, real or
consequential, where the name of a deceased partner
continues to be used cannot be ruled out. A person in search
of legal counsel might be guided by the familiar ring of a
distinguished name appearing in a firm title.
E. Petitioners argue that U.S. Courts have consistently
allowed the continued use of a deceased partner's name in
the firm name of law partnerships. But that is so because it
is sanctioned by custom.
In the case of Mendelsohn v. Equitable Life Assurance
Society (33 N.Y.S. 2d 733) which petitioners Salazar, et al.
quoted in their memorandum, the New York Supreme Court
sustained the use of the firm name Alexander & Green even
if none of the present ten partners of the firm bears either
name because the practice was sanctioned by custom and
did not offend any statutory provision or legislative policy
and was adopted by agreement of the parties. The Court
stated therein: t.hqw
The practice sought to be proscribed has
the sanction of custom and offends no
statutory provision or legislative policy.
Canon 33 of the Canons of Professional
Ethics of both the American Bar
Association and the New York State
Bar Association provides in part as
follows: "The continued use of the name
of a deceased or former partner, when
permissible by local custom is not
unethical, but care should be taken that
no imposition or deception is practiced
through this use." There is no question
as to local custom. Many firms in the
city use the names of deceased members
with the approval of other attorneys,

bar associations and the courts. The

Appellate Division of the First
Department has considered the matter
and reached The conclusion that such
practice should not be prohibited.
(Emphasis supplied)
xxx xxx xxx
Neither the Partnership Law nor the
Penal Law prohibits the practice in
question. The use of the firm name
herein is also sustainable by reason of
agreement between the partners. 18
Not so in this jurisdiction where there is no local custom
that sanctions the practice. Custom has been defined as a
rule of conduct formed by repetition of acts, uniformly
observed (practiced) as a social rule, legally binding and
obligatory. 19 Courts take no judicial notice of custom. A
custom must be proved as a fact, according to the rules of
evidence. 20 A local custom as a source of right cannot be
considered by a court of justice unless such custom is
properly established by competent evidence like any other
fact. 21 We find such proof of the existence of a local
custom, and of the elements requisite to constitute the same,
wanting herein. Merely because something is done as a
matter of practice does not mean that Courts can rely on the
same for purposes of adjudication as a juridical custom.
Juridical custom must be differentiated from social custom.
The former can supplement statutory law or be applied in
the absence of such statute. Not so with the latter.
Moreover, judicial decisions applying or interpreting the
laws form part of the legal system. 22 When the Supreme
Court in the Deen and Perkins cases issued its Resolutions
directing lawyers to desist from including the names of
deceased partners in their firm designation, it laid down a
legal rule against which no custom or practice to the
contrary, even if proven, can prevail. This is not to speak of
our civil law which clearly ordains that a partnership is
dissolved by the death of any partner. 23 Custom which are

contrary to law, public order or public policy shall not be

countenanced. 24
The practice of law is intimately and peculiarly related to
the administration of justice and should not be considered
like an ordinary "money-making trade." t.hqw
... It is of the essence of a profession
that it is practiced in a spirit of public
service. A trade ... aims primarily at
personal gain; a profession at the
exercise of powers beneficial to
mankind. If, as in the era of wide free
opportunity, we think of free
competitive self assertion as the highest
good, lawyer and grocer and farmer
may seem to be freely competing with
their fellows in their calling in order
each to acquire as much of the world's
good as he may within the allowed him
by law. But the member of a profession
does not regard himself as in
competition with his professional
brethren. He is not bartering his services
as is the artisan nor exchanging the
products of his skill and learning as the
farmer sells wheat or corn. There should
be no such thing as a lawyers' or
physicians' strike. The best service of
the professional man is often rendered
for no equivalent or for a trifling
equivalent and it is his pride to do what
he does in a way worthy of his
profession even if done with no
expectation of reward, This spirit of
public service in which the profession
of law is and ought to be exercised is a
prerequisite of sound administration of
justice according to law. The other two
elements of a profession, namely,
organization and pursuit of a learned art

63

have their justification in that they

secure and maintain that spirit. 25
In fine, petitioners' desire to preserve the Identity of their
firms in the eyes of the public must bow to legal and ethical
impediment.
ACCORDINGLY, the petitions filed herein are denied and
petitioners advised to drop the names "SYCIP" and
"OZAETA" from their respective firm names. Those names
may, however, be included in the listing of individuals who
have been partners in their firms indicating the years during
which they served as such.
SO ORDERED.
Teehankee, Concepcion, Jr., Santos, Fernandez, Guerrero
and De Castro, JJ., concur
Fernando, C.J. and Abad Santos, J., took no part.

Ortega vs CA {245 SCRA 529} (1995)

G.R. No. 109248 July 3, 1995
GREGORIO F. ORTEGA, TOMAS O. DEL
CASTILLO,
JR.,
and
BENJAMIN
T.
BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and JOAQUIN L.
MISA,respondents.

VITUG, J.:

The instant petition seeks a review of the decision rendered

by the Court of Appeals, dated 26 February 1993, in CAG.R. SP No. 24638 and No. 24648 affirming in toto that of
the Securities and Exchange Commission ("SEC") in SEC
AC 254.
The antecedents of the controversy, summarized by
respondent Commission and quoted at length by the
appellate court in its decision, are hereunder restated.
The law firm of ROSS, LAWRENCE, SELPH
and CARRASCOSO was duly registered in the
Mercantile Registry on 4 January 1937 and
reconstituted with the Securities and Exchange
Commission on 4 August 1948. The SEC records
show that there were several subsequent
amendments to the articles of partnership on 18
September 1958, to change the firm [name] to
ROSS, SELPH and CARRASCOSO; on 6 July
1965 . . . to ROSS, SELPH, SALCEDO, DEL
ROSARIO, BITO & MISA; on 18 April 1972 to
SALCEDO, DEL ROSARIO, BITO, MISA &
LOZADA; on 4 December 1972 to SALCEDO,
DEL ROSARIO, BITO, MISA & LOZADA; on
11 March 1977 to DEL ROSARIO, BITO, MISA
& LOZADA; on 7 June 1977 to BITO, MISA &
LOZADA; on 19 December 1980, [Joaquin L.
Misa] appellees Jesus B. Bito and Mariano M.
Lozada associated themselves together, as senior
partners with respondents-appellees Gregorio F.
Ortega, Tomas O. del Castillo, Jr., and Benjamin
Bacorro, as junior partners.
On February 17, 1988, petitioner-appellant wrote
the respondents-appellees a letter stating:
I am withdrawing and retiring
from the firm of Bito, Misa
and Lozada, effective at the
end of this month.

"I trust that the accountants

will be instructed to make the
proper liquidation of my
participation in the firm."
On the same day, petitioner-appellant wrote
respondents-appellees another letter stating:
"Further to my letter to you
today, I would like to have a
meeting with all of you with
regard to the mechanics of
liquidation,
and
more
particularly, my interest in the
two floors of this building. I
would like to have this
resolved soon because it has
to do with my own plans."
On 19 February 1988, petitioner-appellant wrote
respondents-appellees another letter stating:
"The partnership has ceased to
be
mutually
satisfactory
because of the working
conditions of our employees
including
the
assistant
attorneys. All my efforts to
ameliorate
the
below
subsistence level of the pay
scale of our employees have
been thwarted by the other
partners. Not only have they
refused to give meaningful
increases to the employees,
even attorneys, are dressed
down publicly in a loud voice
in a manner that deprived
them of their self-respect. The
result of such policies is the
formation of the union,

64

including
attorneys."

the

assistant

On 30 June 1988, petitioner filed with this

Commission's Securities Investigation and
Clearing Department (SICD) a petition for
dissolution and liquidation of partnership,
docketed as SEC Case No. 3384 praying that the
Commission:
"1. Decree the formal
dissolution and order the
immediate liquidation of (the
partnership of) Bito, Misa &
Lozada;
"2. Order the respondents to
deliver or pay for petitioner's
share in the partnership assets
plus the profits, rent or
interest attributable to the use
of his right in the assets of the
dissolved partnership;
"3. Enjoin respondents from
using the firm name of Bito,
Misa & Lozada in any of their
correspondence, checks and
pleadings
and
to
pay
petitioners damages for the
use thereof despite the
dissolution of the partnership
in the amount of at least
P50,000.00;
"4. Order respondents jointly
and severally to pay petitioner
attorney's fees and expense of
litigation in such amounts as
maybe proven during the trial
and which the Commission

may deem just and equitable

under the premises but in no
case less than ten (10%) per
cent of the value of the shares
of petitioner or P100,000.00;
"5. Order the respondents to
pay petitioner moral damages
with
the
amount
of
P500,000.00 and exemplary
damages in the amount of
P200,000.00.
"Petitioner likewise prayed
for such other and further
reliefs that the Commission
may deem just and equitable
under the premises."
On 13 July 1988, respondents-appellees filed their
opposition to the petition.
On 13 July 1988, petitioner filed his Reply to the
Opposition.
On 31 March 1989, the hearing officer rendered a
decision ruling that:
"[P]etitioner's
withdrawal
from the law firm Bito, Misa
& Lozada did not dissolve the
said
law
partnership.
Accordingly, the petitioner
and respondents are hereby
enjoined to abide by the
provisions of the Agreement
relative
to
the
matter
governing the liquidation of
the shares of any retiring or
withdrawing partner in the
partnership interest." 1

On appeal, the SEC en banc reversed the decision of the

Hearing Officer and held that the withdrawal of Attorney
Joaquin L. Misa had dissolved the partnership of "Bito,
Misa & Lozada." The Commission ruled that, being a
partnership at will, the law firm could be dissolved by any
partner at anytime, such as by his withdrawal therefrom,
regardless of good faith or bad faith, since no partner can be
forced to continue in the partnership against his will. In its
decision, dated 17 January 1990, the SEC held:
WHEREFORE, premises considered the appealed
order of 31 March 1989 is hereby REVERSED
insofar as it concludes that the partnership of Bito,
Misa & Lozada has not been dissolved. The case
is hereby REMANDED to the Hearing Officer for
determination of the respective rights and
obligations of the parties. 2
The parties sought a reconsideration of the above decision.
Attorney Misa, in addition, asked for an appointment of a
receiver to take over the assets of the dissolved partnership
and to take charge of the winding up of its affairs. On 4
April 1991, respondent SEC issued an order denying
reconsideration, as well as rejecting the petition for
receivership, and reiterating the remand of the case to the
Hearing Officer.
The parties filed with the appellate court separate appeals
(docketed CA-G.R. SP No. 24638 and CA-G.R. SP No.
24648).
During the pendency of the case with the Court of Appeals,
Attorney Jesus Bito and Attorney Mariano Lozada both died
on, respectively, 05 September 1991 and 21 December
1991. The death of the two partners, as well as the
admission of new partners, in the law firm prompted
Attorney Misa to renew his application for receivership (in
CA G.R. SP No. 24648). He expressed concern over the
need to preserve and care for the partnership assets. The
other partners opposed the prayer.

65

The Court of Appeals, finding no reversible error on the part

of respondent Commission, AFFIRMED in toto the SEC
decision and order appealed from. In fine, the appellate
court held, per its decision of 26 February 1993, (a) that
Atty. Misa's withdrawal from the partnership had changed
the relation of the parties and inevitably caused the
dissolution of the partnership; (b) that such withdrawal was
not in bad faith; (c) that the liquidation should be to the
extent of Attorney Misa's interest or participation in the
partnership which could be computed and paid in the
manner stipulated in the partnership agreement; (d) that the
case should be remanded to the SEC Hearing Officer for the
corresponding determination of the value of Attorney Misa's
share in the partnership assets; and (e) that the appointment
of a receiver was unnecessary as no sufficient proof had
been shown to indicate that the partnership assets were in
any such danger of being lost, removed or materially
impaired.
In this petition for review under Rule 45 of the Rules of
Court, petitioners confine themselves to the following
issues:
1. Whether or not the Court of Appeals has erred
in holding that the partnership of Bito, Misa &
Lozada (now Bito, Lozada, Ortega & Castillo) is a
partnership at will;
2. Whether or not the Court of Appeals has erred
in holding that the withdrawal of private
respondent dissolved the partnership regardless of
his good or bad faith; and
3. Whether or not the Court of Appeals has erred
in holding that private respondent's demand for
the dissolution of the partnership so that he can
get a physical partition of partnership was not
made in bad faith;
to which matters we shall, accordingly, likewise limit
ourselves.

A partnership that does not fix its term is a partnership at

will. That the law firm "Bito, Misa & Lozada," and now
"Bito, Lozada, Ortega and Castillo," is indeed such a
partnership need not be unduly belabored. We quote, with
approval, like did the appellate court, the findings and
disquisition of respondent SEC on this matter; viz:
The partnership agreement (amended articles of
19 August 1948) does not provide for a specified
period or undertaking. The "DURATION" clause
simply states:
"5.
DURATION.
The
partnership shall continue so
long as mutually satisfactory
and upon the death or legal
incapacity of one of the
partners, shall be continued by
the surviving partners."
The hearing officer however opined that the
partnership is one for a specific undertaking and
hence not a partnership at will, citing paragraph 2
of the Amended Articles of Partnership (19
August 1948):
"2. Purpose. The purpose for
which the partnership is
formed, is to act as legal
adviser and representative of
any individual, firm and
corporation
engaged
in
commercial, industrial or
other lawful businesses and
occupations; to counsel and
advise such persons and
entities with respect to their
legal and other affairs; and to
appear for and represent their
principals and client in all
courts
of
justice
and
government departments and

offices in the Philippines, and

elsewhere
when
legally
authorized to do so."
The "purpose" of the partnership is not the
specific undertaking referred to in the law.
Otherwise, all partnerships, which necessarily
must have a purpose, would all be considered as
partnerships for a definite undertaking. There
would therefore be no need to provide for articles
on partnership at will as none would so exist.
Apparently what the law contemplates, is a
specific undertaking or "project" which has a
definite or definable period of completion. 3
The birth and life of a partnership at will is predicated on
the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself is
the very foundation and essence of that partnership. Its
continued existence is, in turn, dependent on the constancy
of that mutual resolve, along with each partner's capability
to give it, and the absence of a cause for dissolution
provided by the law itself. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of the
partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution
of the partnership 4 but that it can result in a liability for
damages. 5
In passing, neither would the presence of a period for its
specific duration or the statement of a particular purpose for
its creation prevent the dissolution of any partnership by an
act or will of a partner. 6 Among partners, 7 mutual agency
arises and the doctrine of delectus personae allows them to
have the power, although not necessarily the right, to
dissolve the partnership. An unjustified dissolution by the
partner can subject him to a possible action for damages.
The dissolution of a partnership is the change in the relation
of the parties caused by any partner ceasing to be associated
in the carrying on, as might be distinguished from the
winding up of, the business. 8 Upon its dissolution, the

66

partnership continues and its legal personality is retained

until the complete winding up of its business culminating in
its termination. 9
The liquidation of the assets of the partnership following its
dissolution is governed by various provisions of the Civil
Code; 10 however, an agreement of the partners, like any
other contract, is binding among them and normally takes
precedence to the extent applicable over the Code's general
provisions. We here take note of paragraph 8 of the
"Amendment to Articles of Partnership" reading thusly:
. . . In the event of the death or retirement of any
partner, his interest in the partnership shall be
liquidated and paid in accordance with the
existing agreements and his partnership
participation shall revert to the Senior Partners for
allocation as the Senior Partners may
determine; provided, however, that with respect to
the two (2) floors of office condominium which
the partnership is now acquiring, consisting of the
5th and the 6th floors of the Alpap Building, 140
Alfaro Street, Salcedo Village, Makati, Metro
Manila, their true value at the time of such death
or retirement shall be determined by two (2)
independent appraisers, one to be appointed (by
the partnership and the other by the) retiring
partner or the heirs of a deceased partner, as the
case may be. In the event of any disagreement
between the said appraisers a third appraiser will
be appointed by them whose decision shall be
final. The share of the retiring or deceased partner
in the aforementioned two (2) floor office
condominium shall be determined upon the basis
of the valuation above mentioned which shall be
paid monthly within the first ten (10) days of
every month in installments of not less than
P20,000.00 for the Senior Partners, P10,000.00 in
the case of two (2) existing Junior Partners and
P5,000.00 in the case of the new Junior Partner. 11

The term "retirement" must have been used in the articles,

as we so hold, in a generic sense to mean the dissociation by
a partner, inclusive of resignation or withdrawal, from the
partnership that thereby dissolves it.
On the third and final issue, we accord due respect to the
appellate court and respondent Commission on their
common factual finding, i.e., that Attorney Misa did not act
in bad faith. Public respondents viewed his withdrawal to
have been spurred by "interpersonal conflict" among the
partners. It would not be right, we agree, to let any of the
partners remain in the partnership under such an atmosphere
of animosity; certainly, not against their will. 12Indeed, for
as long as the reason for withdrawal of a partner is not
contrary to the dictates of justice and fairness, nor for the
purpose of unduly visiting harm and damage upon the
partnership, bad faith cannot be said to characterize the act.
Bad faith, in the context here used, is no different from its
normal concept of a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity.
WHEREFORE, the decision appealed from is AFFIRMED.
No pronouncement on costs.
SO ORDERED.

Tocao vs CA {342 SCRA 20} (2000)

[G.R. No. 127405. October 4, 2000]

MARJORIE
TOCAO
and
WILLIAM
T.
BELO, petitioners, vs. COURT OF APPEALS
and NENITA A. ANAY, respondents.

DECISION
YNARES-SANTIAGO, J.:
This is a petition for review of the Decision of the
Court of Appeals in CA-G.R. CV No. 41616,[1] affirming
the Decision of the Regional Trial Court of Makati, Branch
140, in Civil Case No. 88-509.[2]
Fresh from her stint as marketing adviser of
Technolux in Bangkok, Thailand, private respondent Nenita
A. Anay met petitioner William T. Belo, then the vicepresident for operations of Ultra Clean Water Purifier,
through her former employer in Bangkok. Belo introduced
Anay to petitioner Marjorie Tocao, who conveyed her desire
to enter into a joint venture with her for the importation and
local distribution of kitchen cookwares. Belo volunteered to
finance the joint venture and assigned to Anay the job of
marketing the product considering her experience and
established relationship with West Bend Company, a
manufacturer of kitchen wares in Wisconsin, U.S.A. Under
the joint venture, Belo acted as capitalist, Tocao as president
and general manager, and Anay as head of the marketing
department and later, vice-president for sales. Anay
organized the administrative staff and sales force while
Tocao hired and fired employees, determined commissions
and/or salaries of the employees, and assigned them to
different branches. The parties agreed that Belos name
should not appear in any documents relating to their
transactions with West Bend Company. Instead, they agreed
to use Anays name in securing distributorship of cookware
from that company. The parties agreed further that Anay
would be entitled to: (1) ten percent (10%) of the annual net
profits of the business; (2) overriding commission of six
percent (6%) of the overall weekly production; (3) thirty
percent (30%) of the sales she would make; and (4) two
percent (2%) for her demonstration services. The agreement
was not reduced to writing on the strength of Belos
assurances that he was sincere, dependable and honest when
it came to financial commitments.
Anay having secured the distributorship of cookware
products from the West Bend Company and organized the
administrative staff and the sales force, the cookware

67

business took off successfully. They operated under the

name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712
Rufino Building, Ayala Avenue, Makati City. Belo made
good his monetary commitments to Anay. Thereafter, Roger
Muencheberg of West Bend Company invited Anay to the
distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern
regional convention in Pismo Beach, California, U.S.A.,
from July 25-26, 1987. Anay accepted the invitation with
the consent of Marjorie Tocao who, as president and general
manager of Geminesse Enterprise, even wrote a letter to the
Visa Section of the U.S. Embassy in Manila on July 13,
1987. A portion of the letter reads:
Ms. Nenita D. Anay (sic), who has been patronizing and
supporting West Bend Co. for twenty (20) years now,
acquired the distributorship of Royal Queen cookware for
Geminesse Enterprise, is the Vice President Sales
Marketing and a business partner of our company, will
attend in response to the invitation. (Italics supplied.)[3]
Anay arrived from the U.S.A. in mid-August 1987,
and immediately undertook the task of saving the business
on account of the unsatisfactory sales record in the Makati
and Cubao offices. On August 31, 1987, she received a
plaque of appreciation from the administrative and sales
people through Marjorie Tocao[4] for her excellent job
performance. On October 7, 1987, in the presence of Anay,
Belo signed a memo[5] entitling her to a thirty-seven percent
(37%) commission for her personal sales "up Dec 31/87.
Belo explained to her that said commission was apart from
her ten percent (10%) share in the profits. On October 9,
1987, Anay learned that Marjorie Tocao had signed a
letter[6] addressed to the Cubao sales office to the effect that
she was no longer the vice-president of Geminesse
Enterprise. The following day, October 10, she received a
note from Lina T. Cruz, marketing manager, that Marjorie
Tocao had barred her from holding office and conducting
demonstrations in both Makati and Cubao offices.[7] Anay
attempted to contact Belo. She wrote him twice to demand
her overriding commission for the period of January 8, 1988

to February 5, 1988 and the audit of the company to

determine her share in the net profits. When her letters were
not answered, Anay consulted her lawyer, who, in turn,
wrote Belo a letter. Still, that letter was not answered.
Anay still received her five percent (5%) overriding
commission up to December 1987. The following year,
1988, she did not receive the same commission although the
company netted a gross sales of P13,300,360.00.

it over in the Geminesse Enterprise. Anay had acted like she

owned the enterprise because of her experience and
expertise. Hence, petitioners were the ones who suffered
actual damages including unreturned and unaccounted
stocks of Geminesse Enterprise, and serious anxiety,
besmirched reputation in the business world, and various
damages not less than P500,000.00. They also alleged that,
to vindicate their names, they had to hire counsel for a fee
of P23,000.00.

On April 5, 1988, Nenita A. Anay filed Civil Case

No. 88-509, a complaint for sum of money with
damages[8] against Marjorie D. Tocao and William Belo
before the Regional Trial Court of Makati, Branch 140.

At the pre-trial conference, the issues were limited to:

(a) whether or not the plaintiff was an employee or partner
of Marjorie Tocao and Belo, and (b) whether or not the
parties are entitled to damages.[10]

In her complaint, Anay prayed that defendants be

ordered to pay her, jointly and severally, the following: (1)
P32,00.00 as unpaid overriding commission from January 8,
1988 to February 5, 1988; (2) P100,000.00 as moral
damages, and (3) P100,000.00 as exemplary damages. The
plaintiff also prayed for an audit of the finances of
Geminesse Enterprise from the inception of its business
operation until she was illegally dismissed to determine her
ten percent (10%) share in the net profits. She further
prayed that she be paid the five percent (5%) overriding
commission on the remaining 150 West Bend cookware sets
before her dismissal.

In their defense, Belo denied that Anay was supposed

to receive a share in the profit of the business. He, however,
admitted that the two had agreed that Anay would receive a
three to four percent (3-4%) share in the gross sales of the
cookware. He denied contributing capital to the business or
receiving a share in its profits as he merely served as a
guarantor of Marjorie Tocao, who was new in the business.
He attended and/or presided over business meetings of the
venture in his capacity as a guarantor but he never
participated in decision-making. He claimed that he wrote
the memo granting the plaintiff thirty-seven percent (37%)
commission upon her dismissal from the business venture at
the request of Tocao, because Anay had no other income.

In their answer,[9] Marjorie Tocao and Belo asserted

that the alleged agreement with Anay that was neither
reduced in writing, nor ratified, was either unenforceable or
void or inexistent. As far as Belo was concerned, his only
role was to introduce Anay to Marjorie Tocao. There could
not have been a partnership because, as Anay herself
admitted, Geminesse Enterprise was the sole proprietorship
of Marjorie Tocao. Because Anay merely acted as
marketing demonstrator of Geminesse Enterprise for an
agreed remuneration, and her complaint referred to either
her compensation or dismissal, such complaint should have
been lodged with the Department of Labor and not with the
regular court.
Petitioners (defendants therein) further alleged that
Anay filed the complaint on account of ill-will and
resentment because Marjorie Tocao did not allow her to lord

For her part, Marjorie Tocao denied having entered

into an oral partnership agreement with Anay. However, she
admitted that Anay was an expert in the cookware business
and hence, they agreed to grant her the following
commissions: thirty-seven percent (37%) on personal sales;
five percent (5%) on gross sales; two percent (2%) on
product demonstrations, and two percent (2%) for
recruitment of personnel. Marjorie denied that they agreed
on a ten percent (10%) commission on the net profits.
Marjorie claimed that she got the capital for the business out
of the sale of the sewing machines used in her garments
business and from Peter Lo, a Singaporean friend-financier
who loaned her the funds with interest. Because she treated
Anay as her co-equal, Marjorie received the same amounts

68

of commissions as her. However, Anay failed to account for

stocks valued at P200,000.00.
On April 22, 1993, the trial court rendered a decision
the dispositive part of which is as follows:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered:
1. Ordering defendants to submit to the Court a
formal account as to the partnership affairs
for the years 1987 and 1988 pursuant to Art.
1809 of the Civil Code in order to determine
the ten percent (10%) share of plaintiff in
the net profits of the cookware business;
2. Ordering defendants to pay five percent (5%)
overriding commission for the one hundred
and fifty (150) cookware sets available for
disposition when plaintiff was wrongfully
excluded from the partnership by
defendants;
3. Ordering defendants to pay plaintiff
overriding commission on the total
production which for the period covering
January 8, 1988 to February 5, 1988
amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as
moral damages and P100,000.00 as
exemplary damages, and
5. Ordering defendants to pay P50,000.00 as
attorneys fees and P20,000.00 as costs of
suit.
SO ORDERED.
The trial court held that there was indeed an oral
partnership agreement between the plaintiff and the
defendants, based on the following: (a) there was an
intention to create a partnership; (b) a common fund was

established through contributions consisting of money and

industry, and (c) there was a joint interest in the profits. The
testimony of Elizabeth Bantilan, Anays cousin and the
administrative officer of Geminesse Enterprise from August
21, 1986 until it was absorbed by Royal International, Inc.,
buttressed the fact that a partnership existed between the
parties. The letter of Roger Muencheberg of West Bend
Company stating that he awarded the distributorship to
Anay and Marjorie Tocao because he was convinced that
with Marjories financial contribution and Anays experience,
the combination of the two would be invaluable to the
partnership, also supported that conclusion. Belos claim that
he was merely a guarantor has no basis since there was no
written evidence thereof as required by Article 2055 of the
Civil Code. Moreover, his acts of attending and/or presiding
over meetings of Geminesse Enterprise plus his issuance of
a memo giving Anay 37% commission on personal sales
belied this. On the contrary, it demonstrated his
involvement as a partner in the business.
The trial court further held that the payment of
commissions did not preclude the existence of the
partnership inasmuch as such practice is often resorted to in
business circles as an impetus to bigger sales volume. It did
not matter that the agreement was not in writing because
Article 1771 of the Civil Code provides that a partnership
may be constituted in any form. The fact that Geminesse
Enterprise was registered in Marjorie Tocaos name is not
determinative of whether or not the business was managed
and operated by a sole proprietor or a partnership. What was
registered with the Bureau of Domestic Trade was merely
the business name or style of Geminesse Enterprise.
The trial court finally held that a partner who is
excluded wrongfully from a partnership is an innocent
partner. Hence, the guilty partner must give him his due
upon the dissolution of the partnership as well as damages
or share in the profits realized from the appropriation of the
partnership business and goodwill. An innocent partner thus
possesses pecuniary interest in every existing contract that
was incomplete and in the trade name of the co-partnership
and assets at the time he was wrongfully expelled.

Petitioners appeal to the Court of Appeals [11] was

dismissed, but the amount of damages awarded by the trial
court were reduced to P50,000.00 for moral damages and
P50,000.00 as exemplary damages. Their Motion for
Reconsideration was denied by the Court of Appeals for
lack of merit.[12] Petitioners Belo and Marjorie Tocao are
now before this Court on a petition for review on certiorari,
asserting that there was no business partnership between
them and herein private respondent Nenita A. Anay who is,
therefore, not entitled to the damages awarded to her by the
Court of Appeals.
Petitioners Tocao and Belo contend that the Court of
Appeals erroneously held that a partnership existed between
them and private respondent Anay because Geminesse
Enterprise came into being exactly a year before the alleged
partnership was formed, and that it was very unlikely that
petitioner Belo would invest the sum of P2,500,000.00 with
petitioner Tocao contributing nothing, without any
memorandum
whatsoever
regarding
the
alleged
partnership.[13]
The issue of whether or not a partnership exists is a
factual matter which are within the exclusive domain of
both the trial and appellate courts. This Court cannot set
aside factual findings of such courts absent any showing
that there is no evidence to support the conclusion drawn by
the court a quo.[14] In this case, both the trial court and the
Court of Appeals are one in ruling that petitioners and
private respondent established a business partnership. This
Court finds no reason to rule otherwise.
To be considered a juridical personality, a partnership
must fulfill these requisites: (1) two or more persons bind
themselves to contribute money, property or industry to a
common fund; and (2) intention on the part of the partners
to divide the profits among themselves.[15] It may be
constituted in any form; a public instrument is necessary
only where immovable property or real rights are
contributed thereto.[16] This implies that since a contract of
partnership is consensual, an oral contract of partnership is
as good as a written one. Where no immovable property or
real rights are involved, what matters is that the parties have
complied with the requisites of a partnership. The fact that

69

there appears to be no record in the Securities and Exchange

Commission of a public instrument embodying the
partnership agreement pursuant to Article 1772 of the Civil
Code[17] did not cause the nullification of the
partnership. The pertinent provision of the Civil Code on
the matter states:
Art. 1768. The partnership has a juridical personality
separate and distinct from that of each of the partners, even
in case of failure to comply with the requirements of article
1772, first paragraph.
Petitioners admit that private respondent had the
expertise to engage in the business of distributorship of
cookware. Private respondent contributed such expertise to
the partnership and hence, under the law, she was the
industrial or managing partner. It was through her reputation
with the West Bend Company that the partnership was able
to open the business of distributorship of that companys
cookware products; it was through the same efforts that the
business was propelled to financial success. Petitioner
Tocao herself admitted private respondents indispensable
role in putting up the business when, upon being asked if
private respondent held the positions of marketing manager
and vice-president for sales, she testified thus:
A: No, sir at the start she was the marketing
manager because there were no one to sell
yet, its only me there then her and then two
(2) people, so about four (4). Now, after that
when she recruited already Oscar Abella
and Lina Torda-Cruz these two (2) people
were given the designation of marketing
managers of which definitely Nita as
superior to them would be the Vice
President.[18]
By the set-up of the business, third persons were made to
believe that a partnership had indeed been forged between
petitioners and private respondents. Thus, the
communication dated June 4, 1986 of Missy Jagler of West
Bend Company to Roger Muencheberg of the same
company states:

Marge Tocao is president of Geminesse Enterprises.

Geminesse will finance the operations. Marge does not have
cookware experience. Nita Anay has started to gather
former managers, Lina Torda and Dory Vista. She has also
gathered former demonstrators, Betty Bantilan, Eloisa
Lamela, Menchu Javier. They will continue to gather other
key people and build up the organization. All they need is
the finance and the products to sell.[19]
On the other hand, petitioner Belos denial that he
financed the partnership rings hollow in the face of the
established fact that he presided over meetings regarding
matters affecting the operation of the business. Moreover,
his having authorized in writing on October 7, 1987, on a
stationery of his own business firm, Wilcon Builders
Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be
interpreted otherwise than that he had a proprietary interest
in the business. His claim that he was merely a guarantor is
belied by that personal act of proprietorship in the business.
Moreover, if he was indeed a guarantor of future debts of
petitioner Tocao under Article 2053 of the Civil Code,[20] he
should have presented documentary evidence therefor.
While Article 2055 of the Civil Code simply provides that
guaranty must be express, Article 1403, the Statute of
Frauds, requires that a special promise to answer for the
debt, default or miscarriage of another be in writing.[21]
Petitioner Tocao, a former ramp model,[22] was also a
capitalist in the partnership. She claimed that she herself
financed the business. Her and petitioner Belos roles as both
capitalists to the partnership with private respondent are
buttressed by petitioner Tocaos admissions that petitioner
Belo was her boyfriend and that the partnership was not
their only business venture together. They also established a
firm that they called Wiji, the combination of petitioner
Belos first name, William, and her nickname, Jiji.[23] The
special relationship between them dovetails with petitioner
Belos claim that he was acting in behalf of petitioner Tocao.
Significantly, in the early stage of the business operation,
petitioners requested West Bend Company to allow them to
utilize their banking and trading facilities in Singapore in
the matter of importation and payment of the cookware

products.[24] The inevitable conclusion, therefore, was that

petitioners merged their respective capital and infused the
amount into the partnership of distributing cookware with
private respondent as the managing partner.
The business venture operated under Geminesse
Enterprise did not result in an employer-employee
relationship between petitioners and private respondent.
While it is true that the receipt of a percentage of net profits
constitutes only prima facie evidence that the recipient is a
partner in the business,[25] the evidence in the case at bar
controverts an employer-employee relationship between the
parties. In the first place, private respondent had a voice in
the management of the affairs of the cookware
distributorship,[26] including selection of people who would
constitute the administrative staff and the sales force.
Secondly, petitioner Tocaos admissions militate against an
employer-employee relationship. She admitted that, like her
who owned Geminesse Enterprise,[27] private respondent
received only commissions and transportation and
representation
allowances[28] and
not
a
fixed
[29]
salary. Petitioner Tocao testified:
Q: Of course. Now, I am showing to you certain
documents already marked as Exhs. X and Y.
Please go over this. Exh. Y is denominated
`Cubao overrides 8-21-87 with ending August 21,
1987, will you please go over this and tell the
Honorable Court whether you ever came across
this document and know of your own knowledge
the amount --A: Yes, sir this is what I am talking about earlier. Thats
the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.
Q: I see. Now, this promotion, advertising, incentive,
there is a figure here and words which I quote:
Overrides Marjorie Ann Tocao P21,410.50 this
means that you have received this amount?
A: Oh yes, sir.

70

Q: I see. And, by way of amplification this is what you

are saying as one representing commission,
representation, advertising and promotion?

Q: Okey. Below your name is the name of Nita Anay

P15,314.25 that is also an indication that she
received the same amount?

A: Yes, sir.

A: Yes, sir.

Q: I see. Below your name is the words and figure and I

quote Nita D. Anay P21,410.50, what is this?

Q: And, as in your previous statement it is not by

coincidence that these two (2) are the same?

A: Thats her overriding commission.

A: No, sir.

Q: Overriding commission, I see. Of course, you are

telling this Honorable Court that there being the
same P21,410.50 is merely by coincidence?

Q: It is again in concept of you treating Miss Anay as

your equal?

A: No, sir, I made it a point that we were equal because

the way I look at her kasi, you know in a sense
because of her expertise in the business she is
vital to my business. So, as part of the incentive I
offer her the same thing.
Q: So, in short you are saying that this you have shared
together, I mean having gotten from the company
P21,140.50 is your way of indicating that you
were treating her as an equal?
A: As an equal.
Q: As an equal, I see. You were treating her as an
equal?
A: Yes, sir.
Q: I am calling again your attention to Exh. Y Overrides
Makati the other one is --A: That is the same thing, sir.
Q: With ending August 21, words and figure Overrides
Marjorie Ann Tocao P15,314.25 the amount there
you will acknowledge you have received that?
A: Yes, sir.
Q: Again in concept of commission, representation,
promotion, etc.?
A: Yes, sir.

A: Yes, sir. (Italics supplied.)[30]

If indeed petitioner Tocao was private respondents
employer, it is difficult to believe that they shall receive the
same income in the business. In a partnership, each partner
must share in the profits and losses of the venture, except
that the industrial partner shall not be liable for the
losses.[31] As an industrial partner, private respondent had
the right to demand for a formal accounting of the business
and to receive her share in the net profit.[32]
The fact that the cookware distributorship was
operated under the name of Geminesse Enterprise, a sole
proprietorship, is of no moment. What was registered with
the Bureau of Domestic Trade on August 19, 1987 was
merely the name of that enterprise.[33]While it is true that in
her undated application for renewal of registration of that
firm name, petitioner Tocao indicated that it would be
engaged in retail of kitchenwares, cookwares, utensils,
skillet,[34] she also admitted that the enterprise was only
60% to 70% for the cookware business, while 20% to 30%
of its business activity was devoted to the sale of water
sterilizer or purifier.[35] Indubitably then, the business name
Geminesse Enterprise was used only for practical reasons it was utilized as the common name for petitioner Tocaos
various business activities, which included the
distributorship of cookware.
Petitioners underscore
Appeals did not return the
stocks of Geminesse
P208,250.00.[36] Obviously a

the fact that the Court of

unaccounted and unremitted
Enterprise amounting to
ploy to offset the damages

awarded to private respondent, that claim, more than

anything else, proves the existence of a partnership between
them. In Idos v. Court of Appeals, this Court said:
The best evidence of the existence of the partnership, which
was not yet terminated (though in the winding up stage),
were the unsold goods and uncollected receivables, which
were presented to the trial court. Since the partnership has
not been terminated, the petitioner and private complainant
remained as co-partners. x x x.[37]
It is not surprising then that, even after private respondent
had been unceremoniously booted out of the partnership in
October 1987, she still received her overriding commission
until December 1987.
Undoubtedly, petitioner Tocao unilaterally excluded
private respondent from the partnership to reap for herself
and/or for petitioner Belo financial gains resulting from
private respondents efforts to make the business venture a
success. Thus, as petitioner Tocao became adept in the
business operation, she started to assert herself to the extent
that she would even shout at private respondent in front of
other people.[38] Her instruction to Lina Torda Cruz,
marketing manager, not to allow private respondent to hold
office in both the Makati and Cubao sales offices concretely
spoke of her perception that private respondent was no
longer necessary in the business operation,[39] and resulted
in a falling out between the two. However, a mere falling
out or misunderstanding between partners does not convert
the partnership into a sham organization.[40] The partnership
exists until dissolved under the law. Since the partnership
created by petitioners and private respondent has no fixed
term and is therefore a partnership at will predicated on
their mutual desire and consent, it may be dissolved by the
will of a partner. Thus:
x x x. The right to choose with whom a person wishes to
associate himself is the very foundation and essence of that
partnership. Its continued existence is, in turn, dependent on
the constancy of that mutual resolve, along with each
partners capability to give it, and the absence of cause for

71

dissolution provided by the law itself. Verily, any one of the

partners may, at his sole pleasure, dictate a dissolution of
the partnership at will. He must, however, act in good faith,
not that the attendance of bad faith can prevent the
dissolution of the partnership but that it can result in a
liability for damages.[41]
An unjustified dissolution by a partner can subject him to
action for damages because by the mutual agency that arises
in a partnership, the doctrine of delectus personae allows
the partners to have the power, although not necessarily
the right to dissolve the partnership.[42]
In this case, petitioner Tocaos unilateral exclusion of
private respondent from the partnership is shown by her
memo to the Cubao office plainly stating that private
respondent was, as of October 9, 1987, no longer the vicepresident for sales of Geminesse Enterprise.[43] By that
memo, petitioner Tocao effected her own withdrawal from
the partnership and considered herself as having ceased to
be associated with the partnership in the carrying on of the
business. Nevertheless, the partnership was not terminated
thereby; it continues until the winding up of the business.[44]
The winding up of partnership affairs has not yet been
undertaken by the partnership. This is manifest in
petitioners claim for stocks that had been entrusted to
private respondent in the pursuit of the partnership business.
The determination of the amount of damages
commensurate with the factual findings upon which it is
based is primarily the task of the trial court.[45] The Court of
Appeals may modify that amount only when its factual
findings are diametrically opposed to that of the lower
court,[46] or the award is palpably or scandalously and
unreasonably excessive.[47] However, exemplary damages
that are awarded by way of example or correction for the
public good,[48] should be reduced to P50,000.00, the
amount
correctly awarded by the Court of
Appeals. Concomitantly, the award of moral damages of
P100,000.00 was excessive and should be likewise reduced
to P50,000.00. Similarly, attorneys fees that should be
granted on account of the award of exemplary damages and
petitioners evident bad faith in refusing to satisfy private

respondents plainly valid, just and demandable

claims,[49] appear to have been excessively granted by the
trial court and should therefore be reduced to P25,000.00.
WHEREFORE, the instant petition for review
on certiorari is
DENIED. The
partnership
among
petitioners and private respondent is ordered dissolved, and
the parties are ordered to effect the winding up and
liquidation of the partnership pursuant to the pertinent
provisions of the Civil Code. This case is remanded to the
Regional Trial Court for proper proceedings relative to said
dissolution. The appealed decisions of the Regional Trial
Court and the Court of Appeals are AFFIRMED with
MODIFICATIONS, as follows --1. Petitioners are ordered to submit to the Regional Trial
Court a formal account of the partnership affairs for the
years 1987 and 1988, pursuant to Article 1809 of the Civil
Code, in order to determine private respondents ten percent
(10%) share in the net profits of the partnership;
2. Petitioners are ordered, jointly and severally, to pay
private respondent five percent (5%) overriding commission
for the one hundred and fifty (150) cookware sets available
for disposition since the time private respondent was
wrongfully excluded from the partnership by petitioners;
3. Petitioners are ordered, jointly and severally, to pay
private respondent overriding commission on the total
production which, for the period covering January 8, 1988
to February 5, 1988, amounted to P32,000.00;
4. Petitioners are ordered, jointly and severally, to pay
private respondent moral damages in the amount of
P50,000.00, exemplary damages in the amount of
P50,000.00 and attorneys fees in the amount of P25,000.00.
SO ORDERED.

Mendiola vs CA {497 SCRA 346} (2006)

G.R. No. 159333

July 31, 2006

ARSENIO
T.
MENDIOLA, petitioner,
vs.
COURT OF APPEALS, NATIONAL LABOR
RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK
AB, respondents.
DECISION
PUNO, J.:
On appeal are the Decision1 and Resolution2 of the Court of
Appeals, dated January 30, 2003 and July 30, 2003,
respectively, in CA-G.R. SP No. 71028, affirming the
ruling3 of the National Labor Relations Commission
(NLRC), which in turn set aside the July 30, 2001
Decision4 of the labor arbiter. The labor arbiter declared
illegal the dismissal of petitioner from employment and
awarded separation pay, moral and exemplary damages, and
attorney's fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc.
(Pacfor) is a corporation organized and existing under the
laws of California, USA. It is a subsidiary of Cellulose
Marketing International, a corporation duly organized under
the laws of Sweden, with principal office in Gothenburg,
Sweden.
Private respondent Pacfor entered into a "Side Agreement
on Representative Office known as Pacific Forest Resources
(Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM),
effective May 1, 1995, "assuming that Pacfor-Phils. is
already approved by the Securities and Exchange
Commission [SEC] on the said date."6 The Side Agreement

72

outlines the business relationship of the parties with regard

to the Philippine operations of Pacfor. Private respondent
will establish a Pacfor representative office in the
Philippines, to be known as Pacfor Phils, and petitioner
ATM will be its President. Petitioner's base salary and the
overhead expenditures of the company shall be borne by the
representative office and funded by Pacfor/ATM, since
Pacfor Phils. is equally owned on a 50-50 equity by ATM
and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private
respondent Pacfor for a license to transact business in the
Philippines under the name of Pacfor or Pacfor Phils.7 In its
application, private respondent Pacfor proposed to establish
its representative office in the Philippines with the purpose
of monitoring and coordinating the market activities for
paper products. It also designated petitioner as its resident
agent in the Philippines, authorized to accept summons and
processes in all legal proceedings, and all notices affecting
the corporation.8
In March 1997, the Side Agreement was amended through a
"Revised Operating and Profit Sharing Agreement for the
Representative Office Known as Pacific Forest Resources
(Philippines),"9 where the salary of petitioner was increased
to $78,000 per annum. Both agreements show that the
operational expenses will be borne by the representative
office and funded by all parties "as equal partners," while
the profits and commissions will be shared among them.
In July 2000, petitioner wrote Kevin Daley, Vice President
for Asia of Pacfor, seeking confirmation of his 50% equity
of Pacfor Phils.10 Private respondent Pacfor, through
William Gleason, its President, replied that petitioner is not
a part-owner of Pacfor Phils. because the latter is merely
Pacfor-USA's representative office and not an entity
separate and distinct from Pacfor-USA. "It's simply a
'theoretical company' with the purpose of dividing the
income 50-50."11 Petitioner presumably knew of this
arrangement from the start, having been the one to propose
to private respondent Pacfor the setting up of a

representative office, and "not a branch office" in the

Philippines to save on taxes.12
Petitioner claimed that he was all along made to believe that
he was in a joint venture with them. He alleged he would
have been better off remaining as an independent agent or
representative of Pacfor-USA as ATM Marketing
Corp.13 Had he known that no joint venture existed, he
would not have allowed Pacfor to take the profitable
business of his own company, ATM Marketing
Corp.14 Petitioner raised other issues, such as the rentals of
office furniture, salary of the employees, company car, as
well as commissions allegedly due him. The issues were not
resolved, hence, in October 2000, petitioner wrote PacforUSA demanding payment of unpaid commissions and office
furniture and equipment rentals, amounting to more than
one million dollars.15
On November 27, 2000, private respondent Pacfor, through
counsel, ordered petitioner to turn over to it all papers,
documents, files, records, and other materials in his or ATM
Marketing Corporation's possession that belong to Pacfor or
Pacfor Phils.16 On December 18, 2000, private respondent
Pacfor also required petitioner to remit more than three
hundred thousand-peso Christmas giveaway fund for clients
of Pacfor Phils.17 Lastly, private respondent Pacfor
withdrew all its offers of settlement and ordered petitioner
to transfer title and turn over to it possession of the service
car.18
Private respondent Pacfor likewise sent letters to its clients
in the Philippines, advising them not to deal with Pacfor
Phils. In its letter to Intercontinental Paper Industries, Inc.,
dated November 21, 2000, private respondent Pacfor stated:
Until further notice, please course all inquiries
and communications for Pacific Forest Resources
(Philippines) to:
Pacific
Forest
200
Tamal
Plaza,

Resources
Suite
200

Corte Madera, CA, USA

(415)
927
1700
(415) 381 4358 fax

94925
phone

Please do not send any communication to Mr.

Arsenio "Boy" T. Mendiola or to the offices of
ATM Marketing Corporation at Room 504,
Concorde Building, Legaspi Village, Makati City,
Philippines.19
In another letter addressed to Davao Corrugated Carton
Corp. (DAVCOR), dated December 2000, private
respondent directed said client "to please communicate
directly with us on any further questions associated with
these payments or any future business. Do not communicate
with [Pacfor] and/or [ATM]."20
Petitioner construed these directives as a severance of the
"unregistered partnership" between him and Pacfor, and the
termination of his employment as resident manager of
Pacfor Phils.21 In a memorandum to the employees of
Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources,
Inc. demanding the turnover of all records to them
effective December 19, 2000. The company
records were turned over only on January 26,
2001. This means our jobs with Pacific Forest
were terminated effective December 19, 2000. I
am concerned about your welfare. I would like to
help you by offering you to work with ATM
Marketing Corporation.
Please let me know if you are interested.22
On the basis of the "Side Agreement," petitioner insisted
that he and Pacfor equally own Pacfor Phils. Thus, it
follows that he and Pacfor likewise own, on a 50/50 basis,
Pacfor Phils.' office furniture and equipment and the service
car. He also reiterated his demand for unpaid commissions,
and proposed to offset these with the remaining Christmas

73

giveaway fund in his possession.23 Furthermore, he did not

renew the lease contract with Pulp and Paper, Inc., the
lessor of the office premises of Pacfor Phils., wherein he
was the signatory to the lease agreement.24
On February 2, 2001, private respondent Pacfor placed
petitioner on preventive suspension and ordered him to
show cause why no disciplinary action should be taken
against him. Private respondent Pacfor charged petitioner
with willful disobedience and serious misconduct for his
refusal to turn over the service car and the Christmas
giveaway fund which he applied to his alleged unpaid
commissions. Private respondent also alleged loss of
confidence and gross neglect of duty on the part of
petitioner for allegedly allowing another corporation owned
by petitioner's relatives, High End Products, Inc. (HEPI), to
use the same telephone and facsimile numbers of Pacfor, to
possibly steal and divert the sales and business of private
respondent for HEPI's principal, International Forest
Products, a competitor of private respondent.25
Petitioner denied the charges. He reiterated that he
considered the import of Pacfor President William
Gleason's letters as a "cessation of his position and of the
existence of Pacfor Phils." He likewise informed private
respondent Pacfor that ATM Marketing Corp. now occupies
Pacfor Phils.' office premises,26 and demanded payment of
his separation pay.27 On February 15, 2001, petitioner filed
his complaint for illegal dismissal, recovery of separation
pay, and payment of attorney's fees with the NLRC.28
In the meantime, private respondent Pacfor lodged fresh
charges against petitioner. In a memorandum dated March
5, 2001, private respondent directed petitioner to explain
why he should not be disciplined for serious misconduct and
conflict of interest. Private respondent charged petitioner
anew with serious misconduct for the latter's alleged act of
fraud and misrepresentation in authorizing the release of an
additional peso salary for himself, besides the dollar salary
agreed upon by the parties. Private respondent also accused
petitioner of disloyalty and representation of conflicting
interests for having continued using the Pacfor Phils.' office

for operations of HEPI. In addition, petitioner allegedly

solicited business for HEPI from a competitor company of
private respondent Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of petitioner,
finding there was constructive dismissal. By directing
petitioner to turn over all office records and materials,
regardless of whether he may have retained copies, private
respondent Pacfor virtually deprived petitioner of his job by
the gradual diminution of his authority as resident manager.
Petitioner's position as resident manager whose duty, among
others, was to maintain the security of its business
transactions
and
communications
was
rendered
meaningless. The dispositive portion of the decision of the
Labor Arbiter reads:
WHEREFORE, premises considered, judgment is
hereby rendered ordering herein respondents
Cellmark AB and Pacific Forest Resources, Inc.,
jointly and severally to compensate complainant
Arsenio T. Mendiola separation pay equivalent to
at least one month for every year of service,
whichever is higher (sic), as reinstatement is no
longer feasible by reason of the strained relations
of the parties equivalent to five (5) months in the
amount of $32,000.00 plus the sum
of P250,000.00; pay complainant the sum
ofP500,000.00 as moral and exemplary damages
and ten percent (10%) of the amounts awarded as
and for attorney's fees.
All other claims are dismissed for lack of basis.
SO ORDERED.30
Private respondent Pacfor appealed to the NLRC which
ruled in its favor. On December 20, 2001, the NLRC set
aside the July 30, 2001 decision of the labor arbiter, for lack
of jurisdiction and lack of merit.31 It held there was no
employer-employee relationship between the parties. Based
on the two agreements between the parties, it concluded that

petitioner is not an employee of private respondent Pacfor,

but a full co-owner (50/50 equity).
The
NLRC
denied
Reconsideration.32

petitioner's

Motion

for

Petitioner was not successful on his appeal to the Court of

Appeals. The appellate court upheld the ruling of the
NLRC.
Petitioner's Motion for Reconsideration33 of the decision of
the Court of Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:
A. The Respondent Court of Appeals committed
reversible error and abused its discretion in
rendering judgment against petitioner since
jurisdiction has been acquired over the subject
matter of the case as there exists employeremployee relationship between the parties.
B. The Respondent Court of Appeals committed
reversible error and abused its discretion in ruling
that jurisdiction over the subject matter cannot be
waived and may be alleged even for the first time
on appeal or considered by the court motu
prop[r]io.35
The first issue is whether an employer-employee
relationship exists between petitioner and private
respondent Pacfor.
Petitioner argues that he is an industrial partner of the
partnership he formed with private respondent Pacfor, and
also an employee of the partnership. Petitioner insists that
an industrial partner may at the same time be an employee
of the partnership, provided there is such an agreement,

74

which, in this case, is the "Side Agreement" and the

"Revised Operating and Profit Sharing Agreement." The
Court of Appeals denied the appeal of petitioner, holding
that "the legal basis of the complaint is not employment but
perhaps partnership, co-ownership, or independent
contractorship." Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent
Pacfor and that no partnership or co-ownership exists
between the parties.
In a partnership, the members become co-owners of what is
contributed to the firm capital and of all property that may
be acquired thereby and through the efforts of the
members.36 The property or stock of the partnership forms a
community of goods, a common fund, in which each party
has a proprietary interest.37 In fact, the New Civil Code
regards a partner as a co-owner of specific partnership
property.38 Each partner possesses a joint interest in the
whole of partnership property. If the relation does not have
this feature, it is not one of partnership.39 This essential
element, the community of interest, or co-ownership of, or
joint interest in partnership property is absent in the
relations between petitioner and private respondent Pacfor.
Petitioner is not a part-owner of Pacfor Phils. William
Gleason, private respondent Pacfor's President established
this fact when he said that Pacfor Phils. is simply a
"theoretical company" for the purpose of dividing the
income 50-50. He stressed that petitioner knew of this
arrangement from the very start, having been the one to
propose to private respondent Pacfor the setting up of a
representative office, and "not a branch office" in the
Philippines to save on taxes. Thus, the parties in this case,
merely shared profits. This alone does not make a
partnership.40
Besides, a corporation cannot become a member of a
partnership in the absence of express authorization by
statute or charter.41 This doctrine is based on the following
considerations: (1) that the mutual agency between the
partners, whereby the corporation would be bound by the
acts of persons who are not its duly appointed and

authorized agents and officers, would be inconsistent with

the policy of the law that the corporation shall manage its
own affairs separately and exclusively; and, (2) that such an
arrangement would improperly allow corporate property to
become subject to risks not contemplated by the
stockholders when they originally invested in the
corporation.42 No such authorization has been proved in the
case at bar.
Be that as it may, we hold that on the basis of the evidence,
an employer-employee relationship is present in the case at
bar. The elements to determine the existence of an
employment relationship are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c)
the power of dismissal; and (d) the employer's power to
control the employee's conduct. The most important element
is the employer's control of the employee's conduct, not
only as to the result of the work to be done, but also as to
the means and methods to accomplish it.43
In the instant case, all the foregoing elements are present.
First, it was private respondent Pacfor which selected and
engaged the services of petitioner as its resident agent in the
Philippines. Second, as stipulated in their Side Agreement,
private respondent Pacfor pays petitioner his salary
amounting to $65,000 per annum which was later increased
to $78,000. Third, private respondent Pacfor holds the
power of dismissal, as may be gleaned through the various
memoranda it issued against petitioner, placing the latter on
preventive suspension while charging him with various
offenses, including willful disobedience, serious
misconduct, and gross neglect of duty, and ordering him to
show cause why no disciplinary action should be taken
against him.
Lastly and most important, private respondent Pacfor has
the power of control over the means and method of
petitioner in accomplishing his work.
The power of control refers merely to the existence of the
power, and not to the actual exercise thereof. The principal
consideration is whether the employer has the right to

control the manner of doing the work, and it is not the actual
exercise of the right by interfering with the work, but the
right to control, which constitutes the test of the existence of
an employer-employee relationship.44 In the case at bar,
private respondent Pacfor, as employer, clearly possesses
such right of control. Petitioner, as private respondent
Pacfor's resident agent in the Philippines, is, exactly so, only
an agent of the corporation, a representative of Pacfor, who
transacts business, and accepts service on its behalf.
This right of control was exercised by private respondent
Pacfor during the period of November to December 2000,
when it directed petitioner to turn over to it all records of
Pacfor Phils.; when it ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor
Phils.; and, when it withdrew all its offers of settlement and
ordered petitioner to transfer title and turn over to it the
possession of the service car. It was also during this period
when private respondent Pacfor sent letters to its clients in
the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, advising them not to deal
with petitioner and/or Pacfor Phils. In its letter to
DAVCOR, private respondent Pacfor replied to the client's
request for an invoice payment extension, and formulated a
revised payment program for DAVCOR. This is one
unmistakable proof that private respondent Pacfor exercises
control over the petitioner.
Next, we shall determine if petitioner was constructively
dismissed from employment.
The evidence shows that when petitioner insisted on his
50% equity in Pacfor Phils., and would not quit however,
private respondent Pacfor began to systematically deprive
petitioner of his duties and benefits to make him feel that his
presence in the company was no longer wanted. First,
private respondent Pacfor directed petitioner to turn over to
it all records of Pacfor Phils. This would certainly make the
work of petitioner very difficult, if not impossible. Second,
private respondent Pacfor ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor
Phils. Then it ordered petitioner to transfer title and turn

75

over to it the possession of the service car. It also advised its

clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, not to deal with petitioner
and/or Pacfor Phils. Lastly, private respondent Pacfor
appointed a new resident agent for Pacfor Phils.45

The July 30, 2001 Decision of the Labor Arbiter

isREINSTATED with the MODIFICATION that the
amount of P250,000.00 representing an alleged increase in
petitioner's salary shall be deducted from the grant of
separation pay for lack of evidence.

Although there is no reduction of the salary of petitioner,

constructive dismissal is still present because continued
employment of petitioner is rendered, at the very least,
unreasonable.46 There is an act of clear discrimination,
insensibility or disdain by the employer that continued
employment may become so unbearable on the part of the
employee so as to foreclose any choice on his part except to
resign from such employment.47

SO ORDERED.

The harassing acts of the private respondent are unjustified.

They were undertaken when petitioner sought clarification
from the private respondent about his supposed 50% equity
on Pacfor Phils. Private respondent Pacfor invokes its rights
as an owner. Allegedly, its issuance of the foregoing
directives against petitioner was a valid exercise of
management prerogative. We remind private respondent
Pacfor that the exercise of management prerogative is not
absolute. "By its very nature, encompassing as it could be,
management prerogative must be exercised in good faith
and with due regard to the rights of labor verily, with the
principles of fair play at heart and justice in mind." The
exercise of management prerogative cannot be utilized as an
implement to circumvent our laws and oppress employees.48
As resident agent of private respondent corporation,
petitioner occupied a position involving trust and
confidence. In the light of the strained relations between the
parties, the full restoration of an employment relationship
based on trust and confidence is no longer possible. He
should be awarded separation pay, in lieu of reinstatement.
IN VIEW WHEREOF, the petition is GRANTED. The
Court of Appeals' January 30, 2003 Decision in CA-G.R. SP
No. 71028 and July 30, 2003 Resolution, affirming the
December 20, 2001 Decision of the National Labor
Relations Commission, are ANNULED and SET ASIDE.

The Case

In the Petition for Review on Certiorari before us, Lim

Tong Lim assails the November 26, 1998 Decision of the
Court of Appeals in CA-GR CV 41477,[1] which disposed as
follows:
WHEREFORE, [there being] no reversible error in the
appealed decision, the same is hereby affirmed.[2]

Lim Tong Lim vs Phil. Fishing Gear Industries, Inc.

{317 SCRA 728} (1999)

[G.R. No. 136448. November 3, 1999]

The decretal portion of the Quezon City Regional

Trial Court (RTC) ruling, which was affirmed by the CA,
reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary
attachment issued by this Court on September 20, 1990;

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING

GEAR INDUSTRIES, INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties
who agree to borrow money to pursue a business and to
divide the profits or losses that may arise therefrom, even if
it is shown that they have not contributed any capital of
their own to a "common fund." Their contribution may be in
the form of credit or industry, not necessarily cash or fixed
assets. Being partners, they are all liable for debts incurred
by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person
who may not have directly transacted on its behalf, but
reaped benefits from that contract.

2. That defendants are jointly liable to plaintiff for the

following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts
and circumstances and the proceedings that transpired
during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of
the fishing nets covered by the Agreement plus P68,000.00
representing the unpaid price of the floats not covered by
said Agreement;
b. 12% interest per annum counted from date of plaintiffs
invoices and computed on their respective amounts as
follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413
for P146,868.00 dated February 13, 1990;

76

iii. Accrued interest of P12,920.00 on Invoice No. 14426

for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00
representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for
storage charges on the nets counted from September 20,
1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the
principal obligation or for the unpaid price of nets and floats
in the amount of P532,045.00 and P68,000.00, respectively,
or for the total amount of P600,045.00, this Court noted that
these items were attached to guarantee any judgment that
may be rendered in favor of the plaintiff but, upon
agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered
sold at public auction for not less than P900,000.00 for
which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in
court. In effect, the amount of P900,000.00 replaced the
attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded
and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that
ownership of the nets [was] retained by the plaintiff until
full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It
[was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash
bidded and paid for by plaintiff to serve as its bond in favor
of defendants.
From the foregoing, it would appear therefore that whatever
judgment the plaintiff may be entitled to in this case will

have to be satisfied from the amount of P900,000.00 as this

amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed
above would amount to only P840,216.92, it would be
inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not
put up a single centavo to raise the amount of P900,000.00
aside from the fact that they are not the owners of the nets
and floats. For this reason, the defendants are hereby
relieved from any and all liabilities arising from the
monetary judgment obligation enumerated above and for
plaintiff to retain possession and ownership of the nets and
floats and for the reimbursement of the P900,000.00
deposited by it with the Clerk of Court.
SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation,"

Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various
sizes from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they were engaged
in a business venture with Petitioner Lim Tong Lim, who
however was not a signatory to the agreement. The total
price of the nets amounted to P532,045. Four hundred
pieces of floats worth P68,000 were also sold to the
Corporation.[4]
The buyers, however, failed to pay for the fishing nets
and the floats; hence, private respondent filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a
prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general
partners, on the allegation that Ocean Quest Fishing
Corporation was a nonexistent corporation as shown by a
Certification from the Securities and Exchange
Commission.[5] On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff

enforced by attaching the fishing nets on board F/B

Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a
Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his
possession. Peter Yao filed an Answer, after which he was
deemed to have waived his right to cross-examine witnesses
and to present evidence on his behalf, because of his failure
to appear in subsequent hearings. Lim Tong Lim, on the
other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of
Attachment.[6] The trial court maintained the Writ, and upon
motion of private respondent, ordered the sale of the fishing
nets at a public auction. Philippine Fishing Gear Industries
won the bidding and deposited with the said court the sales
proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its
Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and
Lim, as general partners, were jointly liable to pay
respondent.[8]
The trial court ruled that a partnership among Lim,
Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement
executed by the three[9] in Civil Case No. 1492-MN which
Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a
declaration of ownership of fishing boats; (d) an injunction
and (e) damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have
the four (4) vessels sold in the amount of P5,750,000.00
including the fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;

77

b) If the four (4) vessel[s] and the fishing net will be sold at
a higher price than P5,750,000.00 whatever will be the
excess will be divided into 3: 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less
than P5,750,000.00 whatever the deficiency shall be
shouldered and paid to JL Holding Corporation by 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement
was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of
the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as
already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner
was a partner of Chua and Yao in a fishing business and
may thus be held liable as a such for the fishing nets and
floats purchased by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants including
herein appellant Lim Tong Lim undertook a partnership for
a specific undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the defendants
was to divide the profits among themselves which is what a
partnership essentially is x x x. By a contract of partnership,
two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New
Civil Code).[13]
Hence, petitioner brought this recourse before this
Court.[14]

The Issues

In his Petition and Memorandum, Lim asks this Court

to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING,
BASED ON A COMPROMISE AGREEMENT THAT
CHUA, YAO AND PETITIONER LIM ENTERED INTO
IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED
THAT HE WAS ACTING FOR OCEAN QUEST
FISHING CORPORATION WHEN HE BOUGHT THE
NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE
SEIZURE AND ATTACHMENT OF PETITIONER LIMS
GOODS.
In determining whether petitioner may be held liable
for the fishing nets and floats purchased from respondent,
the Court must resolve this key issue: whether by their acts,
Lim, Chua and Yao could be deemed to have entered into a
partnership.

This Courts Ruling

the CA based its finding on the Compromise Agreement

alone. Furthermore, he disclaims any direct participation in
the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even
met
the
representatives
of
the
respondent
company. Petitioner further argues that he was a lessor, not
a partner, of Chua and Yao, for the "Contract of Lease"
dated February 1, 1990, showed that he had merely leased
to the two the main asset of the purported partnership -- the
fishing boat F/B Lourdes. The lease was for six months,
with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of
petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua,
Yao and him, pursuant to Article 1767 of the Civil Code
which provides:
Article 1767 - By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves.
Specifically, both lower courts ruled that a partnership
among the three existed based on the following factual
findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who
was engaged in commercial fishing to join him, while
Antonio Chua was already Yaos partner;

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the

equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that

(2) That after convening for a few times, Lim Chua, and
Yao verbally agreed to acquire two fishing boats, the FB
Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim,
brother of Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing
Corporation, which executed a Deed of Sale over these two

78

(2) boats in favor of Petitioner Lim Tong Lim only to serve

as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing ,
re-equipping, repairing, dry docking and other expenses for
the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim
again extended a loan to the partnership in the amount of P1
million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats,
Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong
Lim.
(7) That in pursuance of the business agreement, Peter Yao
and Antonio Chua bought nets from Respondent Philippine
Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in
the Malabon RTC, Branch 72 by Antonio Chua and Peter
Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction;
and (e) damages.
(9) That the case was amicably settled through a
Compromise Agreement executed between the partieslitigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is
clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from Jesus
Lim who was petitioners brother. In their Compromise
Agreement, they subsequently revealed their intention to
pay the loan with the proceeds of the sale of the boats, and
to divide equally among them the excess or loss. These
boats, the purchase and the repair of which were financed
with borrowed money, fell under the term common fund
under Article 1767.The contribution to such fund need not

be cash or fixed assets; it could be an intangible like credit

or industry. That the parties agreed that any loss or profit
from the sale and operation of the boats would be divided
equally among them also shows that they had indeed formed
a partnership.
Moreover, it is clear that the partnership extended not
only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential
to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that there was,
among petitioner, Chua and Yao, a partnership engaged in
the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they
agreed that the proceeds from the sales and operations
thereof would be divided among them.
We stress that under Rule 45, a petition for review
like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the
CA are binding on this Court, absent any cogent proof that
the present action is embraced by one of the exceptions to
the rule.[16] In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis

for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement
was entered into only to end the dispute among them, but
not to adjudicate their preexisting rights and obligations. His
arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties
prior to its execution.

A proper adjudication of claimants rights mandates

that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found,
correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of
one piece of document alone, petitioner fails to appreciate
that the CA and the RTC delved into the history of the
document and explored all the possible consequential
combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual findings
mentioned above nullified petitioners argument that the
existence of a partnership was based only on the
Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he

was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds
support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.
His allegation defies logic. In effect, he would like
this Court to believe that he consented to the sale of his
own boats to pay a debt of Chua and Yao, with the excess of
the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to
the sale proved that there was a preexisting partnership
among all three.
Verily, as found by the lower courts, petitioner
entered into a business agreement with Chua and Yao, in
which debts were undertaken in order to finance the
acquisition and the upgrading of the vessels which would be
used in their fishing business. The sale of the boats, as well
as the division among the three of the balance remaining
after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his
own property but an asset of the partnership. It is not
uncommon to register the properties acquired from a loan in

79

the name of the person the lender trusts, who in this case is
the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -for petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was
merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

to act as its representatives or agents do so without authority

and at their own risk. And as it is an elementary principle of
law that a person who acts as an agent without authority or
without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such
agent.[17]

Section 21 of the Corporation Code of the Philippines

provides:

The doctrine of corporation by estoppel may apply to

the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented
itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who
relied in good faith on such representation. It cannot allege
lack of personality to be sued to evade its responsibility for
a contract it entered into and by virtue of which it received
advantages and benefits.

Sec. 21. Corporation by estoppel. - All persons who assume

to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate
personality.

On the other hand, a third party who, knowing an

association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who
benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took
advantage of.

Petitioner argues that under the doctrine of

corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. Again, we disagree.

One who assumes an obligation to an ostensible corporation

as such, cannot resist performance thereof on the ground
that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven
to be legally nonexistent, a party may be estopped from
denying its corporate existence. The reason behind this
doctrine is obvious - an unincorporated association has no
personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority
on another to act in its behalf; thus, those who act or purport

There is no dispute that the respondent, Philippine

Fishing Gear Industries, is entitled to be paid for the nets it
sold. The only question here is whether petitioner should be
held jointly[18] liable with Chua and Yao. Petitioner contests
such liability, insisting that only those who dealt in the
name of the ostensible corporation should be held
liable. Since his name does not appear on any of the
contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of
the nets found inside F/B Lourdes, the boat which has
earlier been proven to be an asset of the partnership. He in

fact questions the attachment of the nets, because the Writ

has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA
that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation
of it. Clearly, under the law on estoppel, those acting on
behalf of a corporation and those benefited by it, knowing it
to be without valid existence, are held liable as general
partners.
Technically, it is true that petitioner did
not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by
persons with whom he previously had an existing
relationship, he is deemed to be part of said association and
is covered by the scope of the doctrine of corporation by
estoppel. We reiterate the ruling of the Court in Alonso v.
Villamor:[19]
A litigation is not a game of technicalities in which one,
more deeply schooled and skilled in the subtle art of
movement and position , entraps and destroys the other. It
is, rather, a contest in which each contending party fully and
fairly lays before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks
that justice be done upon the merits. Lawsuits, unlike duels,
are not to be won by a rapiers thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights
in technicalities.

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment

was improperly issued against the nets. We agree with the

80

Court of Appeals that this issue is now moot and

academic. As previously discussed, F/B Lourdes was an
asset of the partnership and that it was placed in the name of
petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically
manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture
they agreed upon. Hence, the issuance of the Writ to assure
the payment of the price stipulated in the invoices is
proper. Besides, by specific agreement, ownership of the
nets remained with Respondent Philippine Fishing Gear,
until full payment thereof.
WHEREFORE, the Petition is DENIED and the
assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

Tacao vs CA (365 SCRA 463) 2001

On November 14, 2001, petitioners Marjorie Tocao

and William T. Belo filed a Motion for Reconsideration of
our Decision dated October 4, 2000. They maintain that
there was no partnership bettween petitioner Belo, on the
one hand, and respondent Nenita A. Anay, on the other
hand; and that the latter being merely an employee of
petitioner Tocao.
After a careful review of the evidence presented, we
are convinced that, indeed, petitioner Belo acted merely as
guarantor of Geminesse Enterprise. This was categorically
affirmed by respondents own witness, Elizabeth Bantilan,
during her cross-examination. Furthermore, Bantilan
testified that it was Peter Lo who was the companys
financier. Thus:
Q You mentioned a while ago the name William
Belo. Now, what is the role of William Belo with
Geminesse Enterprise?
A William Belo is the friend of Marjorie Tocao and he
was the guarantor of the company.
Q What do you mean by guarantor?

[G.R. No. 127405. September 20, 2001]

MARJORIE
TOCAO
and
WILLIAM
T.
BELO, petitioners, vs. COURT OF APPEALS
and NENITA A. ANAY, respondents.

A He guarantees the stocks that she owes somebody

who is Peter Lo and he acts as guarantor for
us. We can borrow money from him.
Q You mentioned a certain Peter Lo. Who is this Peter
Lo?
A Peter Lo is based in Singapore.

RESOLUTION

Q What is the role of Peter Lo in the Geminesse

Enterprise?

YNARES-SANTIAGO, J.:

A He is the one fixing our orders that open the L/C.

Q You mean Peter Lo is the financier?

The inherent powers of a Court to amend and control

its processes and orders so as to make them conformable to
law and justice includes the right to reverse itself, especially
when in its honest opinion it has committed an error or
mistake in judgment, and that to adhere to its decision will
cause injustice to a party litigant.[1]

A Yes, he is the financier.

Q And the defendant William Belo is merely the
guarantor of Geminesse Enterprise, am I correct?
A Yes, sir.[2]

The foregoing was neither refuted nor contradicted by

respondents evidence. It should be recalled that the business
relationship created between petitioner Tocao and
respondent Anay was an informal partnership, which was
not even recorded with the Securities and Exchange
Commission.As such, it was understandable that Belo, who
was after all petitioner Tocaos good friend and confidante,
would occasionally participate in the affairs of the business,
although never in a formal or official capacity.[3] Again,
respondents witness, Elizabeth Bantilan, confirmed that
petitioner Belos presence in Geminesse Enterprises
meetings was merely as guarantor of the company and to
help petitioner Tocao.[4]
Furthermore, no evidence was presented to show that
petitioner Belo participated in the profits of the business
enterprise. Respondent herself professed lack of knowledge
that petitioner Belo received any share in the net income of
the partnership.[5] On the other hand, petitioner Tocao
declared that petitioner Belo was not entitled to any share in
the profits of Geminesse Enterprise.[6] With no participation
in the profits, petitioner Belo cannot be deemed a partner
since the essence of a partnership is that the partners share
in the profits and losses.[7]
Consequently, inasmuch as petitioner Belo was not a
partner in Geminesse Enterprise, respondent had no cause of
action against him and her complaint against him should
accordingly be dismissed.
As regards the award of damages, petitioners argue
that respondent should be deemed in bad faith for failing to
account for stocks of Geminesse Enterprise amounting to
P208,250.00 and that, accordingly, her claim for damages
should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondents sudden
ouster from the partnership by petitioner Tocao, her act of
withholding whatever stocks were in her possession and
control was justified, if only to serve as security for her
claims against the partnership. However, while we do not
agree that the same renders private respondent in bad faith
and should bar her claim for damages, we find that the said
sum of P208,250.00 should be deducted from whatever
amount is finally adjudged in her favor on the basis of the

81

formal account of the partnership affairs to be submitted to

the Regional Trial Court.
WHEREFORE, based on the foregoing, the Motion
for Reconsideration of petitioners is PARTIALLY
GRANTED. The Regional Trial Court of Makati is hereby
ordered to DISMISS the complaint, docketed as Civil Case
No. 88-509, as against petitioner William T. Belo only. The
sum of P208,250.00 shall be deducted from whatever
amount petitioner Marjorie Tocao shall be held liable to pay
respondent after the formal accounting of the partnership
affairs.
SO ORDERED.

Tai Tong Chuache & Co. vs Insurance Commission, 158

SCRA 366 (1988)
G.R. No. L-55397 February 29, 1988
TAI
TONG
CHUACHE
&
CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS
MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:
This petition for review on certiorari seeks the reversal of
the decision of the Insurance Commission in IC Case
#367 1dismissing the complaint 2 for recovery of the alleged
unpaid balance of the proceeds of the Fire Insurance
Policies issued by herein respondent insurance company in
favor of petitioner-intervenor.
The facts of the case as found by respondent Insurance
Commission are as follows:

Complainants acquired from a certain

Rolando Gonzales a parcel of land and a
building located at San Rafael Village,
Davao City. Complainants assumed the
mortgage of the building in favor of
S.S.S., which building was insured with
respondent S.S.S. Accredited Group of
Insurers for P25,000.00.

Adjustment
Standard
Corporation
submitted a report as follow

On April 19, 1975, Azucena Palomo

obtained a loan from Tai Tong Chuache
Inc. in the amount of P100,000.00. To
secure the payment of the loan, a
mortgage was executed over the land
and the building in favor of Tai Tong
Chuache & Co. (Exhibit "1" and "1-A").
On
April
25,
1975,
Arsenio
Chua, representative of Thai Tong
Chuache & Co. insured the latter's
interest with Travellers Multi-Indemnity
Corporation
for
P100,000.00
(P70,000.00 for the building and
P30,000.00 for the contents thereof)
(Exhibit "A-a," contents thereof)
(Exhibit "A-a").

Policy
No..

Company

MIRO

Zenith

F02500

Insurance

On June 11, 1975, Pedro Palomo

secured a Fire Insurance Policy No. F02500 (Exhibit "A"), covering the
building for P50,000.00 with respondent
Zenith Insurance Corporation. On July
16, 1975, another Fire Insurance Policy
No. 8459 (Exhibit "B") was procured
from respondent Philippine British
Assurance Company, covering the same
building for P50,000.00 and the
contents thereof for P70,000.00.
On July 31, 1975, the building and the
contents were totally razed by fire.

xxx xxx xxx

... Thus the apportioned share of each
company is as follows:

Corp.
F84590

Phil.

British
Assco.
Co.
Inc.
Policy
No.

Company

FIC15381

SSSAccre

dited
Group
of
Insurers

82

We are showing hereunder another

apportionment of the loss which
includes the Travellers Multi-Indemnity
policy for reference purposes.
Policy
No.

Company

MIRO/

Zenith

F02500

Insurance

Corp.
F84590

Phil.

British
Assco.
Co.

PVC15181

Insurers

In their answers, Philippine British

FFF & PE
50,000
Assurance and Zenith
Insurance
Corporation admitted the material
Accredited
allegations in the complaint, but denied
liability on the ground that the claim of
the complainants had already been
waived, extinguished or paid. Both
companies set up counterclaim in the
Buildingtotal amount of P 91,546.79.
25,000

Insurers

I-Ref

SSS

Group of

F-599
DV

Based on the computation of the loss,

including
the
Travellers
MultiIndemnity,
respondents,
Zenith
Insurance, Phil. British Assurance and
S.S.S. Accredited Group of Insurers,
paid their corresponding shares of the
Risk loss. Complainants were
Injures
paid the
following: P41,546.79 by Philippine
British Assurance Co., P11,877.14 by
Zenith Insurance Corporation, and
P5,936.57 by S.S.S. Group of
Accredited Insurers (Par. 6. Amended
Complaint). Demand was made from
respondent Travellers Multi-Indemnity
Buildingfor its share in the loss butP50,000
the same was
refused. Hence, complainants demanded
from the other three (3) respondents the
balance of each share in the loss based
on the computation of the Adjustment
Standards Report excluding Travellers
Multi-Indemnity in the amount of
I-Building
70,000
P30,894.31
(P5,732.79-Zenith
Insurance: P22,294.62, Phil. British:
and P2,866.90, SSS Accredited) but the
II- action.
same was refused, hence, this
Building

Multi

30,000
Instead of filing an answer, SSS
Accredited Group of Insurers informed
the Commission in its letter
of July 22,
II70,000
Building1977 that the herein claim of
complainants for the balance had been
in full,
Totals paid in the amount of P 5,938.57
P295.000

based on the Adjustment Standards

Corporation Report of September 22,
1975.
Travellers Insurance, on its part,
admitted the issuance of the Policy No.
Pays
599 DV and alleged as its special and
affirmative defenses the following, to
wit: that Fire Policy No. 599 DV,
covering the furniture and building of
complainants was secured by a
certain Arsenio
Chua,
mortgage
creditor, for the purpose of protecting
his mortgage credit against the
P11,877.14
complainants; that the said policy was
issued in the name of Azucena Palomo,
only to indicate that she owns the
insured premises; that the policy
contains an endorsement in favor of
Arsenio Chua as his mortgage interest
may appear to indicate that insured was
16,628.00 Arsenio Chua and the complainants;
that the premium due on said fire policy
was paid by Arsenio Chua; that
respondent Travellers is not liable to
pay complainants.
24,918.79

On May 31, 1977, Tai Tong Chuache &

Co. filed a complaint in intervention
claiming the proceeds of the fire
Insurance Policy No. F-559 DV, issued
by respondent Travellers MultiIndemnity.

5,938.50
Travellers Insurance, in answer to the
14,467.31 complaint in intervention, alleged that
the Intervenor is not entitled to
indemnity under its Fire Insurance
16,628.00 Policy for lack of insurable interest
before the loss of the insured premises
and that the complainants, spouses
P90,257.81 Pedro and Azucena Palomo, had

83

already paid in full their mortgage

indebtedness to the intervenor. 3
As adverted to above respondent Insurance Commission
dismissed spouses Palomos' complaint on the ground that
the insurance policy subject of the complaint was taken out
by Tai Tong Chuache & Company, petitioner herein, for its
own interest only as mortgagee of the insured property and
thus complainant as mortgagors of the insured property
have no right of action against herein respondent. It likewise
dismissed petitioner's complaint in intervention in the
following words:
We move on the issue of liability of
respondent Travellers Multi-Indemnity
to the Intervenor-mortgagee. The
complainant testified that she was still
indebted to Intervenor in the amount of
P100,000.00. Such allegation has not
however, been sufficiently proven by
documentary evidence. The certification
(Exhibit 'E-e') issued by the Court of
First Instance of Davao, Branch 11,
indicate that the complainant was
Antonio Lopez Chua and not Tai Tong
Chuache & Company. 4
From the above decision, only intervenor Tai Tong Chuache
filed a motion for reconsideration but it was likewise denied
hence, the present petition.
It is the contention of the petitioner that respondent
Insurance Commission decided an issue not raised in the
pleadings of the parties in that it ruled that a certain Arsenio
Lopez Chua is the one entitled to the insurance proceeds
and not Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous
interpretation of the decision appealed from considering the
manner it was written. 5 As correctly pointed out by
respondent insurance commission in their comment, the

decision did not pronounce that it was Arsenio Lopez Chua

who has insurable interest over the insured property. Perusal
of the decision reveals however that it readily absolved
respondent insurance company from liability on the basis of
the commissioner's conclusion that at the time of the
occurrence of the peril insured against petitioner as
mortgagee had no more insurable interest over the insured
property. It was based on the inference that the credit
secured by the mortgaged property was already paid by the
Palomos before the said property was gutted down by fire.
The foregoing conclusion was arrived at on the basis of the
certification issued by the then Court of First Instance of
Davao, Branch II that in a certain civil action against the
Palomos, Antonio Lopez Chua stands as the complainant
and not petitioner Tai Tong Chuache & Company.
We find the petition to be impressed with merit. It is a well
known postulate that the case of a party is constituted by his
own affirmative allegations. Under Section 1, Rule
131 6 each party must prove his own affirmative allegations
by the amount of evidence required by law which in civil
cases as in the present case is preponderance of evidence.
The party, whether plaintiff or defendant, who asserts the
affirmative of the issue has the burden of presenting at the
trial such amount of evidence as required by law to obtain
favorable judgment. 7 Thus, petitioner who is claiming a
right over the insurance must prove its case. Likewise,
respondent insurance company to avoid liability under the
policy by setting up an affirmative defense of lack of
insurable interest on the part of the petitioner must prove its
own affirmative allegations.
It will be recalled that respondent insurance company did
not assail the validity of the insurance policy taken out by
petitioner over the mortgaged property. Neither did it deny
that the said property was totally razed by fire within the
period covered by the insurance. Respondent, as mentioned
earlier advanced an affirmative defense of lack of insurable
interest on the part of the petitioner that before the
occurrence of the peril insured against the Palomos had
already paid their credit due the petitioner. Respondent
having admitted the material allegations in the complaint,

has the burden of proof to show that petitioner has no

insurable interest over the insured property at the time the
contingency took place. Upon that point, there is a failure of
proof. Respondent, it will be noted, exerted no effort to
present any evidence to substantiate its claim, while
petitioner did. For said respondent's failure, the decision
must be adverse to it.
However, as adverted to earlier, respondent Insurance
Commission absolved respondent insurance company from
liability on the basis of the certification issued by the then
Court of First Instance of Davao, Branch II, that in a certain
civil action against the Palomos, Arsenio Lopez Chua stands
as the complainant and not Tai Tong Chuache. From said
evidence respondent commission inferred that the credit
extended by herein petitioner to the Palomos secured by the
insured property must have been paid. Such is a glaring
error which this Court cannot sanction. Respondent
Commission's findings are based upon a mere inference.
The record of the case shows that the petitioner to support
its claim for the insurance proceeds offered as evidence the
contract of mortgage (Exh. 1) which has not been cancelled
nor released. It has been held in a long line of cases that
when the creditor is in possession of the document of credit,
he need not prove non-payment for it is presumed. 8 The
validity of the insurance policy taken b petitioner was not
assailed by private respondent. Moreover, petitioner's claim
that the loan extended to the Palomos has not yet been paid
was corroborated by Azucena Palomo who testified that
they are still indebted to herein petitioner. 9
Public respondent argues however, that if the civil case
really stemmed from the loan granted to Azucena Palomo
by petitioner the same should have been brought by Tai
Tong Chuache or by its representative in its own behalf.
From the above premise respondent concluded that the
obligation secured by the insured property must have been
paid.
The premise is correct but the conclusion is wrong. Citing
Rule 3, Sec. 2 10 respondent pointed out that the action must

84

be brought in the name of the real party in interest. We

agree. However, it should be borne in mind that petitioner
being a partnership may sue and be sued in its name or by
its duly authorized representative. The fact that Arsenio
Lopez Chua is the representative of petitioner is not
questioned. Petitioner's declaration that Arsenio Lopez
Chua acts as the managing partner of the partnership was
corroborated by respondent insurance company. 11 Thus
Chua as the managing partner of the partnership may
execute all acts of administration 12 including the right to
sue debtors of the partnership in case of their failure to pay
their obligations when it became due and demandable. Or at
the very least, Chua being a partner of petitioner Tai Tong
Chuache & Company is an agent of the partnership. Being
an agent, it is understood that he acted for and in behalf of
the firm. 13 Public respondent's allegation that the civil case
flied by Arsenio Chua was in his capacity as personal
creditor of spouses Palomo has no basis.

HEIRS
OF
TAN
ENG
KEE, petitioners,
vs.
COURT OF APPEALS and BENGUET LUMBER
COMPANY, represented by its President TAN ENG
LAY,respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for
the reversal of the Decision1 dated March 13, 1996 of the
former Fifth Division2 of the Court of Appeals in CA-G.R.
CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed
decision is hereby set aside, and the complaint
dismissed.
The facts are:

The respondent insurance company having issued a policy

in favor of herein petitioner which policy was of legal force
and effect at the time of the fire, it is bound by its terms and
conditions. Upon its failure to prove the allegation of lack of
insurable interest on the part of the petitioner, respondent
insurance company is and must be held liable.
IN VIEW OF THE FOREGOING, the decision appealed
from is hereby SET ASIDE and ANOTHER judgment is
rendered order private respondent Travellers MultiIndemnity Corporation to pay petitioner the face value of
Insurance Policy No. 599-DV in the amount of
P100,000.00. Costs against said private respondent.
SO ORDERED.

Heirs of Tan Eng Kec vs Court of Appeals, 341 SCRA

740 (2000)
G.R. No. 126881

October 3, 2000

Following the death of Tan Eng Kee on September 13,

1984, Matilde Abubo, the common-law spouse of the
decedent, joined by their children Teresita, Nena, Clarita,
Carlos, Corazon and Elpidio, collectively known as herein
petitioners HEIRS OF TAN ENG KEE, filed suit against
the decedent's brother TAN ENG LAY on February 19,
1990. The complaint,3 docketed as Civil Case No. 1983-R
in the Regional Trial Court of Baguio City was for
accounting, liquidation and winding up of the alleged
partnership formed after World War II between Tan Eng
Kee and Tan Eng Lay. On March 18, 1991, the petitioners
filed an amended complaint4 impleading private respondent
herein BENGUET LUMBER COMPANY, as represented
by Tan Eng Lay. The amended complaint was admitted by
the trial court in its Order dated May 3, 1991.5
The amended complaint principally alleged that after the
second World War, Tan Eng Kee and Tan Eng Lay, pooling
their resources and industry together, entered into a
partnership engaged in the business of selling lumber and
hardware and construction supplies. They named their
enterprise "Benguet Lumber" which they jointly managed

until Tan Eng Kee's death. Petitioners herein averred that

the business prospered due to the hard work and thrift of the
alleged partners. However, they claimed that in 1981, Tan
Eng Lay and his children caused the conversion of the
partnership "Benguet Lumber" into a corporation called
"Benguet Lumber Company." The incorporation was
purportedly a ruse to deprive Tan Eng Kee and his heirs of
their rightful participation in the profits of the business.
Petitioners prayed for accounting of the partnership assets,
and the dissolution, winding up and liquidation thereof, and
the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7
rendered judgment6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing,
judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint
venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and
Tan Eng Lay are joint adventurers and/or partners
in a business venture and/or particular partnership
called Benguet Lumber and as such should share
in the profits and/or losses of the business venture
or particular partnership;
c) Declaring that the assets of Benguet Lumber
are the same assets turned over to Benguet
Lumber Co. Inc. and as such the heirs or legal
representatives of the deceased Tan Eng Kee have
a legal right to share in said assets;
d) Declaring that all the rights and obligations of
Tan Eng Kee as joint adventurer and/or as partner
in a particular partnership have descended to the
plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the
President and/or General Manager of Benguet

85

Lumber Company Inc. to render an accounting of

all the assets of Benguet Lumber Company, Inc.
so the plaintiffs know their proper share in the
business;
f) Ordering the appointment of a receiver to
preserve and/or administer the assets of Benguet
Lumber Company, Inc. until such time that said
corporation is finally liquidated are directed to
submit the name of any person they want to be
appointed as receiver failing in which this Court
will appoint the Branch Clerk of Court or another
one who is qualified to act as such.
g) Denying the award of damages to the plaintiffs
for lack of proof except the expenses in filing the
instant case.
h) Dismissing the counter-claim of the defendant
for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals
which, on March 13, 1996, rendered the assailed decision
reversing the judgment of the trial court. Petitioners' motion
for reconsideration7 was denied by the Court of Appeals in a
Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal
Case No. 78856 against Tan Eng Lay and Wilborn Tan for
the use of allegedly falsified documents in a judicial
proceeding. Petitioners complained that Exhibits "4" to "4U" offered by the defendants before the trial court,
consisting of payrolls indicating that Tan Eng Kee was a
mere employee of Benguet Lumber, were fake, based on the
discrepancy in the signatures of Tan Eng Kee. They also
filed Criminal Cases Nos. 78857-78870 against Gloria,
Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all

surnamed Tan, for alleged falsification of commercial

documents by a private individual. On March 20, 1999, the
Municipal Trial Court of Baguio City, Branch 1, wherein
the charges were filed, rendered judgment 9 dismissing the
cases for insufficiency of evidence.

PARTIES
DO
NOT
SUPPORT
THE
EXISTENCE OF A PARTNERSHIP JUST
BECAUSE THERE WAS NO ARTICLES OF
PARTNERSHIP DULY RECORDED BEFORE
THE
SECURITIES
AND
EXCHANGE
COMMISSION:

In their assignment of errors, petitioners claim

that:

a. THAT THE FAMILIES OF TAN

ENG KEE AND TAN ENG LAY
WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;

I
THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP BETWEEN THE LATE TAN
ENG KEE AND HIS BROTHER TAN ENG
LAY BECAUSE: (A) THERE WAS NO FIRM
ACCOUNT; (B) THERE WAS NO FIRM
LETTERHEADS SUBMITTED AS EVIDENCE;
(C) THERE WAS NO CERTIFICATE OF
PARTNERSHIP; (D) THERE WAS NO
AGREEMENT AS TO PROFITS AND LOSSES;
AND (E) THERE WAS NO TIME FIXED FOR
THE DURATION OF THE PARTNERSHIP
(PAGE 13, DECISION).

b. THAT BOTH TAN ENG LAY AND

TAN
ENG
KEE
WERE
COMMANDING THE EMPLOYEES
OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND
TAN
ENG
LAY
WERE
SUPERVISING THE EMPLOYEES
THEREIN;
d. THAT TAN ENG KEE AND TAN
ENG LAY WERE THE ONES
DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE
PUBLIC; AND

II
THE HONORABLE COURT OF APPEALS
ERRED IN RELYING SOLELY ON THE SELFSERVING TESTIMONY OF RESPONDENT
TAN ENG LAY THAT BENGUET LUMBER
WAS A SOLE PROPRIETORSHIP AND THAT
TAN ENG KEE WAS ONLY AN EMPLOYEE
THEREOF.
III
THE HONORABLE COURT OF APPEALS
ERRED
IN
HOLDING
THAT
THE
FOLLOWING FACTS WHICH WERE DULY
SUPPORTED BY EVIDENCE OF BOTH

e. THAT TAN ENG LAY AND TAN

ENG KEE WERE THE ONES
MAKING
ORDERS
TO
THE
SUPPLIERS (PAGE 18, DECISION).
IV
THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP
JUST
BECAUSE
THE
CHILDREN OF THE LATE TAN ENG KEE:
ELPIDIO TAN AND VERONICA CHOI,
TOGETHER
WITH
THEIR
WITNESS

86

BEATRIZ TANDOC, ADMITTED THAT THEY

DO
NOT
KNOW
WHEN
THE
ESTABLISHMENT KNOWN IN BAGUIO
CITY AS BENGUET LUMBER WAS
STARTED AS A PARTNERSHIP (PAGE 16-17,
DECISION).
V

basis on which the lower court rendered judgment. Review

of factual issues is therefore warranted:

In reversing the trial court, the Court of Appeals ruled, to

wit:

(1) when the factual findings of the Court of

Appeals and the trial court are contradictory;

We note that the Court a quo over extended the

issue because while the plaintiffs mentioned only
the existence of a partnership, the Court in turn
went beyond that by justifying the existence of a
joint venture.

(2) when the findings are grounded entirely on

speculation, surmises, or conjectures;

THE HONORABLE COURT OF APPEALS

ERRED IN HOLDING THAT THERE WAS NO
PARTNERSHIP BETWEEN THE LATE TAN
ENG KEE AND HIS BROTHER TAN ENG
LAY BECAUSE THE PRESENT CAPITAL OR
ASSETS OF BENGUET LUMBER IS
DEFINITELY MORE THAN P3,000.00 AND AS
SUCH THE EXECUTION OF A PUBLIC
INSTRUMENT CREATING A PARTNERSHIP
SHOULD HAVE BEEN MADE AND NO SUCH
PUBLIC INSTRUMENT ESTABLISHED BY
THE APPELLEES (PAGE 17, DECISION).

(3) when the inference made by the Court of

Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;

As a premise, we reiterate the oft-repeated rule that findings

of facts of the Court of Appeals will not be disturbed on
appeal if such are supported by the evidence.10 Our
jurisdiction, it must be emphasized, does not include review
of factual issues. Thus:

(6) when the judgment of the Court of Appeals is

premised on a misapprehension of facts;

Filing of petition with Supreme Court. A party

desiring to appeal by certiorari from a judgment
or final order or resolution of the Court of
Appeals, the Sandiganbayan, the Regional Trial
Court or other courts whenever authorized by law,
may file with the Supreme Court a verified
petition for review on certiorari. The petition shall
raise only questions of law which must be
distinctly set forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and
when present, may compel us to analyze the evidentiary

(4) when there is grave abuse of discretion in the

appreciation of facts;
(5) when the appellate court, in making its
findings, goes beyond the issues of the case, and
such findings are contrary to the admissions of
both appellant and appellee;

(7) when the Court of Appeals fails to notice

certain relevant facts which, if properly
considered, will justify a different conclusion;
(8) when the findings of fact are themselves
conflicting;
(9) when the findings of fact are conclusions
without citation of the specific evidence on which
they are based; and
(10) when the findings of fact of the Court of
Appeals are premised on the absence of evidence
but such findings are contradicted by the evidence
on record.12

When mention is made of a joint venture, it would

presuppose parity of standing between the parties,
equal proprietary interest and the exercise by the
parties equally of the conduct of the business,
thus:
xxx

xxx

xxx

We have the admission that the father of the

plaintiffs was not a partner of the Benguet
Lumber before the war. The appellees however
argued that (Rollo, p. 104; Brief, p. 6) this is
because during the war, the entire stocks of the
pre-war Benguet Lumber were confiscated if not
burned by the Japanese. After the war, because of
the absence of capital to start a lumber and
hardware business, Lay and Kee pooled the
proceeds of their individual businesses earned
from buying and selling military supplies, so that
the common fund would be enough to form a
partnership, both in the lumber and hardware
business. That Lay and Kee actually established
the Benguet Lumber in Baguio City, was even
testified to by witnesses. Because of the pooling
of resources, the post-war Benguet Lumber was
eventually established. That the father of the
plaintiffs and Lay were partners, is obvious from
the fact that: (1) they conducted the affairs of the
business during Kee's lifetime, jointly, (2) they
were the ones giving orders to the employees, (3)
they were the ones preparing orders from the
suppliers, (4) their families stayed together at the
Benguet Lumber compound, and (5) all their

87

children were employed in the business in

different capacities.
xxx

xxx

xxx

It is obvious that there was no partnership

whatsoever. Except for a firm name, there was no
firm account, no firm letterheads submitted as
evidence, no certificate of partnership, no
agreement as to profits and losses, and no time
fixed for the duration of the partnership. There
was even no attempt to submit an accounting
corresponding to the period after the war until
Kee's death in 1984. It had no business book, no
written account nor any memorandum for that
matter and no license mentioning the existence of
a partnership [citation omitted].
Also, the exhibits support the establishment of
only a proprietorship. The certification dated
March 4, 1971, Exhibit "2", mentioned codefendant Lay as the only registered owner of the
Benguet Lumber and Hardware. His application
for registration, effective 1954, in fact mentioned
that his business started in 1945 until 1985
(thereafter, the incorporation). The deceased, Kee,
on the other hand, was merely an employee of the
Benguet Lumber Company, on the basis of his
SSS coverage effective 1958, Exhibit "3". In the
Payrolls, Exhibits "4" to "4-U", inclusive, for the
years 1982 to 1983, Kee was similarly listed only
as an employee; precisely, he was on the payroll
listing. In the Termination Notice, Exhibit "5",
Lay was mentioned also as the proprietor.
xxx

xxx

xxx

We would like to refer to Arts. 771 and 772,

NCC, that a partner [sic] may be constituted in
any form, but when an immovable is constituted,
the execution of a public instrument becomes

necessary. This is equally true if the capitalization

exceeds P3,000.00, in which case a public
instrument is also necessary, and which is to be
recorded with the Securities and Exchange
Commission. In this case at bar, we can easily
assume that the business establishment, which
from the language of the appellees, prospered
(pars. 5 & 9, Complaint), definitely exceeded
P3,000.00, in addition to the accumulation of real
properties and to the fact that it is now a
compound. The execution of a public instrument,
on the other hand, was never established by the
appellees.
And then in 1981, the business was incorporated
and the incorporators were only Lay and the
members of his family. There is no proof either
that the capital assets of the partnership, assuming
them to be in existence, were maliciously
assigned or transferred by Lay, supposedly to the
corporation and since then have been treated as a
part of the latter's capital assets, contrary to the
allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence
of a partnership:
1) That Kee was living in a bunk house just across
the lumber store, and then in a room in the bunk
house in Trinidad, but within the compound of the
lumber establishment, as testified to by Tandoc;
2) that both Lay and Kee were seated on a table
and were "commanding people" as testified to by
the son, Elpidio Tan; 3) that both were
supervising the laborers, as testified to by Victoria
Choi; and 4) that Dionisio Peralta was supposedly
being told by Kee that the proceeds of the 80
pieces of the G.I. sheets were added to the
business.
Partnership presupposes the following elements
[citation omitted]: 1) a contract, either oral or

written. However, if it involves real property or

where the capital is P3,000.00 or more, the
execution of a contract is necessary; 2) the
capacity of the parties to execute the contract; 3)
money property or industry contribution; 4)
community of funds and interest, mentioning
equality of the partners or one having a
proportionate share in the benefits; and 5)
intention to divide the profits, being the true test
of the partnership. The intention to join in the
business venture for the purpose of obtaining
profits thereafter to be divided, must be
established. We cannot see these elements from
the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed
from the trial court which had adjudged that TAN ENG
KEE and TAN ENG LAY had allegedly entered into a joint
venture. In this connection, we have held that whether a
partnership exists is a factual matter; consequently, since the
appeal is brought to us under Rule 45, we cannot entertain
inquiries relative to the correctness of the assessment of the
evidence by the court a quo.13 Inasmuch as the Court of
Appeals and the trial court had reached conflicting
conclusions, perforce we must examine the record to
determine if the reversal was justified.
The primordial issue here is whether Tan Eng Kee and Tan
Eng Lay were partners in Benguet Lumber. A contract of
partnership is defined by law as one where:
. . . two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.
Two or more persons may also form a partnership
for the exercise of a profession.14
Thus, in order to constitute a partnership, it must
be established that (1) two or more persons bound
themselves to contribute money, property, or

88

industry to a common fund, and (2) they intend to

divide the profits among themselves.15 The
agreement need not be formally reduced into
writing, since statute allows the oral constitution
of a partnership, save in two instances: (1) when
immovable property or real rights are
contributed,16 and (2) when the partnership has a
capital of three thousand pesos or more.17 In both
cases, a public instrument is required.18 An
inventory to be signed by the parties and attached
to the public instrument is also indispensable to
the validity of the partnership whenever
immovable property is contributed to the
partnership.19
The trial court determined that Tan Eng Kee and Tan Eng
Lay had entered into a joint venture, which it said is akin to
a particular partnership.20 A particular partnership is
distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept
similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal
personality. In a joint account, the participating
merchants can transact business under their own
name, and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure
is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful
termination may continue for a number of years; a
partnership generally relates to a continuing
business of various transactions of a certain
kind.21
A joint venture "presupposes generally a parity of standing
between the joint co-ventures or partners, in which each
party has an equal proprietary interest in the capital or
property contributed, and where each party exercises equal
rights in the conduct of the business."22 Nonetheless, in
Aurbach, et. al. v. Sanitary Wares Manufacturing

Corporation, et. al.,23 we expressed the view that a joint

venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common
law origin. It has no precise legal definition, but it
has been generally understood to mean an
organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is
hardly distinguishable from the partnership, since
their elements are similar community of
interest in the business, sharing of profits and
losses, and a mutual right of control. (Blackner v.
McDermott, 176 F. 2d. 498, [1949]; Carboneau v.
Peterson, 95 P.2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289
P.2d. 242 [1955]). The main distinction cited by
most opinions in common law jurisdiction is that
the partnership contemplates a general business
with some degree of continuity, while the joint
venture is formed for the execution of a single
transaction, and is thus of a temporary nature.
(Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500
[1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d.
74 [1947]; Gates v. Megargel 266 Fed. 811
[1920]). This observation is not entirely accurate
in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a
particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a
joint venture is a form of partnership and should
thus be governed by the law of partnerships. The
Supreme Court has however recognized a
distinction between these two business forms, and
has held that although a corporation cannot enter
into a partnership contract, it may however
engage in a joint venture with others. (At p. 12,
Tuazon v. Bolaos, 95 Phil. 906 [1954]) (Campos
and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).

Undoubtedly, the best evidence would have been the

contract of partnership itself, or the articles of partnership
but there is none. The alleged partnership, though, was
never formally organized. In addition, petitioners point out
that the New Civil Code was not yet in effect when the
partnership was allegedly formed sometime in 1945,
although the contrary may well be argued that nothing
prevented the parties from complying with the provisions of
the New Civil Code when it took effect on August 30, 1950.
But all that is in the past. The net effect, however, is that we
are asked to determine whether a partnership existed based
purely on circumstantial evidence. A review of the record
persuades us that the Court of Appeals correctly reversed
the decision of the trial court. The evidence presented by
petitioners falls short of the quantum of proof required to
establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed
away. Only he, aside from Tan Eng Lay, could have
expounded on the precise nature of the business relationship
between them. In the absence of evidence, we cannot accept
as an established fact that Tan Eng Kee allegedly
contributed his resources to a common fund for the purpose
of establishing a partnership. The testimonies to that effect
of petitioners' witnesses is directly controverted by Tan Eng
Lay. It should be noted that it is not with the number of
witnesses wherein preponderance lies;24 the quality of their
testimonies is to be considered. None of petitioners'
witnesses could suitably account for the beginnings of
Benguet Lumber Company, except perhaps for Dionisio
Peralta whose deceased wife was related to Matilde
Abubo.25 He stated that when he met Tan Eng Kee after the
liberation, the latter asked the former to accompany him to
get 80 pieces of G.I. sheets supposedly owned by both
brothers.26Tan Eng Lay, however, denied knowledge of this
meeting or of the conversation between Peralta and his
brother.27 Tan Eng Lay consistently testified that he had his
business and his brother had his, that it was only later on
that his said brother, Tan Eng Kee, came to work for him.
Be that as it may, co-ownership or co-possession
(specifically here, of the G.I. sheets) is not an indicium of
the existence of a partnership.28

89

Besides, it is indeed odd, if not unnatural, that despite the

forty years the partnership was allegedly in existence, Tan
Eng Kee never asked for an accounting. The essence of a
partnership is that the partners share in the profits and
losses.29 Each has the right to demand an accounting as long
as the partnership exists.30 We have allowed a scenario
wherein "[i]f excellent relations exist among the partners at
the start of the business and all the partners are more
interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly
plausible."31 But in the situation in the case at bar, the
deferment, if any, had gone on too long to be plausible. A
person is presumed to take ordinary care of his
concerns.32 As we explained in another case:

This brings us to the matter of Exhibits "4" to "4-U" for

private respondents, consisting of payrolls purporting to
show that Tan Eng Kee was an ordinary employee of
Benguet Lumber, as it was then called. The authenticity of
these documents was questioned by petitioners, to the extent
that they filed criminal charges against Tan Eng Lay and his
wife and children. As aforesaid, the criminal cases were
dismissed for insufficiency of evidence. Exhibits "4" to "4U" in fact shows that Tan Eng Kee received sums as wages
of an employee. In connection therewith, Article 1769 of the
Civil Code provides:

(c) As an annuity to a widow or

representative of a deceased partner;

In determining whether a partnership exists, these rules shall

apply:

In the first place, plaintiff did not furnish the

supposed P20,000.00 capital. In the second place,
she did not furnish any help or intervention in the
management of the theatre. In the third place, it
does not appear that she has even demanded from
defendant any accounting of the expenses and
earnings of the business. Were she really a
partner, her first concern should have been to find
out how the business was progressing, whether
the expenses were legitimate, whether the
earnings were correct, etc. She was absolutely
silent with respect to any of the acts that a partner
should have done; all that she did was to receive
her share of P3,000.00 a month, which cannot be
interpreted in any manner than a payment for the
use of the premises which she had leased from the
owners. Clearly, plaintiff had always acted in
accordance with the original letter of defendant of
June 17, 1945 (Exh. "A"), which shows that both
parties considered this offer as the real contract
between them.33 [emphasis supplied]

(1) Except as provided by Article 1825, persons

who are not partners as to each other are not
partners as to third persons;

In the light of the aforequoted legal provision, we conclude

that Tan Eng Kee was only an employee, not a partner.
Even if the payrolls as evidence were discarded, petitioners
would still be back to square one, so to speak, since they did
not present and offer evidence that would show that Tan
Eng Kee received amounts of money allegedly representing
his share in the profits of the enterprise. Petitioners failed to
show how much their father, Tan Eng Kee, received, if any,
as his share in the profits of Benguet Lumber Company for
any particular period. Hence, they failed to prove that Tan
Eng Kee and Tan Eng Lay intended to divide the profits of
the business between themselves, which is one of the
essential features of a partnership.

A demand for periodic accounting is evidence of a

partnership.34 During his lifetime, Tan Eng Kee appeared
never to have made any such demand for accounting from
his brother, Tang Eng Lay.

(a) As a debt by installment or

otherwise;

(2) Co-ownership or co-possession does not of

itself establish a partnership, whether such coowners or co-possessors do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common right or
interest in any property which the returns are
derived;
(4) The receipt by a person of a share of the
profits of a business is a prima facie evidence that
he is a partner in the business, but no such
inference shall be drawn if such profits were
received in payment:

(b) As wages of an employee or rent to

a landlord;

(d) As interest on a loan, though the

amount of payment vary with the profits
of the business;
(e) As the consideration for the sale of a
goodwill of a business or other property
by installments or otherwise.

Nevertheless, petitioners would still want us to infer or

believe the alleged existence of a partnership from this set
of circumstances: that Tan Eng Lay and Tan Eng Kee were
commanding the employees; that both were supervising the
employees; that both were the ones who determined the
price at which the stocks were to be sold; and that both
placed orders to the suppliers of the Benguet Lumber
Company. They also point out that the families of the
brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet
Lumber Company compound, a privilege not extended to its
ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in
asserting that the above enumerated powers and

90

privileges granted in favor of Tan Eng Kee, were

indicative of his being a partner in Benguet
Lumber for the following reasons:
(i) even a mere supervisor in a company, factory
or store gives orders and directions to his
subordinates. So long, therefore, that an
employee's position is higher in rank, it is not
unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee,
over whom confidence is reposed by the owner,
can order materials from suppliers for and in
behalf of Benguet Lumber. Furthermore, even a
partner does not necessarily have to perform this
particular task. It is, thus, not an indication that
Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his
family, lived in the lumber compound and this
privilege was not accorded to other employees,
the undisputed fact remains that Tan Eng Kee is
the brother of Tan Eng Lay. Naturally, close
personal relations existed between them.
Whatever privileges Tan Eng Lay gave his
brother, and which were not given the other
employees, only proves the kindness and
generosity of Tan Eng Lay towards a blood
relative.
(iv) and even if it is assumed that Tan Eng Kee
was quarreling with Tan Eng Lay in connection
with the pricing of stocks, this does not
adequately prove the existence of a partnership
relation between them. Even highly confidential
employees and the owners of a company
sometimes argue with respect to certain matters
which, in no way indicates that they are partners
as to each other.35

In the instant case, we find private respondent's arguments

to be well-taken. Where circumstances taken singly may be
inadequate to prove the intent to form a partnership,
nevertheless, the collective effect of these circumstances
may be such as to support a finding of the existence of the
parties' intent.36 Yet, in the case at bench, even the aforesaid
circumstances
when
taken
together
are
not
persuasive indicia of a partnership. They only tend to show
that Tan Eng Kee was involved in the operations of Benguet
Lumber, but in what capacity is unclear. We cannot
discount the likelihood that as a member of the family, he
occupied a niche above the rank-and-file employees. He
would have enjoyed liberties otherwise unavailable were he
not kin, such as his residence in the Benguet Lumber
Company compound. He would have moral, if not actual,
superiority over his fellow employees, thereby entitling him
to exercise powers of supervision. It may even be that
among his duties is to place orders with suppliers. Again,
the circumstances proffered by petitioners do not provide a
logical nexus to the conclusion desired; these are not
inconsistent with the powers and duties of a manager, even
in a business organized and run as informally as Benguet
Lumber Company.
There being no partnership, it follows that there is no
dissolution, winding up or liquidation to speak of. Hence,
the petition must fail.
WHEREFORE, the petition is hereby denied, and the
appealed decision of the Court of Appeals is
herebyAFFIRMED in toto. No pronouncement as to costs.

CORONA, J.,
Chairperson,
VELASCO, JR.,
NACHURA,
DEL CASTILLO,* a
nd
MENDOZA, JJ.

- versus -

Promulgated:
JULIET VILLA LIM,
Respond March 3, 2010
ent.
x-----------------------------------------------------------------------------------x

DECISION
NACHURA, J.:

Before

this

Court

is

Petition

for

Review

on Certiorari[1] under Rule 45 of the Rules of Civil

Procedure,

assailing

the

Court

of

Appeals

(CA)

Decision[2] dated June 29, 2005, which reversed and set

aside the decision[3] of the Regional Trial Court (RTC)
of Lucena City, dated April 12, 2004.

SO ORDERED.
The facts of the case are as follows:
Heirs of J. Lim vs Lim, 614 SCRA 141 (2010)
HEIRS OF JOSE LIM,
G.R. No. 172690
represented by ELENITO LIM,
Petitione Present:
rs,

Petitioners are the heirs of the late Jose Lim (Jose),

namely: Jose's widow Cresencia Palad (Cresencia); and
their children Elenito, Evelia, Imelda, Edelyna and Edison,

91

all surnamed Lim (petitioners), represented by Elenito Lim

the business and merely supervised the purchase of

as the latter's capital in an informal partnership with Jimmy

Partition,

additional trucks using the income from the trucking

and Norberto. When Elfledo and respondent got married in

Accounting and Damages against respondent Juliet Villa

business of the partners. By the time the partnership ceased,

1981, the partnership only had one truck; but through the

Lim (respondent), widow of the late Elfledo Lim (Elfledo),

it had nine trucks, which were all registered in Elfledo's

efforts of Elfledo, the business flourished. Other than this

who was the eldest son of Jose and Cresencia.

name. Petitioners asseverated that it was also through

trucking business, Elfledo, together with respondent,

Elfledos management of the partnership that he was able to

engaged in other business ventures. Thus, they were able to

Petitioners alleged that Jose was the liaison officer of

purchase numerous real properties by using the profits

buy real properties and to put up their own car assembly

Interwood

Mauban,

derived therefrom, all of which were registered in his name

and repair business. When Norberto was ambushed and

Quezon. Sometime in 1980, Jose, together with his friends

and that of respondent. In addition to the nine trucks,

killed on July 16, 1993, the trucking business started to

Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a

Elfledo also acquired five other motor vehicles.

falter. When Elfledo died on May 18, 1995 due to a heart

(Elenito).

They

filed

Sawmill

Complaint[4] for

in

Cagsiay,

partnership to engage in the trucking business. Initially,

attack, respondent talked to Jimmy and to the heirs of

with a contribution of P50,000.00 each, they purchased a

On May 18, 1995, Elfledo died, leaving respondent as his

Norberto, as she could no longer run the business. Jimmy

truck to be used in the hauling and transport of lumber of

sole surviving heir. Petitioners claimed that respondent took

suggested that three out of the nine trucks be given to him

the sawmill. Jose managed the operations of this trucking

over the administration of the aforementioned properties,

as his share, while the other three trucks be given to the

business until his death on August 15, 1981. Thereafter,

which belonged to the estate of Jose, without their consent

heirs of Norberto. However, Norberto's wife, Paquita Uy,

Jose's heirs, including Elfledo, and partners agreed to

and approval. Claiming that they are co-owners of the

was not interested in the vehicles. Thus, she sold the same

continue

of

properties, petitioners required respondent to submit an

to respondent, who paid for them in installments.

Elfledo. The shares in the partnership profits and income

accounting of all income, profits and rentals received from

Respondent also alleged that when Jose died in 1981, he

that formed part of the estate of Jose were held in trust by

the estate of Elfledo, and to surrender the administration

left no known assets, and the partnership with Jimmy and

Elfledo, with petitioners' authority for Elfledo to use,

thereof. Respondent refused; thus, the filing of this case.

Norberto ceased upon his demise. Respondent also stressed

the

business

under

the

management

purchase or acquire properties using said funds.

that Jose left no properties that Elfledo could have held in

Respondent traversed petitioners' allegations and claimed

trust. Respondent maintained that all the properties

Petitioners also alleged that, at that time, Elfledo was a

that Elfledo was himself a partner of Norberto and

involved in this case were purchased and acquired through

fresh commerce graduate serving as his fathers driver in the

Jimmy. Respondent also claimed that per testimony of

her and her husbands joint efforts and hard work, and

trucking business. He was never a partner or an investor in

Cresencia, sometime in 1980, Jose gave Elfledo P50,000.00

without any participation or contribution from petitioners or

92

from Jose. Respondent submitted that these are conjugal

partnership properties; and thus, she had the right to refuse

accordingly, the CA's reversal of the RTC's findings was

Hence, this Petition, raising the sole question, viz.:

to render an accounting for the income or profits of their

own business.

Trial on the merits ensued. On April 12, 2004, the RTC

rendered its decision in favor of petitioners, thus:
WHEREFORE, premises considered,
judgment is hereby rendered:
1) Ordering the partition of the abovementioned properties equally between
the plaintiffs and heirs of Jose Lim and
the defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an
accounting of all incomes, profits and
rentals received by her from said
properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.

On June 29, 2005, the CA reversed and set aside the RTC's
decision, dismissing petitioners' complaint for lack of
merit. Undaunted, petitioners filed their Motion for
Reconsideration,[5] which the CA, however, denied in its
Resolution[6] dated May 8, 2006.

fully justified.[9]
We resolve first the procedural matter regarding the

IN THE APPRECIATION BY THE

COURT
OF
THE
EVIDENCE
SUBMITTED BY THE PARTIES,
CAN THE TESTIMONY OF ONE OF
THE PETITIONERS BE GIVEN
GREATER WEIGHT THAN THAT
BY A FORMER PARTNER ON THE
ISSUE OF THE IDENTITY OF THE
OTHER
PARTNERS
IN
THE
PARTNERSHIP?[7]

propriety of the instant Petition.

Verily, the evaluation and calibration of the evidence
necessarily involves consideration of factual issues an
exercise that is not appropriate for a petition for review
on certiorari under Rule 45. This rule provides that the
parties may raise only questions of law, because the
Supreme Court is not a trier of facts. Generally, we are not

In essence, petitioners argue that according to the testimony

duty-bound to analyze again and weigh the evidence

of Jimmy, the sole surviving partner, Elfledo was not a

introduced
[10]

in

and

considered

by

the

tribunals

partner; and that he and Norberto entered into a partnership

below.

with Jose. Thus, the CA erred in not giving that testimony

findings of fact of the CA are conclusive and binding on the

greater weight than that of Cresencia, who was merely the

parties and are not reviewable by this Court, unless the case

spouse of Jose and not a party to the partnership.[8]

falls under any of the following recognized exceptions:

Respondent counters that the issue raised by petitioners is

not proper in a petition for review on certiorari under Rule
45 of the Rules of Civil Procedure, as it would entail the
review, evaluation, calibration, and re-weighing of the
factual findings of the CA. Moreover, respondent invokes
the rationale of the CA decision that, in light of the
admissions of Cresencia and Edison and the testimony of
respondent, the testimony of Jimmy was effectively refuted;

When supported by substantial evidence, the

(1) When the conclusion is a finding

grounded entirely on speculation,
surmises and conjectures;
(2) When the inference made is
manifestly mistaken, absurd or
impossible;
(3) Where there is a grave abuse of
discretion;
(4) When the judgment is based on a
misapprehension of facts;

93

(5) When the findings of fact are

conflicting;
(6) When the Court of Appeals, in
making its findings, went beyond the
issues of the case and the same is
contrary to the admissions of both
appellant and appellee;
(7) When the findings are contrary to
those of the trial court;
(8) When the findings of fact are
conclusions without citation of
specific evidence on which they are
based;
(9) When the facts set forth in the
petition as well as in the petitioners'
main and reply briefs are not disputed
by the respondents; and
(10) When the findings of fact of the
Court of Appeals are premised on the
supposed absence of evidence and
contradicted by the evidence on
record.[11]

A partnership exists when two or more persons agree to

Petitioners heavily rely on Jimmy's testimony. But that

place their money, effects, labor, and skill in lawful

testimony

commerce or business, with the understanding that there

respondent. It must be considered and weighed along with

shall be a proportionate sharing of the profits and losses

petitioners' other evidence vis--vis respondent's contrary

among them. A contract of partnership is defined by the

evidence. In civil cases, the party having the burden of

Civil Code as one where two or more persons bind

proof must establish his case by a preponderance of

themselves to contribute money, property, or industry to a

evidence. "Preponderance of evidence" is the weight,

common fund, with the intention of dividing the profits

credit, and value of the aggregate evidence on either side

among themselves.

[12]

is

just

one

piece

of

evidence

against

and is usually considered synonymous with the term

"greater weight of the evidence" or "greater weight of the

Undoubtedly, the best evidence would have been the

credible evidence." "Preponderance of evidence" is a phrase

contract of partnership or the articles of partnership.

that, in the last analysis, means probability of the truth. It is

Unfortunately, there is none in this case, because the

evidence that is more convincing to the court as worthy of

alleged

belief

partnership

was

never

formally

organized.

than
[13]

that

which

is

offered

in

opposition

Nonetheless, we are asked to determine who between Jose

thereto.

Rule 133, Section 1 of the Rules of Court

and Elfledo was the partner in the trucking business.

provides the guidelines in determining preponderance of

evidence, thus:

We note, however, that the findings of fact of the RTC are

contrary to those of the CA. Thus, our review of such
findings is warranted.

A careful review of the records persuades us to affirm the

CA decision. The evidence presented by petitioners falls
short of the quantum of proof required to establish that: (1)
Jose was the partner and not Elfledo; and (2) all the

On the merits of the case, we find that the instant Petition is

properties acquired by Elfledo and respondent form part of

bereft of merit.

the estate of Jose, having been derived from the alleged

partnership.

SECTION
I. Preponderance
of
evidence, how determined. In civil
cases, the party having burden of proof
must establish his case by a
preponderance
of
evidence.
In
determining where the preponderance
or superior weight of evidence on the
issues involved lies, the court may
consider all the facts and circumstances
of the case, the witnesses' manner of
testifying, their intelligence, their
means and opportunity of knowing the

94

facts to which they are testifying, the

nature of the facts to which they testify,
the probability or improbability of their
testimony, their interest or want of
interest, and also their personal
credibility so far as the same may
legitimately appear upon the trial. The
court may also consider the number of
witnesses, though the preponderance is
not necessarily with the greater
number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court

of Appeals[14] is enlightening. Therein, we cited Article
1769 of the Civil Code, which provides:
Art. 1769. In determining whether a
partnership exists, these rules shall
apply:
(1) Except as provided by Article
1825, persons who are not partners as
to each other are not partners as to
third persons;
(2) Co-ownership or co-possession
does not of itself establish a
partnership, whether such co-owners
or co-possessors do or do not share any
profits made by the use of the
property;
(3) The sharing of gross returns does
not of itself establish a partnership,
whether or not the persons sharing
them have a joint or common right or
interest in any property from which the
returns are derived;

(4) The receipt by a person of a share

of the profits of a business is a prima
facie evidence that he is a partner in
the business, but no such inference
shall be drawn if such profits were
received in payment:
(a) As a debt by installments
or otherwise;
(b) As wages of an
employee or rent to
a landlord;
(c) As an annuity to a widow
or
representative of
a
deceased partner;
(d) As interest on a loan,
though the amount of
payment vary with the profits
of the business;
(e) As the consideration for
the sale of a goodwill of a
business or other property by
installments or otherwise.

were registered in the name of Elfledo; (4) Jimmy testified

that Elfledo did not receive wages or salaries from the
partnership, indicating that what he actually received were
shares of the profits of the business; [17] and (5) none of the
petitioners, as heirs of Jose, the alleged partner, demanded
periodic accounting from Elfledo during his lifetime. As
repeatedly stressed in Heirs of Tan Eng Kee,[18] a demand
for periodic accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to
show that the real and personal properties acquired and
registered in the names of Elfledo and respondent formed
part of the estate of Jose, having been derived from Jose's
alleged partnership with Jimmy and Norberto. They failed
to refute respondent's claim that Elfledo and respondent

Applying the legal provision to the facts of this case, the

following circumstances tend to prove that Elfledo was

engaged in other businesses. Edison even admitted that

Elfledo

also
[19]

himself the partner of Jimmy and Norberto: 1) Cresencia

testified that Jose gave Elfledo P50,000.00, as share in the
partnership, on a date that coincided with the payment of the
initial capital in the partnership;[15] (2) Elfledo ran the

sideline.

sold

Interwood

lumber

as

Petitioners could not offer any credible evidence

other than their bare assertions. Thus, we apply the basic

rule of evidence that between documentary and oral
evidence, the former carries more weight.[20]

affairs of the partnership, wielding absolute control, power

and authority, without any intervention or opposition
whatsoever from any of petitioners herein; [16] (3) all of the
properties, particularly the nine trucks of the partnership,

Finally, we agree with the judicious findings of

the CA, to wit:
The above testimonies prove that
Elfledo was not just a hired help but one

95

of the partners in the trucking business,

active and visible in the running of its
affairs from day one until this ceased
operations upon his demise. The extent
of his control, administration and
management of the partnership and its
business, the fact that its properties were
placed in his name, and that he was not
paid salary or other compensation by
the partners, are indicative of the fact
that Elfledo was a partner and a
controlling one at that. It is apparent
that the other partners only contributed
in the initial capital but had no say
thereafter on how the business was
ran. Evidently it was through Elfredos
efforts and hard work that the
partnership was able to acquire more
trucks and otherwise prosper. Even the
appellant participated in the affairs of
the partnership by acting as the
bookkeeper sans salary.
It is notable too that Jose Lim died
when the partnership was barely a year
old, and the partnership and its
business not only continued but also
flourished. If it were true that it was
Jose
Lim
and
not
Elfledo
who was the partner,
then upon his
death the partnership should have
been dissolved and its assets
liquidated. On the contrary, these were
not done but instead its operation
continued under the helm of Elfledo
and without any participation from the
heirs of Jose Lim.
Whatever properties appellant and her
husband had acquired, this was
through their own concerted efforts
and hard work. Elfledo did not limit
himself to the business of their

partnership but engaged in other lines

of businesses as well.

In sum, we find no cogent reason to disturb the findings and

the ruling of the CA as they are amply supported by the law
and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The
assailed Court of Appeals Decision dated June 29, 2005

Petition for review of the decision of the Court of Tax

Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered
partnership and are, therefore, subject to the payment of the
deficiency corporate income taxes assessed against them by
respondent Commissioner of Internal Revenue for the years
1955 and 1956 in the total sum of P21,891.00, plus 5%
surcharge and 1% monthly interest from December 15,
1958, subject to the provisions of Section 51 (e) (2) of the
Internal Revenue Code, as amended by Section 8 of
Republic Act No. 2343 and the costs of the suit, 1 as well as
the resolution of said court denying petitioners' motion for
reconsideration of said decision.

is AFFIRMED. Costs against petitioners.

SO ORDERED.

Ona vs CIR 45 SCRA, 74 (1972)

G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES,
namely: RODOLFO B. OA, MARIANO B. OA, LUZ
B. OA, VIRGINIA B. OA and LORENZO B. OA,
JR., petitioners,
vs.
THE
COMMISSIONER
OF
INTERNAL
REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant
Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

The facts are stated in the decision of the Tax Court as

follows:
Julia Buales died on March 23, 1944,
leaving as heirs her surviving spouse,
Lorenzo T. Oa and her five children. In
1948, Civil Case No. 4519 was
instituted in the Court of First Instance
of Manila for the settlement of her
estate. Later, Lorenzo T. Oa the
surviving spouse was appointed
administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR
rec.). On April 14, 1949, the
administrator submitted the project of
partition, which was approved by the
Court on May 16, 1949 (See Exhibit K).
Because three of the heirs, namely Luz,
Virginia and Lorenzo, Jr., all surnamed
Oa, were still minors when the project
of partition was approved, Lorenzo T.
Oa, their father and administrator of
the estate, filed a petition in Civil Case
No. 9637 of the Court of First Instance
of Manila for appointment as guardian
of said minors. On November 14, 1949,
the Court appointed him guardian of the

96

persons and property of the aforenamed

minors (See p. 3, BIR rec.).

1949
1950
1951
1952
1953
1954
1955
1956

The project of partition (Exhibit K; see

also pp. 77-70, BIR rec.) shows that the
heirs have undivided one-half (1/2)
interest in ten parcels of land with a
total assessed value of P87,860.00, six
houses with a total assessed value of
Year
Investment
P17,590.00 and an undetermined
amount to be collected from the War
Account
Damage Commission. Later, they
received from said Commission the

amount of P50,000.00, more or less.

This amount was not divided among
P24,657.65
them but was used in the rehabilitation
of properties owned by them in
51,301.31
common (t.s.n., p. 46). Of the ten
parcels of land aforementioned, two
67,927.52
were acquired after
the death of the
decedent with money borrowed from
61,258.27
the Philippine Trust
Company in the
amount of P72,173.00 (t.s.n., p. 24;
63,623.37
Exhibit 3, pp. 31-34
BIR rec.).
100,786.00
The project of partition also shows that
the estate shares175,028.68
equally with Lorenzo
T. Oa, the administrator thereof, in the
obligation of P94,973.00, consisting of
loans contracted by the latter with the
approval of the Court (see p. 3 of
Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was
approved by the Court on May 16,
1949, no attempt was made to divide the
properties therein listed. Instead, the
properties
remained
under
the
management of Lorenzo T. Oa who
used said properties in business by
leasing or selling them and investing the
income derived therefrom and the

proceeds from the sales thereof in real

properties and securities. As a result,
petitioners' properties and investments
gradually increased from P105,450.00
in 1949 to P480,005.20 in 1956 as can
be gleaned from the following year-end
balances:
Land

Building

Account

Account

P87,860.00

P17,590.00

128,566.72

96,076.26

120,349.28

110,605.11

87,065.28

152,674.39

84,925.68

161,463.83

99,001.20

167,962.04

120,249.78

169,262.52

135,714.68

169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 2526, 40, 50, 102-104)
From said investments and properties
petitioners derived such incomes as
profits from installment sales of
subdivided lots, profits from sales of
stocks, dividends, rentals and interests
(see p. 3 of Exhibit 3; p. 32, BIR rec.;
t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept
by Lorenzo T. Oa where the
corresponding shares of the petitioners

in the net income for the year are also

known. Every year, petitioners returned
for income tax purposes their shares in
the net income derived from said
properties and securities and/or from
transactions involving them (Exhibit
3, supra; t.s.n., pp. 25-26). However,
petitioners did not actually receive their
shares in the yearly income. (t.s.n., pp.
25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T.
Oa who, as heretofore pointed out,
invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).
On the basis of the foregoing facts,
respondent (Commissioner of Internal
Revenue) decided that petitioners
formed an unregistered partnership and
therefore, subject to the corporate
income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00
and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively.
(See Exhibit 5, amended by Exhibit 17,
pp. 50 and 86, BIR rec.). Petitioners
protested against the assessment and
asked for reconsideration of the ruling
of respondent that they have formed an
unregistered partnership. Finding no
merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR
rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955

97

Net income as per

................ P40,209.89

investigation

Income
tax
due
thereon
...............................
8,042.00
25%
surcharge
.............................................. 2,010.50
Compromise
for
non-filing
.......................... 50.00
Total
...............................................................
P10,102.50
1956
Net income as per
................ P69,245.23

investigation

Income
tax
due
thereon
...............................
13,849.00
25%
surcharge
.............................................. 3,462.25
Compromise
for
non-filing
.......................... 50.00
Total
...............................................................
P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case,
the 25% surcharge was eliminated in
line with the ruling of the Supreme
Court
in Collector
v.
Batangas
Transportation Co., G.R. No. L-9692,
Jan. 6, 1958, so that the questioned
assessment refers solely to the income
tax proper for the years 1955 and 1956
and the "Compromise for non-filing,"
the latter item obviously referring to the
compromise in lieu of the criminal

liability for failure of petitioners to file

the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR
records). (Pp. 1-3, Annex C to Petition)

ERRED IN NOT HOLDING THAT

THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN
COMMON AND THE LOANS
RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;

Petitioners have assigned the following as alleged errors of

the Tax Court:
I.
THE COURT OF TAX APPEALS
ERRED IN HOLDING THAT THE
PETITIONERS
FORMED
AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS
ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE COOWNERS OF THE PROPERTIES
INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS
THEREFROM (sic);

V.
ON THE ASSUMPTION THAT
THERE WAS AN UNREGISTERED
PARTNERSHIP, THE COURT OF
TAX APPEALS ERRED IN NOT
DEDUCTING
THE
VARIOUS
AMOUNTS
PAID
BY
THE
PETITIONERS AS INDIVIDUAL
INCOME
TAX
ON
THEIR
RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE
PROPERTIES
OWNED
IN
COMMON,
FROM
THE
DEFICIENCY
TAX
OF
THE
UNREGISTERED PARTNERSHIP.

III.
THE COURT OF TAX APPEALS
ERRED
IN
HOLDING
THAT
PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR
1955
AND
1956
AS
AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE
PETITIONERS CONSTITUTED AN
UNREGISTERED
PARTNERSHIP,
THE COURT OF TAX APPEALS

In other words, petitioners pose for our resolution the

following questions: (1) Under the facts found by the Court
of Tax Appeals, should petitioners be considered as coowners of the properties inherited by them from the
deceased Julia Buales and the profits derived from
transactions involving the same, or, must they be deemed to
have formed an unregistered partnership subject to tax
under Sections 24 and 84(b) of the National Internal
Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by
the properties owned by them in common and the loans
granted to them upon the security of the said properties,
with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should

98

be considered as that of co-owners and not of the

unregistered partnership? And (3) assuming again that they
are taxable as an unregistered partnership, should not the
various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their
respective shares of the profits accruing from the properties
they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck
the Court is that whereas petitioners' predecessor in interest
died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as
May 16, 1949, and presumably petitioners have been
holding their respective shares in their inheritance since
those dates admittedly under the administration or
management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to
the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years
1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to
corporate tax, and it was only from 1955 that he considered
them as having formed an unregistered partnership. At least,
there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily
understandable why petitioners' position that they are coowners and not unregistered co-partners, for the purposes of
the impugned assessment, cannot be upheld. Truth to tell,
petitioners should find comfort in the fact that they were not
similarly assessed earlier by the Bureau of Internal
Revenue.
The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the
project of partition approved in 1949, "the properties
remained under the management of Lorenzo T. Oa who
used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceed
from the sales thereof in real properties and securities," as a

result of which said properties and investments steadily

increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these
became possible because, admittedly, petitioners never
actually received any share of the income or profits from
Lorenzo T. Oa and instead, they allowed him to continue
using said shares as part of the common fund for their
ventures, even as they paid the corresponding income taxes
on the basis of their respective shares of the profits of their
common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to
their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that
during the material years herein involved, some of the said
properties were sold at considerable profit, and that with
said profit, petitioners engaged, thru Lorenzo T. Oa, in the
purchase and sale of corporate securities. It is likewise
admitted that all the profits from these ventures were
divided among petitioners proportionately in accordance
with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in
business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect,
they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax
Code.
It is but logical that in cases of inheritance, there should be a
period when the heirs can be considered as co-owners rather
than unregistered co-partners within the contemplation of
our corporate tax laws aforementioned. Before the partition
and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously,
without them becoming thereby unregistered co-partners,

but it does not necessarily follow that such status as coowners continues until the inheritance is actually and
physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares
under the common management of the administrator or
executor or of anyone chosen by them and engage in
business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b)
of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it
was stated, among the reasons for holding the appellants
therein to be unregistered co-partners for tax purposes, that
their common fund "was not something they found already
in existence" and that "it was not a property inherited by
them pro indiviso," but it is certainly far fetched to argue
therefrom, as petitioners are doing here, that ergo, in all
instances where an inheritance is not actually divided, there
can be no unregistered co-partnership. As already indicated,
for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the
moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the
moment of such partition, the heirs are entitled already to
their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other
heirs, and, accordingly he becomes liable individually for
all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs
under a single management to be used with the intent of
making profit thereby in proportion to his share, there can
be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

99

In this connection, petitioners' reliance on Article 1769,

paragraph (3), of the Civil Code, providing that: "The
sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from
which the returns are derived," and, for that matter, on any
other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National
Internal Revenue Code. Mr. Justice Roberto Concepcion,
now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one
imposed upon "corporations", which,
strictly speaking, are distinct and
different from "partnerships". When our
Internal Revenue Code includes
"partnerships" among the entities
subject to the tax on "corporations", said
Code must allude, therefore, to
organizations
which
are not
necessarily "partnerships",
in
the
technical sense of the term. Thus, for
instance,
section
24
of
said
Code exempts from the aforementioned
tax
"duly
registered
general
partnerships," which constitute precisely
one of the most typical forms of
partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of
said Code, "the term corporation
includes partnerships, no matter how
created or organized." This qualifying
expression clearly indicates that a joint
venture need not be undertaken in any
of the standard forms, or in confirmity
with the usual requirements of the law
on partnerships, in order that one could
be deemed constituted for purposes of
the tax on corporation. Again, pursuant
to said section 84(b),the term

"corporation" includes, among others,

"joint
accounts,(cuentas
en
participacion)" and "associations", none
of which has a legal personality of its
own, independent of that of its
members. Accordingly, the lawmaker
could not have regarded that personality
as a condition essential to the existence
of the partnerships therein referred to. In
fact, as above stated, "duly registered
general co-partnerships" which are
possessed of the aforementioned
personality have been expressly
excluded by law (sections 24 and 84[b])
from the connotation of the term
"corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own
concept of
a
partnership. Under
the
term
"partnership"
it
includes not only a
partnership
as
known in common
law but, as well, a
syndicate,
group,
pool, joint venture,
or
other
unincorporated
organization which
carries on any
business, financial
operation,
or
venture, and which
is not, within the
meaning of the
Code, a trust, estate,

or a corporation. ... .
(7A Merten's Law
of Federal Income
Taxation, p. 789;
emphasis ours.)
The
term
"partnership"
includes
a
syndicate,
group,
pool, joint venture
or
other
unincorporated
organization,
through
or
by
means of which any
business, financial
operation,
or
venture is carried
on. ... . (8 Merten's
Law of Federal
Income Taxation, p.
562
Note
63;
emphasis ours.)
For purposes of the tax on
corporations, our National Internal
Revenue
Code
includes
these
partnerships with the exception only
of
duly
registered
general
copartnerships within the purview of
the term "corporation." It is, therefore,
clear to our mind that petitioners herein
constitute a partnership, insofar as said
Code is concerned, and are subject to
the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes
vs. Commissioner of Internal Revenue, G. R. Nos. L-2402021, July 29, 1968, 24 SCRA 198, wherein the Court ruled
against a theory of co-ownership pursued by appellants
therein.

100

As regards the second question raised by petitioners about

the segregation, for the purposes of the corporate taxes in
question, of their inherited properties from those acquired
by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their
motion for reconsideration:
In connection with the second ground, it
is alleged that, if there was an
unregistered partnership, the holding
should be limited to the business
engaged in apart from the properties
inherited by petitioners. In other words,
the taxable income of the partnership
should be limited to the income derived
from the acquisition and sale of real
properties and corporate securities and
should not include the income derived
from the inherited properties. It is
admitted that the inherited properties
and the income derived therefrom were
used in the business of buying and
selling other real properties and
corporate securities. Accordingly, the
partnership income must include not
only the income derived from the
purchase and sale of other properties but
also the income of the inherited
properties.
Besides, as already observed earlier, the income derived
from inherited properties may be considered as individual
income of the respective heirs only so long as the
inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares
are used as part of the common assets of the heirs to be used
in making profits, it is but proper that the income of such
shares should be considered as the part of the taxable
income of an unregistered partnership. This, We hold, is the
clear intent of the law.

Likewise, the third question of petitioners appears to have

been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the
court ruled this wise:
In support of the third ground, counsel
for petitioners alleges:
Even if we were to
yield to the decision
of this Honorable
Court that the herein
petitioners
have
formed
an
unregistered
partnership
and,
therefore, have to be
taxed as such, it
might be recalled
that the petitioners
in their individual
income tax returns
reported their shares
of the profits of the
unregistered
partnership.
We
think it only fair and
equitable that the
various
amounts
paid
by
the
individual
petitioners
as
income tax on their
respective shares of
the
unregistered
partnership should
be deducted from
the
deficiency
income tax found by
this
Honorable
Court against the

unregistered
partnership. (page 7,
Memorandum for
the Petitioner in
Support of Their
Motion
for
Reconsideration,
Oct. 28, 1961.)
In other words, it is the position of
petitioners that the taxable income of
the partnership must be reduced by the
amounts of income tax paid by each
petitioner on his share of partnership
profits. This is not correct; rather, it
should be the other way around. The
partnership profits distributable to the
partners (petitioners herein) should be
reduced by the amounts of income tax
assessed against the partnership.
Consequently, each of the petitioners in
his individual capacity overpaid his
income tax for the years in question, but
the income tax due from the partnership
has been correctly assessed. Since the
individual income tax liabilities of
petitioners are not in issue in this
proceeding, it is not proper for the Court
to pass upon the same.
Petitioners insist that it was error for the Tax Court to so
rule that whatever excess they might have paid as individual
income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of
the Tax Court is to oblige petitioners to pay double income
tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income
taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as regards
the point under discussion is simply that of a taxpayer who
has paid the wrong tax, assuming that the failure to pay the

101

corporate taxes in question was not deliberate. Of course,

such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and
action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has
already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the
delay is precisely because the taxpayers failed to make the
proper return and payment of the corporate taxes legally due
from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not
exactly above suspicion in their conduct vis-a-vis their tax
obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the
Court of Tax Appeals appealed from is affirm with costs
against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ.,
concur.

Orbillos, Jr. vs CIR, 1395 436 (1985)

G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS,
ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers
and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

This case is about the income tax liability of four brothers

and sisters who sold two parcels of land which they had
acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to
Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The
next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The
company sold the two lots to petitioners for P178,708.12 on
March 13 (Exh. A and B, p. 44, Rollo). Presumably, the
Torrens titles issued to them would show that they were coowners of the two lots.
In 1974, or after having held the two lots for more than a
year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total
sum of P313,050 (Exh. C and D). They derived from the
sale a total profit of P134,341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an
income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the fiveyear prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate
income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or a
total of P71,074.56.
Not only that. He considered the share of the profits of each
petitioner in the sum of P33,584 as a " taxable in full (not a
mere capital gain of which is taxable) and required them
to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency
income taxes and penalties totalling P127,781.76 on their

profit of P134,336, in addition to the tax on capital gains

already paid by them.
The Commissioner acted on the theory that the four
petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of
the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of
the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.
We hold that it is error to consider the petitioners as having
formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to
buy the two lots, resold the same and divided the profit
among themselves.
To regard the petitioners as having formed a taxable
unregistered partnership would result in oppressive taxation
and confirm the dictum that the power to tax involves the
power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention.
They were co-owners pure and simple. To consider them as
partners would obliterate the distinction between a coownership and a partnership. The petitioners were not
engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of
construction, then they had no choice but to resell the same
to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to
be terminated sooner or later. Castan Tobeas says:

AQUINO, J.:

102

Como establecer el deslinde entre la

comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina
mas generalizada-esta: por razon del
origen, en que la sociedad presupone
necesariamente la convencion, mentras
que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del
fin objecto, en que el objeto de la
sociedad es obtener lucro, mientras que
el de la indivision es solo mantener en
su integridad la cosa comun y favorecer
su conservacion.
Reflejo de este criterio es la sentencia
de 15 de Octubre de 1940, en la que se
dice que si en nuestro Derecho positive
se ofrecen a veces dificultades al tratar
de fijar la linea divisoria entre
comunidad de bienes y contrato de
sociedad, la moderna orientacion de la
doctrina cientifica seala como nota
fundamental de diferenciacion aparte
del origen de fuente de que surgen, no
siempre
uniforme,
la
finalidad
perseguida por los interesados: lucro
comun partible en la sociedad, y mera
conservacion y aprovechamiento en la
comunidad. (Derecho Civil Espanol,
Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing
of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or
common right or interest in any property from which the
returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of
Internal Revenue, 67 Phil. 666, where 15 persons

contributed small amounts to purchase a two-peso

sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000.
The 15 persons were held liable for income tax as an
unregistered partnership.
The instant case is distinguishable from the cases where the
parties engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of
respondent Commissioner:
Co-owership
distinguished
from
partnership.We find that the case at
bar is fundamentally similar to the De
Leon case. Thus, like the De Leon heirs,
the Longa heirs inherited the 'hacienda'
in
questionpro-indiviso from
their
deceased parents; they did not
contribute or invest additional ' capital
to increase or expand the inherited
properties; they merely continued
dedicating the property to the use to
which it had been put by their forebears;
they individually reported in their tax
returns their corresponding shares in the
income and expenses of the 'hacienda',
and they continued for many years the
status of co-ownership in order, as
conceded by respondent, 'to preserve its
(the 'hacienda') value and to continue
the existing contractual relations with
the Central Azucarera de Bais for
milling purposes. Longa vs. Aranas,
CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed
unregistered
pratnership.CoOwnership who own properties which
produce
income
should
not
automatically be considered partners of
an unregistered partnership, or a

corporation, within the purview of the

income tax law. To hold otherwise,
would be to subject the income of all
co-ownerships of inherited properties to
the tax on corporations, inasmuch as if a
property does not produce an income at
all, it is not subject to any kind of
income tax, whether the income tax on
individuals or the income tax on
corporation. (De Leon vs. CI R, CTA
Case No. 738, September 11, 1961,
cited in Araas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25,
1972, 45 SCRA 74, where after an extrajudicial settlement
the co-heirs used the inheritance or the incomes derived
therefrom as a common fund to produce profits for
themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of
Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of
the building to an administrator and divided equally the net
income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters
bought four pieces of real property which they leased to
various tenants and derived rentals therefrom. Clearly, the
petitioners in these two cases had formed an unregistered
partnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to
the petitioners and whether he paid the donor's tax (See Art.
1448, Civil Code). We are not prejudging this matter. It
might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed
and set aside. The assessments are cancelled. No costs.

103

SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

Philex Mining Corp. vs CIR, 551 SCRA 428 (2008)

G.R. No. 148187

April 16, 2008

PHILEX
MINING
vs.
COMMISSIONER
REVENUE, respondent.

CORPORATION, petitioner,
OF

INTERNAL

DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30,
2000 Decision1 of the Court of Appeals in CA-G.R. SP No.
49385, which affirmed the Decision2 of the Court of Tax
Appeals in C.T.A. Case No. 5200. Also assailed is the April
3, 2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation
(Philex Mining), entered into an agreement4 with Baguio
Gold Mining Company ("Baguio Gold") for the former to
manage and operate the latters mining claim, known as the
Sto. Nino mine, located in Atok and Tublay, Benguet
Province. The parties agreement was denominated as
"Power of Attorney" and provided for the following terms:
4. Within three (3) years from date thereof, the
PRINCIPAL (Baguio Gold) shall make available
to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in

(d) The MANAGERS account shall not

accrue interest. Since it is the desire of
the PRINCIPAL to extend to the
MANAGERS the benefit of subsequent
appreciation of property, upon a
projected termination of this Agency,
the ratio which the MANAGERS
account has to the owners account will
be determined, and the corresponding
proportion of the entire assets of the
STO. NINO MINE, excluding the
claims, shall be transferred to the
MANAGERS, except that such
transferred assets shall not include mine
development, roads, buildings, and
similar property which will be
valueless, or of slight value, to the
MANAGERS. The MANAGERS can,
on the other hand, require at their option
that property originally transferred by
them to the Sto. Nino PROJECT be retransferred to them. Until such assets
are transferred to the MANAGERS, this
Agency shall remain subsisting.

such amounts as from time to time may be

required by the MANAGERS within the said 3year period, for use in the MANAGEMENT of
the STO. NINO MINE. The said ELEVEN
MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the
owners account in the Sto. Nino PROJECT. Any
part of any income of the PRINCIPAL from the
STO. NINO MINE, which is left with the Sto.
Nino PROJECT, shall be added to such owners
account.
5. Whenever the MANAGERS shall deem it
necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they
may transfer their own funds or property to the
Sto. Nino PROJECT, in accordance with the
following arrangements:
(a) The properties shall be appraised
and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a
special fund to be known as the
MANAGERS account.
(b) The total of the MANAGERS
account
shall
not
exceed
P11,000,000.00, except with prior
approval of the PRINCIPAL; provided,
however, that if the compensation of the
MANAGERS as herein provided cannot
be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in
cash shall be added to the
MANAGERS account.
(c) The cash and property shall not
thereafter be withdrawn from the Sto.
Nino PROJECT until termination of this
Agency.

xxxx
12. The compensation of the MANAGER shall be
fifty per cent (50%) of the net profit of the Sto.
Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay
income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction
therefrom of the MANAGERS compensation.
xxxx
16. The PRINCIPAL has current pecuniary
obligation in favor of the MANAGERS and, in
the future, may incur other obligations in favor of
the MANAGERS. This Power of Attorney has

104

been executed as security for the payment and

satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as
a means to fulfill the same. Therefore, this
Agency shall be irrevocable while any obligation
of the PRINCIPAL in favor of the MANAGERS
is outstanding, inclusive of the MANAGERS
account. After all obligations of the PRINCIPAL
in favor of the MANAGERS have been paid and
satisfied in full, this Agency shall be revocable by
the PRINCIPAL upon 36-month notice to the
MANAGERS.
17. Notwithstanding any agreement or
understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS
may withdraw from this Agency by giving 6month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held
liable to the PRINCIPAL by reason alone of such
withdrawal. Paragraph 5(d) hereof shall be
operative in case of the MANAGERS
withdrawal.
x x x x5

liability through properties that Baguio Gold may acquire in

the future.
On December 31, 1982, the parties executed an
"Amendment
to
Compromise
with
Dation
in
Payment"8 where the parties determined that Baguio Golds
indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio
Gold to other creditors that petitioner had assumed as
guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted by Baguio Gold
from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay petitioner in two
segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its equitable title in
its Philodrill assets for P16,302,426.00. The parties then
ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of
P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of
account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and
reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

In the course of managing and operating the project, Philex

Mining made advances of cash and property in accordance
with paragraph 5 of the agreement. However, the mine
suffered continuing losses over the years which resulted to
petitioners withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations on
February 20, 1982.6

In its 1982 annual income tax return, petitioner deducted

from its gross income the amount of P112,136,000.00 as
"loss on settlement of receivables from Baguio Gold against
reserves and allowances."9 However, the Bureau of Internal
Revenue (BIR) disallowed the amount as deduction for bad
debt and assessed petitioner a deficiency income tax of
P62,811,161.39.

Thereafter, on September 27, 1982, the parties executed a

"Compromise with Dation in Payment"7 wherein Baguio
Gold admitted an indebtedness to petitioner in the amount
of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to
petitioner, transferring to the latter Baguio Golds equitable
title in its Philodrill assets and finally settling the remaining

Petitioner protested before the BIR arguing that the

deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and
existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it
was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid

management contract it entered into with Baguio Gold. The
bad debt deduction represented advances made by petitioner
which, pursuant to the management contract, formed part of
Baguio Golds "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of
Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original
creditor.
Petitioner also asserted that due to Baguio Golds
irreversible losses, it became evident that it would not be
able to recover the advances and payments it had made in
behalf of Baguio Gold. For a debt to be considered
worthless, petitioner claimed that it was neither required to
institute a judicial action for collection against the debtor
nor to sell or dispose of collateral assets in satisfaction of
the debt. It is enough that a taxpayer exerted diligent efforts
to enforce collection and exhausted all reasonable means to
collect.
On October 28, 1994, the BIR denied petitioners protest for
lack of legal and factual basis. It held that the alleged debt
was not ascertained to be worthless since Baguio Gold
remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid
and subsisting debt considering that, under the management
contract, petitioner was to be paid fifty percent (50%) of the
projects net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA)
which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the
instant Petition for Review is hereby DENIED for
lack of merit. The assessment in question, viz:
FAS-1-82-88-003067 for deficiency income tax in
the amount of P62,811,161.39 is hereby
AFFIRMED.

105

ACCORDINGLY, petitioner Philex Mining

Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue the
amount
of
P62,811,161.39,
plus,
20%
delinquency interest due computed from February
10, 1995, which is the date after the 20-day grace
period given by the respondent within which
petitioner has to pay the deficiency amount x x x
up to actual date of payment.
SO ORDERED.

11

The CTA rejected petitioners assertion that the advances it

made for the Sto. Nino mine were in the nature of a loan. It
instead characterized the advances as petitioners
investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The
CTA held that the "Power of Attorney" executed by
petitioner and Baguio Gold was actually a partnership
agreement. Since the advanced amount partook of the nature
of an investment, it could not be deducted as a bad debt
from petitioners gross income.
The CTA likewise held that the amount paid by petitioner
for the long-term loan obligations of Baguio Gold could not
be allowed as a bad debt deduction. At the time the
payments were made, Baguio Gold was not in default since
its loans were not yet due and demandable. What petitioner
did was to pre-pay the loans as evidenced by the notice sent
by Bank of America showing that it was merely demanding
payment of the installment and interests due. Moreover,
Citibank imposed and collected a "pre-termination penalty"
for the pre-payment.
The Court of Appeals affirmed the decision of the
CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45
of the Rules of Court, alleging that:

The Court of Appeals erred in construing that the

advances made by Philex in the management of
the Sto. Nino Mine pursuant to the Power of
Attorney partook of the nature of an investment
rather than a loan.
II.
The Court of Appeals erred in ruling that the
50%-50% sharing in the net profits of the Sto.
Nino Mine indicates that Philex is a partner of
Baguio Gold in the development of the Sto. Nino
Mine notwithstanding the clear absence of any
intent on the part of Philex and Baguio Gold to
form a partnership.
III.
The Court of Appeals erred in relying only on the
Power of Attorney and in completely disregarding
the Compromise Agreement and the Amended
Compromise Agreement when it construed the
nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve
upon the issue of the propriety of the bad debts
write-off.14
Petitioner insists that in determining the nature of its
business relationship with Baguio Gold, we should not only
rely on the "Power of Attorney", but also on the subsequent
"Compromise with Dation in Payment" and "Amended
Compromise with Dation in Payment" that the parties
executed in 1982. These documents, allegedly evinced the
parties intent to treat the advances and payments as a loan
and establish a creditor-debtor relationship between them.

I.
The petition lacks merit.

The lower courts correctly held that the "Power of

Attorney" is the instrument that is material in determining
the true nature of the business relationship between
petitioner and Baguio Gold. Before resort may be had to the
two compromise agreements, the parties contractual intent
must first be discovered from the expressed language of the
primary contract under which the parties business relations
were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the
parties pursuant to the termination of their business
relationship created under the "Power of Attorney". On the
other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their
dealings with one another.
The execution of the two compromise agreements can
hardly be considered as a subsequent or contemporaneous
act that is reflective of the parties true intent. The
compromise agreements were executed eleven years after
the "Power of Attorney" and merely laid out a plan or
procedure by which petitioner could recover the advances
and payments it made under the "Power of Attorney". The
parties entered into the compromise agreements as a
consequence of the dissolution of their business
relationship. It did not define that relationship or indicate its
real character.
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves.15 While a corporation, like
petitioner, cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture which is akin
to a particular partnership:
The legal concept of a joint venture is of common
law origin. It has no precise legal definition, but it
has been generally understood to mean an
organization formed for some temporary purpose.

106

x x x It is in fact hardly distinguishable from the

partnership, since their elements are similar
community of interest in the business, sharing of
profits and losses, and a mutual right of control. x
x x The main distinction cited by most opinions in
common law jurisdictions is that the partnership
contemplates a general business with some degree
of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus
of a temporary nature. x x x This observation is
not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be
particular or universal, and a particular
partnership may have for its object a specific
undertaking. x x x It would seem therefore that
under Philippine law, a joint venture is a form of
partnership and should be governed by the law of
partnerships. The Supreme Court has however
recognized a distinction between these two
business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint venture
with others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of
Attorney" indicates that the parties had intended to create a
partnership and establish a common fund for the purpose.
They also had a joint interest in the profits of the business as
shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold
undertook to contribute money, property and industry to the
common fund known as the Sto. Nio mine.17 In this regard,
we note that there is a substantive equivalence in the
respective contributions of the parties to the development
and operation of the mine. Pursuant to paragraphs 4 and 5 of
the agreement, petitioner and Baguio Gold were to
contribute equally to the joint venture assets under their
respective
accounts.
Baguio
Gold
would
contribute P11M under its owners account plus any of its
income that is left in the project, in addition to its actual
mining claim. Meanwhile, petitioners contribution would

consist of its expertise in the management and operation of

mines, as well as the managers account which is comprised
of P11M in
funds
and
property
and
petitioners "compensation" as manager that cannot be
paid in cash.
However, petitioner asserts that it could not have entered
into a partnership agreement with Baguio Gold because it
did not "bind" itself to contribute money or property to the
project; that under paragraph 5 of the agreement, it was only
optional for petitioner to transfer funds or property to the
Sto. Nio project "(w)henever the MANAGERS shall deem
it necessary and convenient in connection with the
MANAGEMENT of the STO. NIO MINE."18
The wording of the parties agreement as to petitioners
contribution to the common fund does not detract from the
fact that petitioner transferred its funds and property to the
project as specified in paragraph 5, thus rendering effective
the other stipulations of the contract, particularly paragraph
5(c) which prohibits petitioner from withdrawing the
advances until termination of the parties business relations.
As can be seen, petitioner became bound by its
contributions once the transfers were made. The
contributions acquired an obligatory nature as soon as
petitioner had chosen to exercise its option under paragraph
5.
There is no merit to petitioners claim that the prohibition in
paragraph 5(c) against withdrawal of advances should not
be taken as an indication that it had entered into a
partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a
contract of agency coupled with an interest which is not
revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that
cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual
interest of both principal and agent.19 In this case, the nonrevocation or non-withdrawal under paragraph 5(c) applies
to the advances made by petitioner who is supposedly

the agent and not the principal under the contract. Thus, it
cannot be inferred from the stipulation that the parties
relation under the agreement is one of agency coupled with
an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an
indication that the relationship of the parties was one of
agency and not a partnership. Although the said provision
states that "this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS
is outstanding, inclusive of the MANAGERS account," it
does not necessarily follow that the parties entered into an
agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of
Attorney" was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to
create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the
latters mine through the parties mutual contribution of
material resources and industry. The essence of an agency,
even one that is coupled with interest, is the agents ability
to represent his principal and bring about business relations
between the latter and third persons.20 Where representation
for and in behalf of the principal is merely incidental or
necessary for the proper discharge of ones paramount
undertaking under a contract, the latter may not necessarily
be a contract of agency, but some other agreement
depending on the ultimate undertaking of the parties.21
In this case, the totality of the circumstances and the
stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between petitioner
and Baguio Gold.
First, it does not appear that Baguio Gold was
unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof
provides that upon termination of the parties business
relations, "the ratio which the MANAGERS account has to
the owners account will be determined, and the

107

corresponding proportion of the entire assets of the STO.

NINO MINE, excluding the claims" shall be transferred to
petitioner.22As pointed out by the Court of Tax Appeals,
petitioner was merely entitled to a proportionate return of
the mines assets upon dissolution of the parties business
relations. There was nothing in the agreement that would
require Baguio Gold to make payments of the advances to
petitioner as would be recognized as an item of obligation
or "accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement
provided for a distribution of assets of the Sto. Nio mine
upon termination, a provision that is more consistent with a
partnership than a creditor-debtor relationship. It should be
pointed out that in a contract of loan, a person who receives
a loan or money or any fungible thing acquires ownership
thereof and is bound to pay the creditor an equal amount of
the same kind and quality.23 In this case, however, there was
no stipulation for Baguio Gold to actually repay petitioner
the cash and property that it had advanced, but only the
return of an amount pegged at a ratio which the managers
account had to the owners account.
In this connection, we find no contractual basis for the
execution of the two compromise agreements in which
Baguio Gold recognized a debt in favor of petitioner, which
supposedly arose from the termination of their business
relations over the Sto. Nino mine. The "Power of Attorney"
clearly provides that petitioner would only be entitled to the
return of a proportionate share of the mine assets to be
computed at a ratio that the managers account had to the
owners account. Except to provide a basis for claiming the
advances as a bad debt deduction, there is no reason for
Baguio Gold to hold itself liable to petitioner under the
compromise agreements, for any amount over and above the
proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely
for a business corporation to lend hundreds of millions of
pesos to another corporation with neither security, or
collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a

specific maturity date for the advances to become due and

demandable, and the manner of payment was unclear. All
these point to the inevitable conclusion that the advances
were not loans but capital contributions to a partnership.
The strongest indication that petitioner was a partner in the
Sto Nio mine is the fact that it would receive 50% of the
net profits as "compensation" under paragraph 12 of the
agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that
petitioners "compensation" is actually its share in the
income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that
the "receipt by a person of a share in the profits of a
business is prima facie evidence that he is a partner in the
business." Petitioner asserts, however, that no such
inference can be drawn against it since its share in the
profits of the Sto Nio project was in the nature of
compensation or "wages of an employee", under the
exception provided in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner
was not an employee of Baguio Gold who will be paid
"wages" pursuant to an employer-employee relationship. To
begin with, petitioner was the manager of the project and
had put substantial sums into the venture in order to ensure
its viability and profitability. By pegging its compensation
to profits, petitioner also stood not to be remunerated in case
the mine had no income. It is hard to believe that petitioner
would take the risk of not being paid at all for its services, if
it were truly just an ordinary employee.
Consequently, we find that petitioners "compensation"
under paragraph 12 of the agreement actually constitutes its
share in the net profits of the partnership. Indeed, petitioner
would not be entitled to an equal share in the income of the
mine if it were just an employee of Baguio Gold.25 It is not
surprising that petitioner was to receive a 50% share in the
net profits, considering that the "Power of Attorney" also
provided for an almost equal contribution of the parties to
the St. Nino mine. The "compensation" agreed upon only

serves to reinforce the notion that the parties relations were

indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners
advances as investments in a partnership known as the Sto.
Nino mine. The advances were not "debts" of Baguio Gold
to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former
under the "Power of Attorney". As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we
find no reason to depart from the tax courts factual finding
that Baguio Golds debts were not yet due and demandable
at the time that petitioner paid the same. Verily, petitioner
pre-paid Baguio Golds outstanding loans to its bank
creditors and this conclusion is supported by the evidence
on record.26
In sum, petitioner cannot claim the advances as a bad debt
deduction from its gross income. Deductions for income tax
purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction
claimed.27 In this case, petitioner failed to substantiate its
assertion that the advances were subsisting debts of Baguio
Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad
debt deduction.
WHEREFORE, the petition is DENIED. The decision of
the Court of Appeals in CA-G.R. SP No. 49385 dated June
30, 2000, which affirmed the decision of the Court of Tax
Appeals in C.T.A. Case No. 5200 is AFFIRMED.
Petitioner Philex Mining Corporation is ORDERED to
PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date
of payment.
SO ORDERED.

108

Sardane vs CA 167 SCRA, 524 (1988)

G.R. No. L-47045 November 22, 1988
NOBIO
SARDANE, petitioner,
vs.
THE COURT OF APPEALS and ROMEO J.
ACOJEDO, respondents.
Y.G. Villaruz & Associates for petitioner.
Pelagio R. Lachica for private respondent.

REGALADO, J.:
The extensive discussion and exhaustive disquisition in the
decision 1 of the respondent Court 2 should have
written finis to this case without further recourse to Us. The
assignment of errors and arguments raised in the respondent
Court by herein private respondent, as the petitioner therein,
having been correctly and justifiedly sustained by said court
without any reversible error in its conclusions, the present
petition must fail.
The assailed decision details the facts and proceedings
which spawned the present controversy as follows:
Petitioner brought an action in the City
Court of Dipolog for collection of a sum
of P5,217.25 based on promissory notes
executed by the herein private
respondent Nobio Sardane in favor of
the herein petitioner. Petitioner bases
his right to collect on Exhibits B, C, D,
E, F, and G executed on different dates
and signed by private respondent Nobio

Sardane. Exhibit B is a printed

promissory note involving Pl,117.25
and dated May 13, 1972. Exhibit C is
likewise a printed promissory note and
denotes on its face that the sum loaned
was Pl,400.00. Exhibit D is also a
printed promissory note dated May 31,
1977 involving an amount of P100.00.
Exhibit E is what is commonly known
to the layman as 'vale' which reads:
'Good for: two hundred pesos (Sgd)
Nobio Sardane'. Exhibit F is stated in
the following tenor: 'Received from Mr.
Romeo Acojedo the sum Pesos: Two
Thousand Two Hundred (P2,200.00)
ONLY, to be paid on or before
December 25, 1975. (Sgd) Nobio
Sardane.' Exhibit G and H are both
vales' involving the same amount of one
hundred pesos, and dated August 25,
1972 and September 12, 1972
respectively.
It has been established in the trial court
that on many occasions, the petitioner
demanded the payment of the total
amount of P5,217.25. The failure of the
private respondent to pay the said
amount prompted the petitioner to seek
the services of lawyer who made a letter
(Exhibit 1) formally demanding the
return of the sum loaned. Because of the
failure of the private respondent to heed
the demands extrajudicially made by the
petitioner, the latter was constrained to
bring an action for collection of sum of
money.
During the scheduled day for trial,
private respondent failed to appear and
to file an answer. On motion by the
petitioner, the City Court of Dipolog

issued an order dated May 18, 1976

declaring the private respondent in
default and allowed the petitioner to
present his evidence ex-parte. Based on
petitioner's evidence, the City Court of
Dipolog rendered judgment by default
in favor of the petitioner.
Private respondent filed a motion to lift
the order of default which was granted
by the City Court in an order dated May
24, 1976, taking into consideration that
the answer was filed within two hours
after the hearing of the evidence
presented ex-parte by the petitioner.
After the trial on the merits, the City
Court of Dipolog rendered its decision
on September 14, 1976, the dispositive
portion of which reads:
IN VIEW OF THE FOREGOING,
judgment is hereby rendered in favor of
the plaintiff and against the defendant as
follows:
(a) Ordering the defendant to pay unto
the plaintiff the sum of Five Thousand
Two Hundred Seventeen Pesos and
Twenty-five centavos (P5,217.25) plus
legal interest to commence from April
23, 1976 when this case was filed in
court; and
(b) Ordering the defendant to pay the
plaintiff the sum of P200.00 as
attorney's fee and to pay the cost of this
proceeding. 3
Therein defendant Sardane appealed to the Court of First
Instance of Zamboanga del Norte which reversed the

109

decision of the lower court by dismissing the complaint and

ordered the plaintiff-appellee Acojedo to pay said
defendant-appellant P500.00 each for actual damages, moral
damages, exemplary damages and attorney's fees, as well as
the costs of suit. Plaintiff-appellee then sought the review of
said decision by petition to the respondent Court.
The assignment of errors in said petition for review can be
capsulized into two decisive issues, firstly, whether the oral
testimony for the therein private respondent Sardane that a
partnership existed between him and therein petitioner
Acojedo are admissible to vary the meaning of the
abovementioned promissory notes; and, secondly, whether
because of the failure of therein petitioner to cross-examine
therein private respondent on his sur-rebuttal testimony,
there was a waiver of the presumption accorded in favor of
said petitioner by Section 8, Rule 8 of the Rules of Court.
On the first issue, the then Court of First Instance held that
"the pleadings of the parties herein put in issue the
imperfection or ambiguity of the documents in question",
hence "the appellant can avail of the parol evidence rule to
prove his side of the case, that is, the said amount taken by
him from appellee is or was not his personal debt to
appellee, but expenses of the partnership between him and
appellee."
Consequently, said trial court concluded that the promissory
notes involved were merely receipts for the contributions to
said partnership and, therefore, upheld the claim that there
was ambiguity in the promissory notes, hence parol
evidence was allowable to vary or contradict the terms of
the represented loan contract.
The parol evidence rule in Rule 130 provides:
Sec.
7. Evidence
of
written
agreements.When the terms of an
agreement have been reduced to
writing, it is to be considered as
containing all such terms, and,

therefore, there can be, between the

parties and their successors in interest,
no evidence of the terms of the
agreement other than the contents of the
writing except in the following cases:
(a) Where a mistake or imperfection of
the writing or its failure to express the
the true intent and agreement of the
parties, or the validity of the agreement
is put in issue by the pleadings;
(b) When there is an intrinsic ambiguity
in the writing.
As correctly pointed out by the respondent Court the
exceptions to the rule do not apply in this case as there is no
ambiguity in the writings in question, thus:
In the case at bar, Exhibits B, C, and D
are printed promissory notes containing
a promise to pay a sum certain in
money, payable on demand and the
promise to bear the costs of litigation in
the event of the private respondent's
failure to pay the amount loaned when
demanded extrajudicially. Likewise, the
vales denote that the private respondent
is obliged to return the sum loaned to
him by the petitioner. On their face,
nothing appears to be vague or
ambigous, for the terms of the
promissory notes clearly show that it
was incumbent upon the private
respondent to pay the amount involved
in the promissory notes if and when the
petitioner demands the same. It was
clearly the intent of the parties to enter
into a contract of loan for how could an
educated man like the private
respondent be deceived to sign a
promissory note yet intending to make

such a writing to be mere receipts of the

petitioner's supposed contribution to the
alleged partnership existing between the
parties?
It has been established in the trial court
that, the private respondent has been
engaged in business for quite a long
period of time--as owner of the Sardane
Trucking Service,
entering into
contracts with the government for the
construction of wharfs and seawall; and
a member of the City Council of
Dapitan (TSN, July 20, 1976, pp. 5758).<re||an1w> It indeed puzzles
us how the private respondent could
have been misled into signing a
document containing terms which he
did not mean them to be. ...
xxx xxx xxx
The private respondent admitted during
the
cross-examination
made by
petitioner's counsel that he was the one
who was responsible for the printing of
Exhibits B, C, and D (TSN, July 28,
1976, p. 64). How could he purportedly
rely on such a flimsy pretext that the
promissory notes were receipts of the
petitioner's contribution? 4
The Court of Appeals held, and We agree, that even if
evidence aliunde other than the promissory notes may be
admitted to alter the meaning conveyed thereby, still the
evidence is insufficient to prove that a partnership existed
between the private parties hereto.
As manager of the basnig Sarcado naturally some degree of
control over the operations and maintenance thereof had to
be exercised by herein petitioner. The fact that he had

110

received 50% of the net profits does not conclusively

establish that he was a partner of the private respondent
herein. Article 1769(4) of the Civil Code is explicit that
while the receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the
business, no such inference shall be drawn if such profits
were received in payment as wages of an employee.
Furthermore, herein petitioner had no voice in the
management of the affairs of the basnig. Under similar
facts, this Court in the early case of Fortis vs. Gutierrez
Hermanos, 5 in denying the claim of the plaintiff therein
that he was a partner in the business of the defendant,
declared:

he who obtained the engine used in the Sardaco from the

Department of Local Government and Community
Development. Further, the use by the parties of the pronoun
"our" in referring to "our basnig, our catch", "our deposit",
or "our boseros" was merely indicative of the camaraderie
and not evidentiary of a partnership, between them.

This contention cannot be sustained. It

was a mere contract of employment.
The plaintiff had no voice nor vote in
the management of the affairs of the
company.
The
fact
that
the
compensation received by him was to
be determined with reference to the
profits made by the defendant in their
business did not in any sense make him
a partner therein. ...

On the second issue, the pertinent rule on actionable

documents in Rule 8, for ready reference, reads:

The same rule was reiterated in Bastida vs. Menzi & Co.,
Inc., et al. 6 which involved the same factual and legal
milieu.
There are other considerations noted by respondent Court
which negate herein petitioner's pretension that he was a
partner and not a mere employee indebted to the present
private respondent. Thus, in an action for damages filed by
herein private respondent against the North Zamboanga
Timber Co., Inc. arising from the operations of the business,
herein petitioner did not ask to be joined as a party plaintiff.
Also, although he contends that herein private respondent is
the treasurer of the alleged partnership, yet it is the latter
who is demanding an accounting. The advertence of the
Court of First Instance to the fact that the casco bears the
name of herein petitioner disregards the finding of the
respondent Court that it was just a concession since it was

The foregoing factual findings, which belie the further claim

that the aforesaid promissory notes do not express the true
intent and agreement of the parties, are binding on Us since
there is no showing that they fall within the exceptions to
the rule limiting the scope of appellate review herein to
questions of law.

Sec. 8. How to contest genuineness of

such documents.When an action or
defense is founded upon a written
instrument, copied in or attached to the
corresponding pleading as provided in
the preceding section, the genuineness
and due execution of the instrument
shall be deemed admitted unless the
adverse party, under oath, specifically
denies them, and sets forth what he
claims to be the facts; but this provision
does not apply when the adverse party
does not appear to be a party to the
instrument or when compliance with an
order for the inspection of the original
instrument is refused.
The record shows that herein petitioner did not deny under
oath in his answer the authenticity and due execution of the
promissory notes which had been duly pleaded and attached
to the complaint, thereby admitting their genuineness and
due execution. Even in the trial court, he did not at all
question the fact that he signed said promissory notes and
that the same were genuine. Instead, he presented parol
evidence to vary the import of the promissory notes by

alleging that they were mere receipts of his contribution to

the alleged partnership.
His arguments on this score reflect a misapprehension of the
rule on parol evidence as distinguished from the rule on
actionable documents. As the respondent Court correctly
explained to herein petitioner, what he presented in the trial
Court was testimonial evidence that the promissory notes
were receipts of his supposed contributions to the alleged
partnership which testimony, in the light of Section 7, Rule
130, could not be admitted to vary or alter the explicit
meaning conveyed by said promissory notes. On the other
hand, the presumed genuineness and due execution of said
promissory notes were not affected, pursuant to the
provisions of Section 8, Rule 8, since such aspects were not
at all questioned but, on the contrary, were admitted by
herein petitioner.
Petitioner's invocation of the doctrines in Yu Chuck, et al.
vs. Kong Li Po, 7 which was reiterated in Central Surety &
Insurance Co. vs. C. N. Hodges, et al. 8 does not sustain his
thesis that the herein private respondent had "waived the
mantle of protection given him by Rule 8, Sec. 8". It is true
that such implied admission of genuineness and due
execution may be waived by a party but only if he acts in a
manner indicative of either an express or tacit waiver
thereof. Petitioner, however, either overlooked or ignored
the fact that, as held in Yu Chuck, and the same is true in
other cases of Identical factual settings, such a finding of
waiver is proper where a case has been tried in complete
disregard of the rule and the plaintiff having pleaded a
document by copy, presents oral evidence to prove the due
execution of the document and no objections are made to
the defendant's evidence in refutation. This situation does
not obtain in the present case hence said doctrine is
obviously inapplicable.
Neither did the failure of herein private respondent to crossexamine herein petitioner on the latter's sur-rebuttal
testimony constitute a waiver of the aforesaid implied
admission. As found by the respondent Court, said surrebuttal testimony consisted solely of the denial of the

111

testimony of herein private respondent and no new or

additional matter was introduced in that sur-rebuttal
testimony to exonerate herein petitioner from his obligations
under the aforesaid promissory notes.
On the foregoing premises and considerations, the
respondent Court correctly reversed and set aside the
appealed decision of the Court of First Instance of
Zamboanga del Norte and affirmed in full the decision of
the City Court of Dipolog City in Civil Case No. A-1838,
dated September 14, 1976.
Belatedly, in his motion for reconsideration of said decision
of the respondent Court, herein petitioner, as the private
respondent therein, raised a third unresolved issue that the
petition for review therein should have been dismissed for
lack of jurisdiction since the lower Court's decision did not
affirm in full the judgment of the City Court of Dipolog,
and which he claimed was a sine qua non for such a petition
under the law then in force. He raises the same point in his
present appeal and We will waive the procedural
technicalities in order to put this issue at rest.

mode of appeal in the cases therein contemplated, the Court

of Appeals en banc provided thereof in its Resolution of
August 12, 1971, by requiring a petition for review but
which also did not require for its availability that the
judgment of the court of first instance had affirmed in full
that of the lower court. Said mode of appeal and the
procedural requirements thereof governed the appeal taken
in this case from the aforesaid Court of First Instance to the
Court of Appeals in 1977. 10 Herein petitioner's plaint on
this issue is, therefore, devoid of merit.
WHEREFORE, the judgment of the respondent Court of
Appeals is AFFIRMED, with costs against herein petitioner.
SO ORDERED.

Litonjua, Jr. vs Litonjua, Sr., 477 SCRA 576 (2005)

AURELIO K. LITONJUA, JR.,
G.R.
NOS.
166299-300
Petitioner,

Parenthetically, in that same motion for reconsideration he

had sought affirmative relief from the respondent Court
praying that it sustain the decision of the trial Court, thereby
invoking and submitting to its jurisdiction which he would
now assail. Furthermore, the objection that he raises is
actually not one of jurisdiction but of procedure. 9

- versus

At any rate, it will be noted that petitioner anchors his said

objection on the provisions of Section 29, Republic Act 296
as amended by Republic Act 5433 effective September 9,
1968. Subsequently, the procedure for appeal to the Court of
Appeals from decisions of the then courts of first instance in
the exercise of their appellate jurisdiction over cases
originating from the municipal courts was provided for by
Republic Act 6031, amending Section 45 of the Judiciary
Act effective August 4, 1969. The requirement for
affirmance in full of the inferior court's decision was not
adopted or reproduced in Republic Act 6031. Also, since
Republic Act 6031 failed to provide for the procedure or

EDUARDO K. LITONJUA, SR.,

ROBERT T. YANG, ANGLO PHILS.
MARITIME, INC., CINEPLEX, INC.,
DDM GARMENTS, INC., EDDIE K.
LITONJUA SHIPPING AGENCY,
INC.,
EDDIE
K.
LITONJUA
SHIPPING CO., INC., LITONJUA
SECURITIES, INC. (formerly E. K.
Litonjua Sec), LUNETA THEATER,
INC., E & L REALTY, (formerly E &
L INTL SHIPPING CORP.), FNP

Present:

CO., INC., HOME ENTERPRISES,

INC., BEAUMONT DEV. REALTY
CO., INC., GLOED LAND CORP.,
EQUITY TRADING CO., INC., 3D
CORP., L DEV. CORP, LCM
THEATRICAL
ENTERPRISES,
INC., LITONJUA SHIPPING CO.
INC., MACOIL INC., ODEON
REALTY
CORP.,
SARATOGA
REALTY, INC., ACT THEATER
INC. (formerly General Theatrical &
Film Exchange, INC.), AVENUE
REALTY,
INC.,
AVENUE
THEATER,
INC.
and
LVF
PHILIPPINES, INC., (Formerly VF
PHILIPPINES),
Responde
nts.

CORONA,
CARPIO
MORALES
and
GARCIA, JJ.

Promulgated:

December
2005

13,

x------------------------------------------------x

DECISION
GARCIA, J.:

PANGANIBA
N, J., Chairman
SANDOVALGUTIERREZ,

In this petition for review under Rule 45 of the Rules of

Court, petitioner Aurelio K. Litonjua, Jr. seeks to nullify

112

and set aside the Decision of the Court of Appeals (CA)

corporations. Yang is described in the complaint as

dated March 31, 2004[1] in consolidated cases C.A. G.R. Sp.

petitioners and Eduardos partner in their Odeon Theater

No. 76987 and C.A. G.R. SP. No 78774 and its Resolution

investment.[5] The same complaint also contained the

dated December 07, 2004,[2] denying petitioners motion for

following material averments:

reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein

respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers.
The legal dispute between them started when, on December
4, 2002, in the Regional Trial Court (RTC) at Pasig City,
Aurelio filed a suit against his brother Eduardo and herein
respondent Robert T. Yang (Yang) and several corporations
for

specific
[3]

complaint,

performance

and

accounting.

In

docketed as Civil Case No. 69235 and

alleged that, since June 1973, he and Eduardo are into a

joint venture/partnership arrangement in the Odeon Theater
business which had expanded thru investment in Cineplex,
LCM

Theatrical

Enterprises,

Odeon

3.01.1 This joint venture/[partnership]

agreement was contained in a
memorandum addressed by Eduardo to
his siblings, parents and other
relatives. Copy of this memorandum
is attached hereto and made an integral
part as Annex A and the portion
referring to [Aurelio] submarked
as Annex A-1.

4.01 from 22 June 1973 to about August

2001, or [in] a span of 28 years,
[Aurelio] and Eduardo had accumulated
in their joint venture/partnership various
assets including but not limited to the
corporate defendants and [their]
respective assets.

4.02 In addition . . . the joint

venture/partnership had also acquired
[various other assets], but Eduardo
caused to be registered in the names of
other parties.

xxx xxx xxx

his

eventually raffled to Branch 68 of the court,[4] Aurelio

Inc.,

3.01 On or about 22 June 1973,

[Aurelio] and Eduardo entered into a
joint venture/partnership for the
continuation of their family business
and common family funds .

acquired by them whichever is greater. .

..

Realty

Corporation (operator of Odeon I and II theatres), Avenue

Realty, Inc., owner of lands and buildings, among other

3.02 It was then agreed upon between

[Aurelio] and Eduardo that in
consideration of [Aurelios] retaining his
share in the remaining family businesses
(mostly, movie theaters, shipping and
land development) and contributing his
industry to the continued operation of
these businesses, [Aurelio] will be given
P1 Million or 10% equity in all these
businesses and those to be subsequently

4.04 The substantial assets of most of

the corporate defendants consist of real
properties . A list of some of these real
properties is attached hereto and made
an integral part as Annex B.
xxx xxx xxx

5.02 Sometime in 1992, the relations

between [Aurelio] and Eduardo became

113

sour so that [Aurelio] requested for an

accounting and liquidation of his share
in the joint venture/partnership [but
these demands for complete accounting
and liquidation were not heeded].

10) JR. (AKL) [Referring to petitioner

Aurelio K. Litonjua]:

(P100, 000.00) in cash or asset, like Lt.

Artiaga so you can live better there. The
rest I will give you in form of stocks
which you can keep. This stock I assure
you is good and saleable. I will also
gladly give you the share of WackWack and Valley Golf because you
have been good. The rest will be in
stocks from all the corporations which I
repeat, ten percent (10%) equity. [6]

You have now your own life to live

after having been married. .
xxx xxx xxx

5.05 What is worse, [Aurelio] has

reasonable cause to believe that
Eduardo
and/or
the
corporate
defendants as well as Bobby [Yang], are
transferring . . . various real properties
of the corporations belonging to the
joint venture/partnership to other parties
in fraud of [Aurelio]. In consequence,
[Aurelio] is therefore causing at this
time the annotation on the titles of these
real properties a notice of lis
pendens . (Emphasis in the original;
underscoring and words in bracket
added.)

For ease of reference, Annex A-1 of the complaint, which

I am trying my best to mold you the

way I work so you can follow the
pattern . You will be the only one left
with the company, among us brothers
and I will ask you to stay as I want you
to run this office every time I am away.
I want you to run it the way I am trying
to run it because I will be all alone and I
will depend entirely to you (sic). My
sons will not be ready to help me yet
until about maybe 15/20 years from
now. Whatever is left in the corporation,
I will make sure that you get ONE
MILLION PESOS (P1,000,000.00) or
ten percent (10%) equity, whichever is
greater. We two will gamble the whole
thing of what I have and what you are
entitled to. . It will be you and me alone
on this. If ever I pass away, I want you
to take care of all of this. You keep my
share for my two sons are ready take
over but give them the chance to run the
company which I have built.

On December 20, 2002, Eduardo and the corporate

respondents,

as

joint ANSWER With

defendants a
Compulsory

quo, filed

Counterclaim denying

under oath the material allegations of the complaint, more

particularly that portion thereof depicting petitioner and
Eduardo as having entered into a contract of partnership. As
affirmative defenses, Eduardo, et al., apart from raising a
jurisdictional matter, alleged that the complaint states no
cause of action, since no cause of action may be derived
from the actionable document, i.e., Annex A-1, being void
under the terms of Article 1767 in relation to Article 1773

xxx xxx xxx

petitioner asserts to have been meant for him by his brother

of the Civil Code, infra. It is further alleged that whatever

Eduardo, pertinently reads:

undertaking Eduardo agreed to do, if any, under Annex ABecause you will need a place to stay, I
will arrange to give you first ONE
HUNDRED THOUSANDS PESOS:

1, are unenforceable under the provisions of the Statute of

Frauds.[7]

114

reconsideration[12] and Yangs motion to dismiss. The

following then transpired insofar as Yang is concerned:
For his part, Yang - who was served with summons long
after the other defendants submitted their answer moved to

any.[8] Petitioner opposed this motion to dismiss.

On January 10, 2003, Eduardo, et al., filed a Motion to

2. On April 24, 2003, he moved for

reconsideration of the Omnibus Order of April 2, 2003,
but his motion was denied in an Order of July 4,
2003.[14]

has no cause of action and the complaint does not state

CAs 14th Division ordered the consolidation of CA G.R. SP

No. 78774 with CA G.R. SP No. 76987.

1. On April 14, 2003, Yang filed

his ANSWER, but expressly reserved the right to seek
reconsideration of the April 2, 2003 Omnibus Order and
to pursue his failed motion to dismiss[13] to its full
resolution.

dismiss on the ground, inter alia, that, as to him, petitioner

Per its resolution dated October 2, 2003,[16] the

Following the submission by the parties of their

respective Memoranda of Authorities, the appellate court

Resolve Affirmative Defenses.[9] To this motion, petitioner

interposed an Opposition with ex-Parte Motion to Set the
Case for Pre-trial.[10]

3. On August 26, 2003, Yang went to the

Court of Appeals (CA) in a petition for certiorari under
Rule 65 of the Rules of Court, docketed as CA-G.R. SP
No. 78774,[15] to nullify the separate orders of the trial
court, the first denying his motion to dismiss the basic
complaint and, the second, denying his motion for
reconsideration.

Acting on the separate motions immediately

adverted to above, the trial court, in an Omnibus Order
Earlier, Eduardo and the corporate defendants, on

dated March 5, 2003, denied the affirmative defenses and,

except for Yang, set the case for pre-trial on April 10,

the contention that grave abuse of discretion and injudicious

haste

2003.[11]

attended

the

issuance

of

the

trial

courts

aforementioned Omnibus Orders dated March 5, and April

2, 2003, sought relief from the CA via similar recourse.
In another Omnibus Order of April 2, 2003, the
same court denied the motion of Eduardo, et al., for

came out with the herein assailed Decision dated March

31, 2004, finding for Eduardo and Yang, as lead petitioners
therein, disposing as follows:

WHEREFORE, judgment is
hereby rendered granting the issuance of
the writ of certiorari in these
consolidated cases annulling, reversing
and setting aside the assailed orders of
the court a quo dated March 5, 2003,
April 2, 2003 and July 4, 2003 and the
complaint filed by private respondent
[now petitioner Aurelio] against all the
petitioners [now herein respondents
Eduardo, et al.] with the court a quo is
hereby dismissed.
SO ORDERED.[17] (Emphasis in the
original; words in bracket added.)

Their petition for certiorari was docketed as CA G.R. SP

No. 76987.

115

Explaining its case disposition, the appellate court

stated, inter alia, that the alleged partnership, as evidenced
by the actionable documents, Annex A and A-1 attached to

D. When it ruled that petitioner has

changed his theory on appeal when all
that Petitioner had done was to support
his pleaded cause of action by another
legal perspective/argument.

or industry to a common fund with the intention of

dividing the profits among themselves.[21] A joint venture,
on the other hand, is hardly distinguishable from, and

the complaint, and upon which petitioner solely predicates

may be likened to, a partnership since their elements are

his right/s allegedly violated by Eduardo, Yang and the

similar, i.e., community of interests in the business and

corporate defendants a quo is void or legally inexistent.

sharing of profits and losses. Being a form of partnership,

In time, petitioner moved for reconsideration but

The petition lacks merit.

a joint venture is generally governed by the law on

partnership.[22]

his motion was denied by the CA in its equally

assailed Resolution of December 7, 2004.[18] .
Petitioners demand, as defined in the petitory
Hence, petitioners present recourse, on the contention that

portion of his complaint in the trial court, is for delivery

the CA erred:

or payment to him, as Eduardos and Yangs partner, of his

partnership/joint venture share, after an accounting has

A. When it ruled that there was no

partnership created by the actionable
document because this was not a public
instrument and immovable properties
were contributed to the partnership.

been duly conducted of what he deems to be

partnership/joint venture property.[19]

The underlying issue that necessarily comes to

mind in this proceedings is whether or not petitioner and
respondent Eduardo are partners in the theatre, shipping and
realty business, as one claims but which the other denies.
And the issue bearing on the first assigned error relates to
the question of what legal provision is applicable under the
premises, petitioner seeking, as it were, to enforce the

B. When it ruled that the actionable

document did not create a demandable
right in favor of petitioner.

A partnership exists when two or more persons

agree to place their money, effects, labor, and skill in
lawful commerce or business, with the understanding that
there shall be a proportionate sharing of the profits and

C. When it ruled that the complaint

stated no cause of action against
[respondent] Robert Yang; and

losses between them.[20] A contract of partnership is

defined by the Civil Code as one where two or more

actionable document - Annex A-1 - which he depicts in his

complaint to be the contract of partnership/joint venture
between himself and Eduardo. Clearly, then, a look at the
legal provisions determinative of the existence, or defining
the formal requisites, of a partnership is indicated. Foremost
of these are the following provisions of the Civil Code:

persons bound themselves to contribute money, property,

116

Art. 1771. A partnership may be

constituted in any form, except where
immovable property or real rights are
contributed thereto, in which case a
public instrument shall be necessary.

As an unsigned document, there can be no quibbling

that

Annex A-1 does

not

meet

the

public

instrumentation requirements exacted under Article

1771 of the Civil Code. Moreover, being unsigned and

that is consisting of movie theaters,

shipping and land development under
paragraph 3.02 of the complaint. In
other words, his contribution as a
partner in the alleged partnership/joint
venture consisted of immovable
properties and real rights. .[23]

doubtless referring to a partnership involving more than

Art. 1772. Every contract of partnership
having a capital of three thousand pesos
or more, in money or property, shall
appear in a public instrument, which
must be recorded in the Office of the
Securities and Exchange Commission.

P3,000.00 in money or property, Annex A-1 cannot be

presented for notarization, let alone registered with the
Securities and Exchange Commission (SEC), as called
for under the Article 1772 of the Code. And inasmuch
as the inventory requirement under the succeeding

Failure to comply with the requirement

of the preceding paragraph shall not
affect the liability of the partnership and
the members thereof to third persons.

Article 1773 goes into the matter of validity when

immovable property is contributed to the partnership,
the next logical point of inquiry turns on the nature of
petitioners contribution, if any, to the supposed
partnership.

Art. 1773. A contract of partnership is

void, whenever immovable property is
contributed thereto, if an inventory of
said property is not made, signed by the
parties, and attached to the public
instrument.

Significantly enough, petitioner matter-offactly concurred with the appellate courts observation
that, prescinding from what he himself alleged in his
basic complaint, his contribution to the partnership
consisted of his share in the Litonjua family businesses
which owned variable immovable properties. Petitioners
assertion in his motion for reconsideration[24] of the CAs
decision, that what was to be contributed to the business
[of the partnership] was [petitioners] industry and his
share in the family [theatre and land development]

The CA, addressing the foregoing query, correctly

stated that petitioners contribution consisted of immovables

business leaves no room for speculation as to what

petitioner contributed to the perceived partnership.

and real rights. Wrote that court:

Lest it be overlooked, the contract-validating

Annex A-1, on its face, contains typewritten

entries, personal in tone, but is unsigned and undated.

A further examination of the

allegations in the complaint would show
that [petitioners] contribution to the socalled partnership/joint venture was his
supposed share in the family business

inventory requirement under Article 1773 of the Civil Code

applies as long real property or real rights are initially
brought into the partnership. In short, it is really of no
moment which of the partners, or, in this case, who between

117

immovable property duly signed by the parties.

petitioner and his brother Eduardo, contributed immovables.

sued upon and sought to be enforced. The legal and

In context, the more important consideration is that real

factual milieu of the case calls for this disposition. A

property was contributed, in which case an inventory of the

partnership may be constituted in any form, save when

for purposes of establishing the existence of a

contributed property duly signed by the parties should be

immovable property or real rights are contributed

valid contract of partnership. Indeed, because of

attached to the public instrument, else there is legally no

thereto or when the partnership has a capital of at

the failure to comply with the essential formalities

partnership to speak of.

least P3,000.00, in which case a public instrument shall

As such, the said Memorandum is null and void

of a valid contract, the purported partnership/joint

be necessary.[25] And if only to stress what has

venture is legally inexistent and it produces no
repeatedly been articulated, an inventory to be signed by
Petitioner, in an obvious bid to evade the
application of Article 1773, argues that the immovables
in question were not contributed, but were acquired

the parties and attached to the public instrument is

effect whatsoever. Necessarily, a void or legally

also indispensable to the validity of the partnership

inexistent contract cannot be the source of any

whenever immovable property is contributed to it.

contractual or legal right. Accordingly, the

after the formation of the supposed partnership.

allegations in the complaint, including the
Needless to stress, the Court cannot accord cogency to
this specious argument. For, as earlier stated, petitioner
himself admitted contributing his share in the supposed
shipping, movie theatres and realty development family

Given the foregoing perspective, what the

appellate court wrote in its assailed Decision

[26]

about

actionable document attached thereto, clearly

demonstrates that [petitioner] has NO valid

the probative value and legal effect of Annex Acontractual or legal right which could be violated
1 commends itself for concurrence:

businesses which already owned immovables even

by the [individual respondents] herein. As a

before Annex A-1 was allegedly executed.

Considering that the allegations in the

consequence, [petitioners] complaint does NOT

complaint showed that [petitioner] contributed

state a valid cause of action because NOT all the

immovable properties to the alleged partnership,

essential elements of a cause of action are

the Memorandum (Annex A of the complaint)

present. (Underscoring and words in bracket

plausibly extend Annex A-1 the legal effects that

which

added.)

petitioner so desires and pleads to be given. Annex A-1,

partnership/joint

in fine, cannot support the existence of the partnership

instrument and there was NO inventory of the

Considering thus the value and nature of

petitioners alleged contribution to the purported
partnership, the Court, even if so disposed, cannot

purports

to

establish

venture is

NOT

the

said

a public

118

crystal clear that [petitioner] has no

create rights and obligations of the

valid or legal right which could be

parties and which rights and obligations

December 7, 2004[27] denying petitioners motion for

violated by [respondents]. (Words in

may be enforceable and demandable.

reconsideration:

bracket added.)

Just because the relationship created by

Likewise well-taken are the following complementary

excerpts from the CAs equally assailed Resolution of

the agreement cannot be specifically

Further, We conclude that despite glaring defects
labeled or pigeonholed into a category
in the allegations in the complaint as
well

as

the

actionable

document

attached thereto (Rollo, p. 191), the

[trial] court did not appreciate and apply

Under the second assigned error, it is petitioners posture

that Annex A-1, assuming its inefficacy or nullity
as a partnership document, nevertheless created
demandable rights in his favor. As petitioner

the legal provisions which were brought

succinctly puts it in this petition:

to its attention by herein [respondents]

of nominate contract does not mean it is

void or unenforceable.
Petitioner has thus thrusted the notion of an innominate
contract on this Court - and earlier on the CA after he
experienced a reversal of fortune thereat - as an
afterthought. The appellate court, however, cannot really be

in the their pleadings. In our evaluation

43. Contrariwise, this actionable document,

of [petitioners] complaint, the latter

especially its above-quoted provisions,

alleged inter alia to have contributed

established an actionable contract even

immovable properties to the alleged

though it may not be a partnership. This

certiorari jurisdiction was circumscribed by what was

partnership but the actionable document

actionable contract is what is known as

alleged to have been the order/s issued by the trial court in

is not a public document and there was

an innominate contract (Civil Code,

grave abuse of discretion. As respondent Yang pointedly

no inventory of immovable properties

Article 1307).

faulted for not yielding to petitioners dubious stratagem of

altering his theory of joint venture/partnership to an
innominate contract. For, at bottom, the appellate courts

observed,[28] since the parties basic position had been welldefined, that of petitioner being that the actionable

signed

by

the

parties.

Both

the

document established a partnership/joint venture, it is on

allegations in the complaint and the

44. It may not be a contract of loan, or a mortgage

actionable documents considered, it is

or whatever, but surely the contract does

those positions that the appellate court exercised its

certiorari jurisdiction. Petitioners act of changing his

119

original theory is an impermissible practice and constitutes,

As it were, the only portion of Annex A-1 which could

It is at once apparent that what respondent Eduardo imposed

as the CA aptly declared, an admission of the untenability of

perhaps be remotely regarded as vesting petitioner with a

upon himself under the above passage, if he

such theory in the first place.

right to demand from respondent Eduardo the observance of

indeed wrote Annex A-1, is a promise which is

[Petitioner] is now humming a different tune . . . .

In a sudden twist of stance, he has now
contended that the actionable instrument
may be considered an innominate
contract. xxx Verily, this now changes
[petitioners] theory of the case which is
not only prohibited by the Rules but
also is an implied admission that the
very theory he himself has adopted,
filed and prosecuted before the
respondent court is erroneous.

a determinate conduct, reads:

not to be performed within one year from contract

Be that as it may . . We hold that this new theory

contravenes [petitioners] theory of the
actionable document being a partnership
document. If anything, it is so obvious
we do have to test the sufficiency of the
cause of action on the basis of
partnership law xxx.[29] (Emphasis in
the original; Words in bracket added).

But even assuming in gratia argumenti that Annex A1 partakes of a perfected innominate contract, petitioners
complaint would still be dismissible as against Eduardo and,

execution on June 22, 1973. Accordingly, the

xxx You will be the only one left with the
company, among us brothers and I will

the Statute of Frauds and ergo unenforceable for

ask you to stay as I want you to run this

non-compliance therewith.[30] By force of the

office everytime I am away. I want you

statute of frauds, an agreement that by its terms is

to run it the way I am trying to run it

not to be performed within a year from the

making thereof shall be unenforceable by action,

because I will be alone and I will

unless the same, or some note or memorandum
depend entirely to you, My sons will not

thereof, be in writing and subscribed by the party

be ready to help me yet until about

charged. Corollarily, no action can be proved

maybe 15/20 years from now. Whatever

unless the requirement exacted by the statute of

is left in the corporation, I will make

frauds is complied with.[31]

sure that you get ONE MILLION

PESOS (P1,000,000.00) or ten percent

Lest it be overlooked, petitioner is the intended beneficiary

of the P1 Million or 10% equity of the family
businesses supposedly promised by Eduardo to

(10%) equity, whichever is greater.

give in the near future. Any suggestion that the

more so, against Yang. It cannot be over-emphasized that

petitioner points to Eduardo as the author of Annex A-1.

agreement embodied in Annex A-1 is covered by

(Underscoring added)

stated amount or the equity component of the

Withal, even on this consideration alone, petitioners claim

promise was intended to go to a common fund

against Yang is doomed from the very start.

would be to

read something

not

written

in Annex A-1. Thus, even this angle alone argues

against the very idea of a partnership, the creation

120

1. Petitioner asserted in his complaint that his so-

3. Petitioner states in par. 2.01 of the complaint

called joint venture/partnership with Eduardo was

that [he] and Eduardo are business partners in the

or industry to a common fund with the intention

for the continuation of their family business and

[respondent] corporations, while Bobby is his and

of dividing the profits between or among

common family funds which were theretofore

Eduardos

being mainly managed by Eduardo. [33] But Yang

investment (par. 2.03). This means that the

denies kinship with the Litonjua family and

partnership between petitioner and Eduardo came

petitioner has not disputed the disclaimer.

first; Yang became their partner in their Odeon

of which requires two or more contracting minds

mutually agreeing to contribute money, property

[32]

themselves.

In sum then, the Court rules, as did the CA, that

partner

in

their

Odeon

Theater

petitioners complaint for specific performance anchored

on an actionable document of partnership which is
Theater investment thereafter. Several paragraphs

legally inexistent or void or, at best, unenforceable does

2. In some detail, petitioner mentioned what he

later,

Eduardo and the corporate defendants. And if no of

had contributed to the joint venture/partnership

himself by alleging that his investment and that of

action

against

with Eduardo and what his share in the businesses

Eduardo and Yang in the Odeon theater business

respondent Eduardo because no valid partnership

will be. No allegation is made whatsoever about

has expanded through a reinvestment of profit

existed between him and petitioner, the Court cannot

what Yang contributed, if any, let alone his

income

proportional share in the profits. But such

corporation including but not limited to [six]

allegation cannot, however, be made because, as

corporate respondents This simply means that the

aptly observed by the CA, the actionable

Odeon

document did not contain such provision, let alone

corporate respondents.

As may be noted, petitioner has not, in his complaint,

mention the name of Yang. How, indeed, could a

petitioner refers to the corporate respondents as

provide the logical nexus that would tie Yang to him as

person be considered a partner when the

progeny of the Odeon Theatre business.[34]

not state a cause of action as against respondent

can

successfully

be

maintained

see its way clear on how the same action could plausibly

however,

and

petitioner

direct

would

investments

contradict

in

several

prosper against Yang. Surely, Yang could not have

become a partner in, or could not have had any form of
business relationship with, an inexistent partnership.

his partner. In fact, attendant circumstances would

indicate the contrary. Consider:

Theatre

business

came

before

Significantly

the

enough,

document purporting to establish the partnership

contract did not even mention his name.

Needless to stress, petitioner has not sufficiently

established in his complaint the legal vinculum whence

121

he sourced his right to drag Yang into the fray. The

Court of Appeals, in its assailed decision, captured and
formulated the legal situation in the following wise:

Yang. More importantly, however, the

necessary to establish the elements of a

foregoing ruling of this Court that the

cause of action against Yang. [35]

purported

partnership

between

[Eduardo] is void and legally inexistent

[Respondent]

Yang,

is

impleaded
directly affects said claim against Yang.

because, as alleged in the complaint, he

Since [petitioner] is trying to establish

is a partner of [Eduardo] and the

his claim against Yang by linking him
[petitioner]

in the Odeon

Theater

Pressing its point, the CA later stated in its

resolution

denying

petitioners

motion

for

reconsideration the following:

to the legally inexistent partnership . . .

Investment which expanded through

xxx Whatever the complaint

such attempt had become futile because

reinvestments of profits and direct

there

was

NOTHING

that

would

investments in several corporations,

calls it, it is the actionable document

attached to the complaint that is

contractually connect [petitioner] and

thus:

Yang. To establish a valid cause of

controlling. Suffice it to state, We have

not ignored the actionable document As

action, the complaint should have a

xxx xxx xxx

statement of fact upon which to connect

a matter of fact, We emphasized in our

decision that insofar as [Yang] is

[respondent]
Clearly,

[petitioners]

claim

against

Yang

to

the

alleged

partnership between [petitioner] and

Yang arose from his alleged partnership

concerned, he is not even mentioned in

the said actionable document. We are

respondent [Eduardo], including their

with petitioner and the respondent.

alleged

investment

in

the

Odeon

However, there was NO allegation in

therefore puzzled how a person not

mentioned in a document purporting to

Theater. A statement of facts on those

the complaint which directly alleged

matters is pivotal to the complaint as

how the supposed contractual relation

establish
considered

partnership
a

could

be

partner.[36] (Words

in

they would constitute the ultimate facts

was created between [petitioner] and

bracket ours).

122

joint venture or whatever or some

innominate contract It may be noted that
The last issue raised by petitioner, referring to
whether or not he changed his theory of the case, as
peremptorily determined by the CA, has been discussed

therefore, to agree with the CA when it made short

one kind of innominate contract is what

shrift of petitioners innominate contract theory on the

is known as du ut facias (I give that you

basis of the foregoing basic reasons.

may do).[37]

Petitioners protestation that his act of introducing the

concept of innominate contract was not a case of

at length earlier and need not detain us long. Suffice it

changing theories but of supporting his pleaded cause of

to say that after the CA has ruled that the alleged

partnership is inexistent, petitioner took a different tack.

raised for the first time on appeal.[40] It is not difficult,

43.

Contrariwise,

this
action that of the existence of a partnership - by another

actionable document,

especially its

Thus, from a joint venture/partnership theory which he

legal perspective/argument, strikes the Court as a

above-quoted provisions, established an

strained attempt to rationalize an untenable position.

actionable contract even though it may

Paragraph 12 of his motion for reconsideration of the

Illustrative of this shift is petitioners statement in par. #8

not be a partnership. This actionable

CAs decision virtually relegates partnership as a fall-

of his motion for reconsideration of the CAs decision

contract is what is known as an

back theory. Two paragraphs later, in the same notion,

combined with what he said in par. # 43 of this petition,

innominate contract (Civil Code, Article

as follows:

1307).[38]

adopted and consistently pursued in his complaint,

petitioner embraced the innominate contract theory.

petitioner faults the appellate court for reading, with

myopic eyes, the actionable document solely as
establishing a partnership/joint venture. Verily, the cited

8.
actionable

Whether
document

or

not

the

paragraphs are a study of a party hedging on whether or

creates

not to pursue the original cause of action or altogether

partnership, joint venture, or whatever,

Springing surprises on the opposing party is offensive to

is a legal matter. What is determinative

the sporting idea of fair play, justice and due process;

for purposes of sufficiency of the

hence, the proscription against a party shifting from one

complainants allegations, is whether the

abandoning the same, thus:

12. Incidentally, assuming that the actionable
document created a partnership between

theory at the trial court to a new and different theory in

the appellate court.[39] On the same rationale, an issue

[respondent]

Eduardo,

Sr.

and

actionable document bears out an

which was neither averred in the complaint cannot be
actionable contract be it a partnership, a

123

[petitioner],

no

immovables

were

respondents Eduardo and Yang doubtless pivots on the

contributed to this partnership. xxx

existence of the partnership between the three of them,

as purportedly evidenced by the undated and unsigned

14. All told, the Decision takes off from

Annex A-1. A void Annex A-1, as an actionable

a false premise that the actionable

document of partnership, would strip petitioner of a

document attached to the complaint

cause of action under the premises. A complaint for

does

not

establish

delivery and accounting of partnership property based

contractual

on such void or legally non-existent actionable

relationship between [petitioner] and
document is dismissible for failure to state of action. So,
Eduardo, Sr. and Roberto T Yang

in gist, said the Court of Appeals. The Court agrees.

simply because his document does not

WHEREFORE, the instant petition is DENIED and

create a partnership or a joint venture.

the impugned Decision and Resolution of the Court of

This is a myopic reading of the

Appeals AFFIRMED.

actionable document.
Cost against the petitioner.

Per the Courts own count, petitioner used in his

SO ORDERED.
complaint

the

venture/partnership nineteen

mixed
(19)

words joint
times

and

the

term partner four (4) times. He made reference to

the law of joint venture/partnership [being applicable]
to the business relationship between [him], Eduardo
and Bobby [Yang] and to his rights in all specific
properties of their joint venture/partnership. Given this
consideration, petitioners right of action against

124