Evangelista V. Cir

AGENCY, TRUST AND PARTNERSHIP
I. NATURE
EVANGELISTA v. CIR
FACTS:
Petitioner-siblings Evangelista (Eufemia, Manuela, and Francisca) borrowed from their father the sum of P59,140.00
which amount together with their personal monies was used by them for the purpose of buying real properties: a lot
from Mrs. Florentino, 21 parcels of land from Mrs. Oppus, a lot from Insular Investments Inc., a lot from Mrs. Afable.
The Evangelistas 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. The properties were leased to various tenants, and from March, 1945 up to 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. On 1946, they realized a net rental income of P7,498.13; In 1948, P12,615.35.
It further appears that on September 24, 1954 respondent CIR demanded the payment of income tax on corporations,
real estate dealer's fixed tax and corporation residence tax from 1945-1949, which totaled P6,878.34. The Evangelistas
then filed with the CTA praying that they be absolved rom the payment of the taxes, which CTA denied. Their MR was
likewise denied. Hence this appeal.
Pet Evangelista: They insist, however, that they are mere co-owners, not co-partners, 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.
ISSUE/S:
1) WON the relationship between the petitioners was co-ownership, not partnership? – PARTNERSHIP
2) WON the petitioners were subject to the tax on corporations, residence tax for corporations and real estate dealers
fixed tax? – YES
RULING:
1) The petitioners Evangelistas were engaged in a partnership. The contention that they were mere co-owners was
correctly rejected by CTA.
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.
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. They invested the same, not merely not merely in one transaction, but in a series of
transactions. In other words, one cannot but perceive a character of habitually peculiar to business transactions
engaged in the purpose of gain. Moreover, the lots were not devoted to residential purposes, or to other personal uses,
but were leased separately to several persons. The properties have been under the management of one person, namely
Simeon. 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. Such conditions have existed for over 15 years, since the first property was
acquired, and over 12 years, since Simeon became the manager. Lastly, the Evangelistas 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.
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2) For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the
exception only of duly registered general co-partnerships — 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. They are likewise subject to residence tax for corporations and real estate
dealers fixed tax.
With regard to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership,"
as used in section 24 and 84 of said Code, the pertinent parts of which read:
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 (compañias colectivas), a tax upon such income equal to the sum of the following: . . .
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 co-partnerships. (compañias 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, property, or industry to a common fund, with the intention of dividing the profits
among themselves.
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 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."
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 . . . The term 'corporation' as used in
this Act includes joint-stock company, partnership, x x x.” Considering that the pertinent part of this provision is
analogous to that discussed above, petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners Evangelista have habitually engaged in leasing the properties above mentioned
for a period of over twelve years. Thus, they are subject to the tax provided in section 193 (q) of our NIRC, 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, x x x.”
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.
BAUTISTA ANGELO, J., concurring:

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I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of
engaging in real estate business for profit. I wish however to make 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 co-
ownership. Said article paragraphs 2 and 3, provides:
(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 partnership, whether or not the person 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 co-ownership shared or do not share any profits
made by the use of 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
judicial 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.
WOODHOUSE v. HALILI
FACTS:
Plaintiff Woodhouse entered in a written agreement with defendant Halili:
(1) That they shall organize a partnership for the bottling and distribution of Mision soft drinks, Woodhouse to act
as industrial partner or manager, and Halili as a capitalist, furnishing the capital necessary therefor;
(2) That the Halili was to decide matters of general policy regarding the business, while Woodhouse was to attend
to the operation and development of the bottling plant;
(3) That the Woodhouse was to secure the Mission Soft Drinks franchise for and in behalf of the proposed
partnership; and
(4) That Woodhouse was to receive 30 per cent of the net profits of the business.
Woodhouse informed the Mission Dry Corporation (MDC) that that he had interested a prominent financier (Halili) 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 Halili, 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. Pursuant for this request,
Woodhouse was given "a thirty-days" option on exclusive bottling and distribution rights for the Philippines." On
December 10, 1947, a franchise agreement (Exhibit V) was entered into by MDC and the parties herein. When the
bottling plant was already on operation, Woodhouse demanded of Halili that the partnership papers be executed.
Saying there was no hurry, Halili 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 Halili refused to give further allowances to
Woodhouse, 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.
Woodhouse: 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.
Halili: Alleges by way of defense (1) that his consent to the agreement was secured by the representation of Woodhouse
that he was the owner, or was about to become owner of an exclusive bottling franchise, which representation was
false, and Woodhouse did not secure the franchise, but was given to Halili himself; (2) that he did not fail to carry out
his undertakings, but that it was Woodhouse who failed; (3) that Woodhouse agreed to contribute the exclusive
franchise to the partnership, but failed to do so. He also presented a counter-claim for P200,000 as damages.
CFI: Ordered Halili to render an accounting of the profits of the bottling and distribution business, subject of the action,
and to pay Woodhouse 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.
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On appeal, Halili insists that Woodhouse did represent to him 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 of Halili
to the contract was vitiated by fraud and it is, consequently, null and void. Woodhouse insists that he 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 him having represented that he had the exclusive
franchise; it rather strengthens belief that he did actually make the representation.
ISSUE/S:
1) WON Woodhouse had falsely represented that he had an exclusive franchise to bottle Mission beverages? – YES
2) WON this false representation or fraud, if it existed, annuls the agreement to form the partnership? – NO
3) WON the partnership may still be carried out or executed? – YES
RULING:
1) We conclude from all the foregoing that Woodhouse did actually represent to Halili that he was the holder of the
exclusive franchise. Halili was made to believe, and he actually believed, that Woodhouse had the exclusive franchise.
Halili would not perhaps have gone to California and incurred expenses for the trip, unless he believed that Woodhouse
did have that exclusive privilege, and that the latter would be able to get the same from the Mission Dry Corporation
itself.
Halili’s contention is not without merit. Woodchild's attorney, Mr. Laurea, testified that Woodhouse presented himself
as being the exclusive grantee of a franchise. As a matter of fact, the first draft that Mr. Laurea prepared expressly states
that Woodhouse had the exclusive franchise: “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.” 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. 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.
When Woodhouse went to see Halili (and at that time he had already the option), he must have exultantly told Halili
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.
2) The false representation that was present was not enough as to declare the agreement null and void.
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.
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. Halili was, therefore, led to the belief that
Woodhouse had the exclusive franchise, but that the same was to be secured for or transferred to the partnership.
Woodhouse 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
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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 Halili to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price
Woodhouse gave in exchange for the share of 30% granted him in the net profits of the partnership business. Halili
agreed to give plaintiff 30% share in the net profits because he was transferring his exclusive franchise to the
partnership. We conclude from the above that while the representation that Woodhouse had the exclusive franchise
did not vitiate Halili's consent to the contract, it was used by Woodhouse to get from Halili 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 Halili, he
obtained the consent of the latter to give him (Woodhouse) a big slice in the net profits. This is the dolo incidente
defined 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.
3) We find no merit in the claim of Woodhouse 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. From the time that the franchise
from the MDC was obtained, Woodhouse himself had been demanding that Halili comply with the agreement; this
present action also seeks the enforcement of this agreement. Woodhouse’s claim, therefore, is both inconsistent with
their intention and incompatible with his own conduct and suit. Halili may not be compelled against his will to carry out
the agreement nor execute the partnership papers. Halili 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.
With regard to damages, Woodhouse is entitled under the terms of the agreement to 30% of the net profits of the
business. Against this amount of damages, we must set off the damage Halili 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. With the modification above indicated (damages), the judgment appealed from is
hereby affirmed.
ANTONIA TORRES v. CA and MANUEL TORRES
FACTS:
Petitioner-sisters Antonia Torres and Emeteria Baring entered into a "joint venture agreement" with respondent
Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to the contract, they executed a
Deed of Sale covering the said parcel of land in favor of respondent, who then had it registered in his name. By
mortgaging the property, respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. All three of them also agreed to share the proceeds
from the sale of the subdivided lots. However, the project did not push through, and the land was subsequently
foreclosed by the bank.
Antonia and Emeteria blamed on "respondent's (Manuel) lack of funds or means and skills" and that Manuel used the
loan in furtherance of his own company, Universal Umbrella Company. They further claim that the Joint Venture
Agreement is void under:
a) Article 1773 – that since the parties did not make, sign or attach to the public instrument an inventory of the real
property contributed, the partnership is void.
b) Article 1422 – because it is the direct result of an earlier illegal contract, which was for the sale of the land without
valid consideration.
Manuel alleged that he used the loan to implement the Agreement. With the said amount, he was able to effect the
survey and the subdivision of the lots, put up advertisements, cause construction of roads, curbs and gutters, and
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entered into a contract with an engineering firm all for P85,000. Manuel blamed the failure on Antonia’s acts causing
annotations of adverse claims on the title to the land, which eventually scared away prospective buyers.
Subsequently, Antonia filed a criminal case for estafa against Manuel and his wife, who were however acquitted.
Thereafter, they filed the present civil case which the trial court dismissed. On appeal, however, the appellate court
remanded the case for further proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier stated,
was affirmed by the CA.
CA: Held that the parties had formed a partnership for the development of the subdivision. Thus, they must bear the
loss suffered by the partnership in the same proportion as their share in the profits stipulated in the contract. CA invoked
Article 1797 of the Civil Code which provides:
Art. 1797 — 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.
ISSUE/S:
1) WON the CA erred in concluding that the transaction between the petitioners and respondent was that of a joint
venture/partnership? – NO (IT WAS A PARTNERSHIP)
2) WON the Joint Venture Agreement is void? – NO
RULING:
1) A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant to
Article 1767 of the Civil Code, wherein Antonia would contribute property to the partnership in the form of land which
was to be developed into a subdivision; while Manuel would give, in addition to his industry, the amount needed for
general expenses and other costs. Furthermore, the income from the said project would be divided according to the
stipulated percentage. Clearly, the contract manifested the intention of the parties to form a partnership.
Manuel's actions (which cost P85,000) clearly belie Antonia’s contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property, but also
industry.
Therefore, Antonia is bound by terms of contract. Under Article 1315 of the Civil Code, contracts bind the parties not
only to what has been expressly stipulated, but also to all necessary consequences thereof. Courts are not authorized
to extricate parties from the necessary consequences of their acts, and the fact that the contractual stipulations may
turn out to be financially disadvantageous will not relieve parties thereto of their obligations. They cannot now disavow
the relationship formed from such agreement due to their supposed misunderstanding of its terms.
2) The partnership is not void under Art. 1773 and Art. 1422.
Article 1773 was intended primarily to protect third persons, where according to Tolentino, the contract is declared
void by the law when no such inventory is made. The case at bar does not involve third parties who may be prejudiced.
Moreover, petitioners Antonia and Emetria themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. They cannot in one breath deny the contract and
in another recognize it, depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions
in regard to a contract and courts will not tolerate, much less approve, such practice. The alleged nullity of the
partnership will not prevent courts from considering the Joint Venture Agreement an ordinary contract from which the
parties' rights and obligations to each other may be inferred and enforced.
With regard to the Joint Venture Agreement allegedly being void under Article 1422, the argument is puerile (childish;
silly). The JVA clearly states that the consideration for the sale was the expectation of profits from the subdivision
project. Consideration, more properly denominated as cause, can take different forms, such as the prestation or
promise of a thing or service by another. There was therefore a consideration for the sale.
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With regard to the liabilities, the CA held that petitioners' acts were not the cause of the failure of the project. 16 But
it also ruled that neither was respondent responsible therefor. Accordingly, we find no reversible error in the CA's ruling
that petitioners are not entitled to damages.
GATCHALIAN v. COLLECTOR OF INTERNAL REVENUE
FACTS:
Plaintiff Gatchalian and 14 others subscribed and paid amounts totaling 2 pesos to enable them to purchase one
sweepstakes ticket worth 2 pesos, in the ordinary course of business, and registered it in the name of Jose Gatchalian
& Company (JGC). The ticket won one of the 3rd prizes in the amount of P50,000, covered by a check drawn by the
National Charity Sweepstakes Office (NCSO) in favor of JGC against the PNB, which was cashed by JGC.
Gatchalian was required by income tax examiner David to file the corresponding income tax return covering the prize
won. CIR then made an assessment against JGC requesting the payment of the sum of P1,499.94. JGC wrote to CIR
requesting exemption from payment of the income tax, which CIR denied. Gatchalian and others failed to pay
notwithstanding subsequent demand, so CIR issued a warrant of distraint and levy against their property. To avoid
embarrassment, they paid under protest. The CIR overruled the protests and denied the request for refund. Gatchalian
claims that he sold parts of his shares on the ticket, and that, therefore, the other persons who paid are entitled to the
parts of whatever prize that might be won by said ticket.
ISSUE/S:
WON the plaintiffs formed a partnership, or merely a community of property without a personality of its own? –
PARTNERSHIP
RULING:
If they merely formed a community of property the latter is exempt from the payment of income tax under the law.
However, based on the facts, Gatchalian and others organized a partnership of a civil nature because each of them put
up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did
in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines
Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000
in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a community of property only.
The collected the tax under section 10 of Act No. 2833, as last amended by section 2 of Act No. 3761:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income received in the
preceding calendar year from all sources by every corporation, joint-stock company, partnership, joint account,
association or insurance company, organized in the Philippine Islands, no matter how created or organized, but not
including duly registered general co-partnership x x x.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax
which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No.
3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually,
resulting in their exemption from the tax.
ARBES, ET AL. v. POLISTICO, ET AL.
FACTS:
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This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico &
Co." The Arbes, et al. were members or shareholders, and Polistico, et al. were designated as president-treasurer,
directors and secretary of said association. It is well to remember that this case is now brought before the consideration
of this court for the second time.
The commissioner rendered his report on the income, expenses and cash on hand, which Polistico objected to.
However, the Trial Court found the same sufficient and thus held that the association "Turnuhan Polistico & Co." is
unlawful, sentencing Polistico, et al. jointly and severally to return the amount of P24,607.80, as well as the documents
showing the uncollected credits of the association, to Arbes, et al. and to the rest of the members of the said association.
Polistico, et al: Contend that not all persons having an interest in this association are included as plaintiffs or
defendants, and that the objection to the commissioner's report should have been admitted by the court below.
ISSUE/S:
1) WON all members of the association should be made parties in an action to enforce an accounting for money and
property in their possessions? – NO
2) WON the commissioner's report should have been admitted by the court below? – YES
RULING:
1) The Court held that the decision on the case of Borlasa vs. Polistico must be followed 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.
2) 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.
PARTNERSHIP DISCUSSION:
There is no question that "Turnuhan Polistico & Co." is an unlawful partnership, 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.
According to Manresa, if the partnership has no valid existence, if it is considered juridically nonexistent, 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? Ricci holds
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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 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 as nonexistent, 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. So for Art. 1666, 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.
With regard to the contributions, 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.
MARJORIE TOCAO and WILLIAM T. BELO v. CA and NENITA A. ANAY
FACTS:
Petitioners Tocao and Belo filed an MR of our Decision dated October 4, 2000. They maintain that there was no
partnership between Belo and Anay; and that the latter being merely an employee of Tocao.
ISSUE/S:
WON there was partnership between Belo and Anay? – NO
RULING:
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 Anay's own witness, Elizabeth Bantilan, during
her cross-examination where she said that Belo guarantees the stocks that she owes Peter Lo; that they can borrow
money from him. Furthermore, Bantilan testified that it was Peter Lo who was the company's financier.
It should be recalled that the business relationship created between Tocao and 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 Tocao's good friend and confidante, would occasionally participate in the affairs of the business, although
never in a formal or official capacity. 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.
On the other hand, Tocao declared that Belo was not entitled to any share in the profits of Geminesse Enterprise. With
no participation in the profits, Belo cannot be deemed a partner since the essence of a partnership is that the partners
share in the profits and losses. Consequently, inasmuch as Belo was not a partner in Geminesse Enterprise, Anay had
no cause of action against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, given the circumstances surrounding Anay’s sudden ouster from the partnership by
Tocao, Anay’s act of withholding whatever stocks were in her possession and control was justified and was not in bad
9
faith, if only to serve as security for her claims against the partnership. However, we find that the said sum of
P208,250.00 should be deducted from whatever amount is finally adjudged in Anay’s favor on the basis of the formal
account of the partnership affairs to be submitted to the Regional Trial Court.
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.
HEIRS OF JOSE LIM v. JULIET VILLA LIM
FACTS:
Jose, together with his friends Jimmy and Norberto, formed a partnership to engage in the trucking business. Initially,
with a contribution of ₱50,000.00 each, they purchased a truck to be used in the hauling and transport of lumber of the
sawmill which Jose managed until his death. Thereafter, all of Jose's heirs, and partners agreed to continue the business
under the management of Elfledo (Jose’s eldest son). The shares in the partnership profits and income that formed part
of the estate of Jose were held in trust by Elfledo, with petitioner heirs’ authority for Elfledo to use, purchase or acquire
properties using said funds. By the time the partnership ceased, it had nine trucks, which were all registered in Elfledo's
name. When Elfledo died, his sole heir Juliet Villa Lim (his widow), took over the administration of the properties which
Petitioner Heirs (other children and widow of Jose Lim) claim was without their consent and approval. Claiming co-
ownership, petitioner heirs required Juliet to submit an accounting of all income, profits and rentals received from the
estate of Elfledo, and to surrender its administration, which she refused.
Petitioner Heirs filed a Complaint for Partition, Accounting and Damages against Juliet, alleging that Elfledo served as
Jose’s driver in the trucking business; he was never a partner or an investor and merely supervised the purchase of
additional trucks using the income from the trucking business of the partners. They also allege that Elf;edo purchased
numerous real properties by using the profits derived from the partnership.
Juliet claimed that Elfledo was himself a partner of Norberto and Jimmy; that Jose gave Elfledo ₱50k as the latter's
capital in an informal partnership. Juliet claims that when Elfledo died, she talked to Jimmy and to the heirs of Norberto;
that 3 out of the 9 trucks was given to Jimmy as his share, while Juliet bought the other 3 trucks from Norberto's wife
who was not interested in the vehicles. She also alleged that when Jose died, he left no known assets, and the
partnership ceased upon his demise. Thus, the properties involved in this case were purchased and acquired without
any participation or contribution from petitioner heirs or from Jose.
RTC: Decided in favor of petitioners, ordering equal partition, and for Juliet to submit an accounting.
CA: Reversed RTC, dismissing petitioners' complaint for lack of merit. The MR was likewise denied.
Petitioner Heirs argue that according to the testimony of Jimmy, the sole surviving partner, Elfledo was not a partner;
and that he and Norberto entered into a partnership with Jose
ISSUE/S:
WON the Elfledo Lim was the partner of Jimmy and Norberto, and not Jose Lim? – YES
RULING:
Under Rule 45, the parties may raise only questions of law, because the Supreme Court is not a trier of facts. 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 properties
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acquired by Elfledo and Juliet form part of the estate of Jose, having been derived from the alleged partnership.
Undoubtedly, the best evidence would have been the contract of partnership or the articles of partnership.
Unfortunately, there is none in this case, because the alleged partnership was never formally organized.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against respondent. It
must be considered and weighed along with petitioners' other evidence vis-à-vis respondent's contrary evidence. In
civil cases, the party having the burden of proof must establish his case by a preponderance of evidence.
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 losses among them.
A contract of partnership is defined by the Civil Code 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.
In determining whether a partnership exists, the rules under Art. 1769 shall apply. Applying such, the following
circumstances tend to prove that Elfledo was himself the partner: Cresencia testified that Jose gave Elfledo ₱50K as
share in the partnership, Elfledo ran the affairs of the partnership, all of the properties were registered in the name of
Elfledo, 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, and that demanded periodic accounting from Elfledo during
his lifetime. As repeatedly stressed in Heirs of Tan Eng Kee, a demand for periodic accounting is evidence of a
partnership.
Moreover, petitioner heirs failed to adduce any evidence, nor refute Juliet’s claim that she and Elfledo engaged in other
businesses. Thus, between documentary and oral evidence, the former carries more weight. The above testimonies
prove that Elfledo was not just a hired help but one 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.
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.
AGAD v. MABATO
FACTS:
Plaintiff Agad prayed in his complaint against defendant Mabato and Mabato & Agad Company, that Mabato be
sentenced to pay him (Agad) the sum of P14,000, as his share in the profits of the partnership, in addition to P1,000 as
attorney's fees, and ordering the dissolution of the partnership, as well as the winding up of its affairs by a receiver to
be appointed therefor. Agad alleged that he and Mabato are partners in a fishpond business pursuant to a public
instrument (Annex "A"), to the capital of which Agad contributed P1,000, with the right to receive 50% of the profits;
that from 1952 up to and including 1956, Mabato who handled the partnership funds, had yearly rendered accounts of
the operations of the partnership; and that, despite repeated demands, Mabato had failed and refused to render
accounts for the years 1957 to 1963.
Mabato admitted the formal allegations of the complaint and denied the existence of said partnership, upon the ground
that the contract therefor had not been perfected because Agad had allegedly failed to give his P1,000 contribution to
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the partnership capital. Mabato prayed that Annex "A" be declared void ab initio; and that Agad be sentenced to pay
actual, moral and exemplary damages, as well as attorney's fees. Subsequently, Mabato filed a motion to dismiss.
The Court granted the motion to dismiss for failure to state a cause of action. This conclusion was predicated upon the
theory that the contract of partnership, Annex "A", is null and void, pursuant to Art. 1773 of our Civil Code, because an
inventory of the fishpond referred in said instrument had not been attached thereto. A reconsideration of this order
having been denied, Agad brought the matter to us for review by record on appeal.
ISSUE/S:
WON "immovable property or real rights" have been contributed to the partnership, and if so, the partnership is void
under Art. 1773? – NO, THEREFORE ART. 1773 IS NOT APPLICABLE
RULING:
Mabato alleged and the lower court held that the answer should be in the affirmative, because "it is really inconceivable
how a partnership engaged in the fishpond business could exist without said fishpond property (being) contributed to
the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was established "to operate
a fishpond", not to "engage in a fishpond business". Moreover, none of the partners contributed either a fishpond or a
real right to any fishpond. Their contributions were limited to the sum of P1,000 each. “That the capital of the said
partnership is P2,000, of which P1,000.00 has been contributed by Mabato and P1,000 has been contributed by Agad.
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said fishpond nor a
real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real
right thereto could become part of its assets. WHEREFORE, we find that said Article 1773 of the Civil Code is not in point
and that, the order appealed from should be, as it is hereby set aside and the case remanded to the lower court for
further proceedings
ANGELES v. SECRETARY OF JUSTICE and FELINO MERCADO
FACTS:
The Angeles spouses filed a criminal complaint for estafa against their brother-in-law Mercado, claiming that Mercado
convinced them to enter into a contract of antichresis in 1992 covering eight parcels of land owned by Suazo, which
was to last for five years with ₱210,000 as consideration. After three years, the Angeles spouses asked for an accounting
from Mercado when he did not give one in 1995, upon which they discovered that Mercado transferred the antichresis
to his and his spouse’s name. They allege that the contract for antichresis executed in the name of the Mercado spouses
proves Mercado’s misappropriation of their ₱210,000. They likewise claim that there was no partnership, relying on
Articles 1771 to 1773.
Mercado denied such and claimed that there exists an industrial partnership between him and his spouse as industrial
partners and the Angeles spouses as the financiers since 1991. He used his and his spouse’s earnings as part of the
capital in the business transactions which he entered into in behalf of the Angeles spouses. It was their practice to enter
into business transactions with other people under the name of Mercado because the Angeles spouses did not want to
be identified as the financiers. Mercado attached bank receipts showing deposits in behalf of Emerita Angeles and
contracts under his name for the Angeles spouses. Mercado also attached the minutes of the barangay conciliation
proceedings wherein Oscar Angeles stated that there was a written sosyo industrial agreement: capital would come
from the Angeles spouses while the profit would be divided evenly between Mercado and the Angeles spouses.
Provincial Prosecution Office: Issued an amended resolution dismissing the Angeles spouses’ complaint for estafa
against Mercado, stating that the subject of the complaint hinges on a partnership gone sour.
Secretary of Justice: Held that the indictment of Mercado for the crime of estafa cannot be sustained. Under the
circumstances, we are inclined to believe that [the Angeles spouses] knew from the very start that the questioned
document was not really in their names. In addition, we are convinced that a partnership truly existed between the
[Angeles spouses] and [Mercado]. The formation of a partnership was clear from the fact that they contributed money
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to a common fund and divided the profits among themselves. Although the legal formalities for the formation of a
partnership were not adhered to, the partnership relationship is evident in this case. Consequently, there is no estafa
where money is delivered by a partner to his co-partner on the latter’s representation that the amount shall be applied
to the business of their partnership. In case of misapplication or conversion of the money received, the co-partner’s
liability is civil in nature
ISSUE/S:
1) WON a partnership existed? – YES
2) WON there was misappropriation by Mercado, assuming that there was a partnership? – NONE
RULING:
1) The Angeles spouses’ position that there is no partnership because of the lack of a public instrument indicating the
same and a lack of registration with the Securities and Exchange Commission ("SEC") holds no water. First, the Angeles
spouses contributed money to the partnership and not immovable property. Second, mere failure to register the
contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership.
The purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the contract
of partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such
failure to register affect the partnership’s juridical personality. A partnership may exist even if the partners do not use
the words "partner" or "partnership."
2) The Secretary of Justice adequately explained the alleged misappropriation by Mercado: "The document alone, which
was in the name of [Mercado and his spouse], failed to convince us that there was deceit or false representation on the
part of [Mercado] that induced the [Angeles spouses] to part with their money. [Mercado] satisfactorily explained that
the [Angeles spouses] do not want to be revealed as the financiers." Furthermore, accounting of the proceeds is not a
proper subject for the present case. For these reasons, we hold that the Secretary of Justice did not abuse his discretion
in dismissing the appeal of the Angeles spouses.
AURELIO LITONJUA v. EDUARDO LITONJUA, ET AL.
FACTS:
Aurelio and Eduardo are brothers. The legal dispute between them started on 2002 when Aurelio filed a suit against
Eduardo and Yang and several corporations for specific performance and accounting, alleging that he and Eduardo are
into a joint venture/partnership arrangement in the Odeon Theater business which had expanded thru investment in
Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue
Realty, Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint as their partner
in their Odeon Theater investment. It was likewise alleged that such partnership was for the continuation of their family
business and common family funds; that sometime in 1992, the relations between them became sour so that Aurelio
requested for an accounting and liquidation of his share in the joint venture/partnership, which were not heeded. What
is worse, Aurelio has reasonable cause to believe that Eduardo and/or the corporate defendants as well as Yang, are
transferring . . . various real properties of the corporations belonging to the joint venture/partnership to other parties
in fraud of Aurelio.
Eduardo and the corporate respondents denied under oath the material allegations, more particularly that portion
thereof depicting Aurelio and Eduardo as having entered into a contract of partnership. He also alleged that the
complaint states no cause of action, since no cause of action may be derived from the actionable document being void
under the terms of Article 1767 in relation to Article 1773. Yang moved to dismiss on the ground that, as to him, Aurelio
has no cause of action and the complaint does not state any. Eduardo, et al., filed a Motion to Resolve Affirmative
Defenses. To this motion, Aurelio interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.
13
Trial Court: In an Omnibus Order denied the affirmative defenses and, except for Yang, set the case for pre-trial. In
another Omnibus Order, the same court denied the motion of Eduardo, et al., for reconsideration and Yang’s motion to
dismiss. Yang moved for reconsideration, but was denied. Yang appealed to the CA. Eduardo and the corporate
defendants sought relief from the CA via similar recourse.
CA: Consolidated the appeals. It reversed the Trial Court, dismissing Aurelio’s complaints, ruling that the alleged
partnership, as evidenced by the actionable documents, is "void or legally inexistent".
ISSUE/S:
1) WON there was a partnership created by the actionable document because this was not a public instrument and
immovable properties were contributed to the partnership? – NO PARTNERSHIP
2) WON Aurelio has a cause of action? – YES
RULING:
In sum, the Court rules, as did the CA, that petitioner’s complaint for specific performance anchored on an actionable
document of partnership which is legally inexistent or void or, at best, unenforceable does not state a cause of action
as against respondent Eduardo and the corporate defendants. And if no of action can successfully be maintained against
respondent Eduardo because no valid partnership existed between him and petitioner, the Court cannot see its way
clear on how the same action could plausibly 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.
1) Aurelio’s demand is for delivery or payment to him, as Eduardo’s and Yang’s partner, of his partnership/joint venture
share, after an accounting has been duly conducted of what he deems to be partnership/joint venture property.
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 losses between them.
A contract of partnership is defined by the Civil Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits among themselves. A joint
venture, on the other hand, is hardly distinguishable from, and may be likened to, a partnership since their elements
are similar, i.e., community of interests in the business and sharing of profits and losses. Being a form of partnership, a
joint venture is generally governed by the law on partnership.
Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. 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 doubtless referring to a partnership involving more
than 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 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 petitioner’s contribution, if any,
to the supposed partnership.
A further examination of the allegations in the complaint would show that Aurelio’s contribution to the so-called
"partnership/joint venture" was his supposed share in the family business 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.
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as long
real property or real rights are initially brought into the partnership. Aurelio, in an obvious bid to evade the application
of Article 1773, argues that the immovables in question were not contributed, but were acquired after the formation
of the supposed partnership. Needless to stress, the Court cannot accord cogency to this specious argument. For, as
earlier stated, Aurelio himself admitted contributing his share. A partnership may be constituted in any form, save when
immovable property or real rights are contributed thereto or when the partnership has a capital of at least ₱3,000.00,
in which case a public instrument shall be necessary. And if only to stress what has repeatedly been articulated, an
14
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 it.
As such, the said "Memorandum" … is null and void for purposes of establishing the existence of a valid contract of
partnership. Indeed, because of the failure to comply with the essential formalities of a valid contract, the purported
"partnership/joint venture" is legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally
inexistent contract cannot be the source of any contractual or legal right. Accordingly, the allegations in the complaint,
including the actionable document attached thereto, clearly demonstrates that Aurelio has NO valid contractual or legal
right which could be violated. As a consequence, Aurelio’s complaint does NOT state a valid cause of action because
NOT all the essential elements of a cause of action are present.
2) As Aurelio succinctly puts it in this petition: Contrariwise, this actionable document, especially its above-quoted
provisions, established an actionable contract even though it may not be a partnership. This actionable contract is what
is known as an innominate contract (Civil Code, Article 1307). Just because the relationship created by the agreement
cannot be specifically labeled or pigeonholed into a category of nominate contract does not mean it is void or
unenforceable.
However, Aurelio 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. Be that as it may.…. We hold that this new theory
contravenes Aurelio’s 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.
But even if it partakes of a perfected innominate contract, Aurelio’s complaint would still be dismissible as against
Eduardo and, more so, against Yang. It cannot be over-emphasized that Aurelio points to Eduardo as the author of
Annex "A-1". Withal, even on this consideration alone, Aurelio’s claim against Yang is doomed from the very start.
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 give in the near future. Any suggestion that the stated amount or the equity
component of the promise was intended to go to a common fund 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 of which requires two or more
contracting minds mutually agreeing to contribute money, property or industry to a common fund with the intention
of dividing the profits between or among themselves.
ORTEGA, DEL CASTILLO and BACORRO v. CA, SEC and JOAQUIN MISA
FACTS:
The SEC records show that there were several subsequent amendments to the articles of partnership to the law firm of
ROSS, LAWRENCE, SELPH and CARRASCOSO to change the firm [name], which was changed 6 times, adding and
removing names to such. About 3 years after the last change, Misa, Bito and Lozada associated themselves together, as
senior partners with respondents-appellees Ortega, del Castillo, Jr., and Bacorro, as junior partners. Misa then wrote
that he is withdrawing and retiring from the firm of Bito, Misa and Lozada, effective at the end of this month. Claiming
through letter that the partnership has ceased to be mutually satisfactory because of the working conditions, Misa filed
with this Commission's Securities Investigation and Clearing Department (SICD) a petition for dissolution and liquidation
of partnership, which Ortega and others opposed.
The hearing officer ruled that the partnership is one for a specific undertaking and hence not a partnership at will,
hence, Misa’s withdrawal did not dissolve the said law partnership. Accordingly, the parties 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.
On appeal, the SEC en banc reversed such decision and held that the withdrawal of Misa had dissolved the partnership.
Being a partnership at will, the law firm could be dissolved by any partner at anytime, such as by his withdrawal
15
therefrom, regardless of good faith or bad faith, since no partner can be forced to continue in the partnership against
his will. SEC remanded the case to the hearing officer.
The parties sought a reconsideration of the above decision. 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. SEC denied the
reconsideration, as well as the petition for receivership, reiterating the remand. The parties filed with the appellate
court separate appeals, during the pendency of which, Bito and Lozada both died. Such deaths and the addition of new
partners prompted Misa to renew his application for receivership, which the other partners opposed. CA affirmed SEC’s
decision in toto.
ISSUE/S:
1) WON the partnership is a partnership at will? – YES
2) WON the withdrawal of Misa dissolved the partnership regardless of his good or bad faith? – NO; and Atty. Misa was
not in bad faith
RULING:
1) 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 CA, the findings and disquisition of respondent SEC that the partnership agreement does not
provide for a specified period or undertaking.
Contrary to the hearing officer’s ruling, 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.
2) 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 but that it can result in a liability for damages.
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. Among partners, 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. Upon its dissolution, the
partnership continues and its legal personality is retained until the complete winding up of its business culminating in
its termination. The liquidation of the assets of the partnership following its dissolution is governed by various provisions
of the Civil Code; 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. In paragraph 8 of the "Amendment to
Articles of Partnership," term "retirement" must have been used in the articles in a generic sense to mean the
dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby dissolves it.
Moreover, Atty. Misa did not act in bad faith. His withdrawal was viewed 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. Indeed, 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
16
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.
AGUILA v. CA and FELICIDAD S. VDA. DE ABROGAR
FACTS:
Petitioner Aguila, manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities, entered into a
Memorandum of Agreement with respondent Felicidad whereby Aguila shall buy Felicidad’s house and lot in Marikina
for P200K, with the option to repurchase the said property within a period of ninety (90) days from the execution of the
memorandum. They subsequently executed a deed of absolute sale. Felicidad failed to redeem the property within the
90-day period. Pursuant to the SPA, Aguila 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. Aguila, thru counsel, demanded that Felicidad vacate the
premises within 15 days after receipt of the letter and surrender its possession peacefully; she refused, leading to an
ejectment case against her in the MTC which was granted. On appeal, Felicidad lost all cases in the RTC, CA and this
Court.
Felicidad then filed a petition for declaration of nullity of a deed of sale with the RTC, alleging 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. It appears, however, that Felicidad had filed a criminal complaint for falsification against Aguila which was
dismissed.
On appeal, CA reversed ruling that the transaction between the parties is indubitably an equitable mortgage. Being a
mortgage, the transaction entered into by the parties is in the nature of a pactum commissorium; the deed of sale
should be declared void.
Aguila 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 Felicidad is a pacto de retro sale
and not an equitable mortgage as held by the appellate court.
ISSUE/S:
WON Aguila is not the real party in interest, hence, the complaint should be dismissed? – YES, because A.C. Aguila &
Sons, Co. is a partnership, hence, Aguila as a partner partners cannot be held liable
RULING:
Every action must be prosecuted and defended in the name of the real party in interest. 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. Hence, a complaint filed against such a person should be dismissed for failure
to state a cause of action.
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. In this case, Felicidad
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 Felicidad, with the consent of her late husband, and A.C. Aguila & Sons, Co.,
represented by Aguila. 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.
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 Aguila. Our conclusion that Aguila 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.
17
MENDIOLA v. CA, NLRC, PACIFIC FOREST RESOURCES, PHILS., INC. and/or CELLMARK AB
FACTS:
Private respondent Pacific Forest Resources, Phils., Inc. USA (Pacfor) entered into a "Side Agreement on Representative
Office known as Pacific Forest Resources (Phils.), Inc." with petitioner Mendiola effective May 1, 1995, "assuming that
PacforPhils. is already approved by the Securities and Exchange Commission [SEC] on the said date." The Side
Agreement outlines the business relationship of the parties with regard to the Philippine operations of Pacfor, to be
known as Pacfor Phils (equally owned on a 50-50 equity by ATM and Pacfor-usa), and Mendiola will be its President.
When SEC granted the application, Pacfor designated Mendiola as its resident agent in the Philippines, authorized to
accept summons and processes in all legal proceedings, and all notices affecting the corporation. Subsequently, the Side
Agreement was amended, where Mendiola’s salary was increased, and 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. Three years later, Mendiola sought confirmation of his 50% equity of Pacfor Phils. Gleason, its President,
replied that Mendiola 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. Mendiola presumably knew of this for it was he who proposed
to Pacfor such setting up of a representative office, and "not a branch office" in the Philippines to save on taxes.
Mendiola claimed that he was all along made to believe that he was in a joint venture with them; that 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. Because of other unresolved issues, Mendiola wrote Pacfor-USA demanding payment of unpaid
commissions and office furniture and equipment rentals, amounting to more than one million dollars. On the basis of
the "Side Agreement," he 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.
Pacfor ordered Mendiola 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 and to remit more than P300K Christmas
giveaway fund for clients of Pacfor Phils. Pacfor also withdrew all its offers of settlement and ordered Mendiola to
transfer title and turn over to it possession of the service car. Pacfor likewise sent letters to its clients in the Philippines,
advising them not to deal with Pacfor Phils. It even sent DAVCOR a separate letter containing the same. Subsequently,
Pacfor placed Mendiola on preventive suspension and ordered him to show cause why no disciplinary action should be
taken against him. Pacfor also accused Mendiola of disloyalty and representation of conflicting interests for having
continued using the Pacfor Phils.' office for operations of HEPI. In addition, Mendiola allegedly solicited business for
HEPI from a competitor company of private respondent Pacfor.
Mendiola denied the charges. He reiterated that he considered the import of Pacfor President Gleason's letters as a
"cessation of his position and of the existence of Pacfor Phils." Mendiola then filed his complaint for illegal dismissal,
recovery of separation pay, and payment of attorney's fees with the NLRC. Mendiola claims that he is an industrial
partner of the partnership he formed with Pacfor, and also an employee of the partnership.
Labor Arbiter: Ruled in favor of Mendiola, finding there was constructive dismissal, ordering Cellmark AB (which Pacfor
is a subsidiary of) and Pacfor, jointly and severally to compensate complainant Mendiola separation pay plus damages.
NLRC: Revered the Labor Arbiter upon Pacfor’s appeal for lack of jurisdiction and lack of merit. It held there was no
employer-employee relationship between the parties, concluding that Mendiola is not an employee of Pacfor, but a full
co-owner (50/50 equity). CA upheld NLRC’s ruling.
ISSUE/S:
WON Mendiola is a partner of Pacfor, and an employee thereof at the same time? –NO, employee only
RULING:
We hold that Mendiola is an employee of Pacfor and that no partnership or co-ownership exists between the parties.
18
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. The property or stock of the partnership forms a
community of goods, a common fund, in which each party has a proprietary interest. In fact, the New Civil Code regards
a partner as a co-owner of specific partnership property. 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. This essential element, the
community of interest, or co-ownership of, or joint interest in partnership property is absent in the relations between
Mendiola and Pacfor. Mendiola is not a part-owner of Pacfor Phils. Gleason, 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. Thus,
the parties in this case, merely shared profits. This alone does not make a partnership.
Besides, a corporation cannot become a member of a partnership in the absence of express authorization by statute or
charter. 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. No such
authorization has been proved in the case at bar.
Be that as it may, an employer-employee relationship is present. 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. All the foregoing elements are
present.
With regard to Mendiola’s dismissal, though 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. The harassing
acts of Pacfor are unjustified. They were undertaken when Mendiola sought clarification about his supposed 50% equity
on Pacfor Phils. Mendiola should be awarded separation pay, in lieu of reinstatement.
The Decision of the Labor Arbiter is REINSTATED 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.
CAMPOS RUEDA v. PACIFIC COMMERCIAL CO
FACTS:
The limited partnership was, and is, indebted to Pacific in various sums amounting to not less than P1,000, payable in
the Philippines, which were not paid more than thirty days prior to the date of the filing by Pacific of the application for
involuntary insolvency now before us. The trial court denied the petition on the ground that it was not proven, nor
alleged, that the members of the aforesaid firm were insolvent at the time the application was filed; and that was said
partners are personally and solidarily liable for the consequence of the transactions of the partnership, it cannot be
adjudged insolvent so long as the partners are not alleged and proven to be insolvent. From this judgment Pacific appeal
to this court, on the ground that this finding of the lower court is erroneous.
A motion was presented by Pacific praying this court that this case be considered purely a moot question now, for the
reason that subsequent to the decision appealed from, the partnership Campos Rueda & Co., voluntarily filed an
application for a judicial decree adjudging itself insolvent, which is just what the herein petitioners and appellants tried
to obtain from the lower court in this proceeding.
ISSUE/S:
WON a limited partnership may be adjudged insolvent against its will? – YES
RULING:
The motion now before us must be, and is hereby, denied even under the facts stated by the appellants in their motion
aforesaid. The question raised in this case is not purely moot one; the fact that a man was insolvent on a certain day
19
does not justify an inference that he was sometime prior thereto. A decree of insolvency begins to operate on the date
it is issued. It is one thing to adjudge Campos Rueda & Co. insolvent in December, 1921, as prayed for in this case, and
another to declare it insolvent in July, 1922, as stated in the motion.
Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and
purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and
the juridical personality of a limited partnership being different from that of its members, it must, on general principle,
answer for, and suffer, the consequence of its acts as such an entity capable of being the subject of rights and
obligations. If, as in the instant case, the limited partnership of Campos Rueda & Co. failed to pay its obligations with
three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency Law, one of the
acts of bankruptcy upon which an adjudication of involuntary insolvency can be predicated, this partnership must suffer
the consequences of such a failure, and must be adjudged insolvent.
We are not unmindful of the fact that some courts of the United States have held that a partnership may not be
adjudged insolvent in an involuntary insolvency proceeding unless all of its members are insolvent, while others have
maintained a contrary view. But it must be borne in mind that under the American common law, partnerships have no
juridical personality independent from that of its members; and if now they have such personality for the purpose of
the insolvency law, it is only by virtue of general law enacted by the Congress of the United States.
Under this view it is unnecessary to discuss the other points raised by the parties, although in the particular case under
consideration it can be added that the liability of the limited partners for the obligations and losses of the partnership
is limited to the amounts paid or promised to be paid into the common fund except when a limited partner should have
included his name or consented to its inclusion in the firm name (arts. 147 and 148, Code of Commerce). Therefore, it
having been proven that the partnership Campos Rueda & Co. failed for more than thirty days to pay its obligations to
the petitioners the Pacific Commercial Co. the Asiatic Petroleum Co. and the International Banking Corporation, the
case comes under paragraph 11 of section 20 of Act No. 1956, and consequently the petitioners have the right to a
judicial decree declaring the involuntary insolvency of said partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged that the limited partnership Campos Rueda &
Co. is and was on December 28, 1921, insolvent.
20

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AGENCY, TRUST AND PARTNERSHIP

BAUTISTA ANGELO, J., concurring:

ANTONIA TORRES v. CA and MANUEL TORRES

GATCHALIAN v. COLLECTOR OF INTERNAL REVENUE

ARBES, ET AL. v. POLISTICO, ET AL.

HEIRS OF JOSE LIM v. JULIET VILLA LIM

ANGELES v. SECRETARY OF JUSTICE and FELINO MERCADO

AURELIO LITONJUA v. EDUARDO LITONJUA, ET AL.

AGUILA v. CA and FELICIDAD S. VDA. DE ABROGAR

CAMPOS RUEDA v. PACIFIC COMMERCIAL CO

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