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.

AQUINO, J.:

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 co-owners 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 five-year 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 ½ 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 co-ownership 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 Tobeñas says:

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 señala 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 Oña 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 question pro-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.—Co-Ownership 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 Arañas, 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. SO ORDERED.

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 BOLAÑOS, defendant-appellant.

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.

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.

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.

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

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.

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-at-law 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.

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 Bolaños," 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. (Soroñgon 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 allegation is not correct, for the
pretended identity of parties and cause of action in the two suits does not appear. That other ca se 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.

G.R. No. 126881 October 3, 2000

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:

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 judgment 6 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
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 "4-U" 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 judgment9 dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

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).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING

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 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:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;

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

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 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).

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).

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:

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 basis on which the lower court rendered judgment. Review of factual issues is therefore
warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;

(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;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(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

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

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.

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 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 co-defendant 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 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. Bolaños, 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. 26 Tan 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
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:

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]

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.

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 "4-U" in fact shows that Tan Eng Kee received sums as wages of
an employee. In connection therewith, Article 1769 of the Civil Code provides:

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 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 installment 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.

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.

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
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 hi s
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
hereby AFFIRMED in toto. No pronouncement as to costs. SO ORDERED.

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, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.

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.

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 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:

3. Articles of Incorporation
 (a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically
provide for

(1) Cumulative voting for directors:

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 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. ThatAmendedDecisionwouldsanctiontheCA'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-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY
ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.

II

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)

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 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

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)

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.

(b) When there is an intrinsic ambiguity in the writing.

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:

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)

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:

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
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

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 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 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 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 Lopez-Campos
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.

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 Anti-Dummy 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 de termined 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 AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875. SO ORDERED.

G.R. No. L-2880 December 4, 1906

FRANK S. BOURNS, plaintiff-appellee, vs. D. M. CARMAN, ET AL., defendants-appellants.

MAPA, J.:

The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a
contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said
work was entered into by the said Lo-Chim-Lim, acting as in his own name with the plaintiff, and it
appears that the said Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff, however,
has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging that, at the time the
contract was made, they were the joint proprietors and operators of the said lumber yard engaged in the
purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to
show by the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the said
lumber-yard business.lawphil.net

The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on the
ground that they were not the partners of Lo-Chim-Lim, and rendered judgment against the other
defendants for the amount claimed in the complaint with the costs of proceedings. Vicente Palanca and
Go-Tauco only excepted to the said judgment, moved for a new trial, and have brought the case to this
court by bill of exceptions.

The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain
lumber yard in Calle Lemery of the city of Manila, and that he was the manager of the same, having
ordered the plaintiff to do some work for him at his sawmill in the city of Manila; and that Vicente Palanca
was his partner, and had an interest in the said business as well as in the profits and losses thereof . . .,"
and that Go-Tuaco received part of the earnings of the lumber yard in the management of which he was
interested.

The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in
Calle Lemmery of the city of Manila in the year 1904, and participated in the profits and losses of business
and that Lo-Chim-Lim was managing partner of the said lumber yard." In other words, coparticipants with
the said Lo-Chim-Lim in the business in question.

Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in
conflict with the above finding of that court. Such finding should therefore be sustained. lawphil.net

The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal
nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard, and consequently their
liability toward the plaintiff, in connection with the transaction which gave rise to the present suit.

It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal
agreement only. At least there is no evidence tending to show that the said agreement was reduce d to
writing, or that it was ever recorded in a public instrument.

Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the
partnership was engaged in business under the name and style of Lo-Chim-Lim only, which according to
the evidence was the name of one of the defendants. On the other hand, and this is very important, it
does not appear that there was any mutual agreement, between the parties, and if there were any, it has
not been shown what the agreement was. As far as the evidence shows it seems that the business was
conducted by Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been
shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim individually in his
own name, and there is no evidence that the partnership over contracted in any other form. Under such
circumstances we find nothing upon which to consider this partnership other than as a partnership
of cuentas en participacion. It may be that, as a matter of fact, it is something different, but a simple
business and scant evidence introduced by the partnership We see nothing, according to the evidence, but
a simple business conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons
interested in the profits and losses of the business nowhere appearing. A partnership constituted in such a
manner, the existence of which was only known to those who had an interest in the same, being no
mutual agreements between the partners and without a corporate name indicating to the public in some
way that there were other people besides the one who ostensibly managed and conducted the business, is
exactly the accidental partnership of cuentas en participacion defined in article 239 of the Code of
Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en
participacion is conducted, shall have only a right of action against such person and not against the other
persons interested, and the latter, on the other hand, shall have no right of action against the third person
who contracted with the manager unless such manager formally transfers his right to them. (Art 242 of
the code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants
the payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted
with him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly
dismissed.

The judgment appealed from this hereby reversed and the appellants are absolved of the complaint
without express provisions as to the costs of both instances. After the expiration of twenty days let
judgment be entered in accordance herewith, and ten days thereafter the cause be remanded to the court
below for execution. So ordered.

G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.

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 agreement 4 with
Baguio Gold Mining Company ("Baguio Gold") for the former to manage and operate the latter’s 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 such amounts
as from time to time may be required by the MANAGERS within the said 3-year 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 owner’s 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 owner’s 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.

(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 owner’s 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 re-transferred to them. Until such assets
are transferred to the MANAGERS, this Agency shall remain subsisting.

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 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 6-month 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

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 petitioner’s withdrawal as manager of the mine on January 28, 1982 and in the
eventual cessation of mine operations on February 20, 1982.6

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 Gold’s tangible assets to
petitioner, transferring to the latter Baguio Gold’s equitable title in its Philodrill assets and finally settling
the remaining 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 Gold’s 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 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.

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 Gold’s "pecuniary obligations" to petitioner. It also included
payments made by petitioner as guarantor of Baguio Gold’s long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio Gold’s 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 petitioner’s 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 project’s 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.

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 petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s 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
petitioner’s 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,13 petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.

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.

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. 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. Niño 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 owner’s account plus any of its income that is left in the project, in addition to
its actual mining claim. Meanwhile, petitioner’s contribution would consist of its expertise in the
management and operation of mines, as well as the manager’s account which is comprised of P11M in
funds and property and petitioner’s "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. Niño project
"(w)henever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT
of the STO. NIÑO MINE."18

The wording of the parties’ agreement as to petitioner’s 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 petitioner’s 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 non-revocation 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 latter’s 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 agent’s 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 one’s 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 MANAGER’S account has to the owner’s account will be
determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims" shall be transferred to petitioner.22 As pointed out by the Court of Tax Appeals, petitioner was
merely entitled to a proportionate return of the mine’s 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.
Niño 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 manager’s account had to the owner’s 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 manager’s account had to the owner’s 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 Niño 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 petitioner’s "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 Niño 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 petitioner’s "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 petitioner’s 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 Gold’s creditors, we find no
reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
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.

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION vs. COURT OF APPEALS, COURT OF TAX APPEALS and
COMISSIONER OF INTERNAL REVENUE, respondent.

PANGANIBAN, J.:

Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in
order to facilitate the handling of business contracted with a nonresident foreign insurance company. May
the "clearing house" or "insurance pool" so formed be deemed a partnership or an association that is
taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pool's remittances
to the member companies and to the said foreign firm be taxable as dividends? Under the facts of this
case, has the goverment's right to assess and collect said tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the
October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners'
appeal of the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously
sustained petitioners' liability for deficiency income tax, interest and withholding tax. The Court of Appea ls
ruled:

5
WHEREFORE, the petition is DISMISSED, with costs against petitioner

6
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution denying
reconsideration.

The Facts

The antecedent facts, 7 as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the
laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler
Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965
entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident
foreign insurance corporation. The reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed
an "Information Return of Organization Exempt from Income Tax" for the year ending in
1975, on the basis of which it was assessed by the Commissioner of Internal Re venue
deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the
petitioners, respectively. These assessments were protested by the petitioners through its
auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered
the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax,
interest, and with [h]olding tax, itemized as follows:

Net income per information return P3,737,370.00

===========

Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

——————

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE

Dividend paid to Munich

Reinsurance Company P3,728,412.00

——————

35% withholding tax at

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————
 TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P655,636.00

===========

10% withholding tax at

source due thereon P65,563.60

Add: 25% surcharge 16,390.90

14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P89,438.68

8
COLLECTIBLE ===========

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation,
and that the latter's collection of premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the
taxes due, because "the taxpayer cannot be located at the address given in the information return file d."
Hence, this Petition for Review before us. 9

The Issues

Before this Court, petitioners raise the following issues:

1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was
a partnership or association subject to tax as a corporation;

2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares
of reinsurance premiums, pertaining to their individual and separate contracts of
reinsurance, were "dividends" subject to tax; and

3. Whether or not the respondent Commissioner's right to assess the Clearing House had
already prescribed. 10

The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a
corporation, and that the government's right to assess and collect the taxes had not prescribed.
 First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them "individually and separately," and that their liability was limited
to the extent of their allocated share in the original risk thus reinsured. 11 Hence, the pool did not act or
earn income as a reinsurer. 12 Its role was limited to its principal function of "allocating and distributing
the risk(s) arising from the original insurance among the signatories to the treaty or the members of the
pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody of funds, etc." 13

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share
the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive board of the pool
did not exercise control and management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not and could not possibly have engaged in the
business of reinsurance from which it could have derived income for itself." 17

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency
tasked with the enforcement of tax law, is accorded much weight and even finality, when there is no
showing. that it is patently wrong, 18 particularly in this case where the findings and conclusions of the
internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and the Court of Appeals. 19 Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions
of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of its authority. 20

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the
internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the
year ending 1975, provides:

Sec. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is hereby
imposed upon the taxable net income received during each 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-partnership (compañias
colectivas), general professional partnerships, private educational institutions, and building
and loan associations . . . .

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such
entities in the tax on corporations was made even clearer by the tax Reform Act of 1997, 21 which
amended the Tax Code. Pertinent provisions of the new law read as follows:

Sec. 27. Rates of Income Tax on Domestic Corporations. —

(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in
Section 22 (B) of this Code, and taxable under this Title as a corporation . . . .

Sec. 22. — Definition. — When used in this Title:

xxx xxx xxx

 (B) The term "corporation" shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. "General
professional partnerships" are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.

xxx xxx xxx

Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities apart
from their individual members. 23 The Court of Appeals astutely applied Evangelista. 24

. . . Accordingly, a pool of individual real property owners dealing in real estate business
was considered a corporation for purposes of the tax in sec. 24 of the Tax Code
in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said:

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)

Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." 25 Its requisites are: "(1) mutual contribution to a common stock,
and (2) a joint interest in the profits." 26 In other words, a partnership is formed when persons contract
"to devote to a common purpose either money, property, or labor with the intention of dividing the profits
between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the
transaction of business." 28

In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that
would handle all the insurance businesses covered under their quota-share reinsurance treaty 31 and
surplus reinsurance treaty32 with Munich. The following unmistakably indicates a partnership or an
association covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. 33 This common fund pays for the administration and operation expenses of the
pool. 24

(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies. 35

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the
Pool Agreement. 36 Profit motive or business is, therefore, the primordial reason for the pool's formation.
As aptly found by the CTA:

. . . The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business, . . . If together they have conducted business, profit must
 have been the object as, indeed, profit was earned. Though the profit was apportioned
among the members, this is only a matter of consequence, as it implies that profit actually
resulted. 37

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts obtaining therein
are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a
co-ownership which took up only two isolated transactions. 39 The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more
than ten years, as in the case before us.

Second Issue:

Pool's Remittances are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the
1977 NIRC and "would be tantamount to an illegal double taxation as it would result in taxing the same
taxpayer" 40 Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed dividends. 41 They add that even if such
remittances were treated as dividends, they would have been exempt under the previously mentioned
sections of the 1977 NIRC, 42 as well as Article 7 of paragraph 1 43 and Article 5 of paragraph 5 44 of the
RP-West German Tax Treaty. 45

Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should
be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same
thing" 46 In the instant case, the pool is a taxable entity distinct from the individual corporate entities of
the ceding companies. The tax on its income is obviously different from the tax on the dividends received
by the said companies. Clearly, there is no double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must
be able to justify his claim or right." 47 Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the
income was earned and when the subject information return for the year ending 1975 was filed.

Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any
company that has already paid the tax . . ." This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter
cannot individually claim the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot be
claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation,
be granted exemption based solely on this provision of the Tax Code, because the same subsection
specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory
to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed,
pursuant to their reinsurance treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is
manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles
3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in
line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be mistaken. 53

Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes
on the basis of the information return it had submitted for the year ending 1975, a taxable year when said
treaty was not yet in effect. 54 Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984. 55

Third Issue:

Prescription

Petitioners also argue that the government's right to assess and collect the subject tax had prescribed.
They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this
return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of
assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations
then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already
barred by prescription from making an assessment. 56

We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was
tolled under then Section 333 of the NIRC, 57 because "the taxpayer cannot be located at the address
given in the information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the government's right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a
clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn
the factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the
pool changed its address, for they stated that the pool's information return filed in 1980 indicated therein
its "present address." The Court finds that this falls short of the requirement of Section 333 of the NIRC
for the suspension of the prescriptive period. The law clearly states that the said period will be suspended
only "if the taxpayer informs the Commissioner of Internal Revenue of any change in the address."

WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Cost against petitioners.1âwphi1.nêt SO ORDERED.

G.R. No. L-40098 August 29, 1975

ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and CO OYO, petitioners, vs.
HON. JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu and TAN PUT, respondents.

BARREDO, J.:

Petition for (1) certiorari to annul and set aside certain actuations of respondent Court of First Instance of
Cebu Branch III in its Civil Case No. 12328, an action for accounting of properties and money totalling
allegedly about P15 million pesos filed with a common cause of action against six defendants, in which
after declaring four of the said defendants herein petitioners, in default and while the trial as against the
two defendants not declared in default was in progress, said court granted plaintiff's motion to dismiss the
case in so far as the non-defaulted defendants were concerned and thereafter proceeded to hear ex-parte
the rest of the plaintiffs evidence and subsequently rendered judgment by default against the defaulted
defendants, with the particularities that notice of the motion to dismiss was not duly served on any of the
defendants, who had alleged a compulsory counterclaim against plaintiff in their joint answer, and the
judgment so rendered granted reliefs not prayed for in the complaint, and (2) prohibition to enjoin further
proceedings relative to the motion for immediate execution of the said judgment.

Originally, this litigation was a complaint filed on February 9, 1971 by respondent Tan Put only against the
spouses-petitioners Antonio Lim Tanhu and Dy Ochay. Subsequently, in an amended complaint dated
September 26, 1972, their son Lim Teck Chuan and the other spouses-petitioners Alfonso Leonardo Ng
Sua and Co Oyo and their son Eng Chong Leonardo were included as defendants. In said amended
complaint, respondent Tan alleged that she "is the widow of Tee Hoon Lim Po Chuan, who was a partner in
the commercial partnership, Glory Commercial Company ... with Antonio Lim Tanhu and Alfonso Ng Sua
that "defendant Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo,
through fraud and machination, took actual and active management of the partnership and although Tee
Hoon Lim Po Chuan was the manager of Glory Commercial Company, defendants managed to use the
funds of the partnership to purchase lands and building's in the cities of Cebu, Lapulapu, Mandaue, and
the municipalities of Talisay and Minglanilla, some of which were hidden, but the description of those
already discovered were as follows: (list of properties) ...;" and that:

13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without liquidation
continued the business of Glory Commercial Company by purportedly organizing a
corporation known as the Glory Commercial Company, Incorporated, with paid up capital in
the sum of P125,000.00, which money and other assets of the said Glory Commercial
Company, Incorporated are actually the assets of the defunct Glory Commercial Company
partnership, of which the plaintiff has a share equivalent to one third (¹/3 ) thereof;

14. (P)laintiff, on several occasions after the death of her husband, has asked defendants of
the above-mentioned properties and for the liquidation of the business of the defunct
partnership, including investments on real estate in Hong Kong, but defendants kept on
promising to liquidate said properties and just told plaintiff to

15. (S)ometime in the month of November, 1967, defendants, Antonio Lim Tanhu, by
means of fraud deceit and misrepresentations did then and there, induce and convince the
plaintiff to execute a quitclaim of all her rights and interests, in the assets of the partnership
of Glory Commercial Company, which is null and void, executed through fraud and without
any legal effect. The original of said quitclaim is in the possession of the adverse party
defendant Antonio Lim Tanhu.

16. (A)s a matter of fact, after the execution of said quitclaim, defendant Antonio Lim Tanhu
offered to pay the plaintiff the amount P65,000.00 within a period of one (1) month, for
which plaintiff was made to sign a receipt for the amount of P65,000.00 although no such
amount was given and plaintiff was not even given a copy of said document;

17. (T)hereafter, in the year 1968-69, the defendants who had earlier promised to liquidate
the aforesaid properties and assets in favor among others of plaintiff and until the middle of
the year 1970 when the plaintiff formally demanded from the defendants the accounting of
real and personal properties of the Glory Commercial Company, defendants refused and
stated that they would not give the share of the plaintiff. (Pp. 36-37, Record.)

She prayed as follows:

WHEREFORE, it is most respectfully prayed that judgment be rendered:

a) Ordering the defendants to render an accounting of the real and personal properties of
the Glory Commercial Company including those registered in the names of the defendants
and other persons, which properties are located in the Philippines and in Hong Kong;

b) Ordering the defendants to deliver to the plaintiff after accounting, one third (¹/ 3 ) of the
total value of all the properties which is approximately P5,000,000.00 representing the just
share of the plaintiff;

c) Ordering the defendants to pay the attorney of the plaintiff the sum of Two Hundred Fifty
Thousand Pesos (P250,000.00) by way of attorney's fees and damages in the sum of One
Million Pesos (P1,000,000.00).

This Honorable Court is prayed for other remedies and reliefs consistent with law and equity
and order the defendants to pay the costs. (Page 38, Record.)
The admission of said amended complaint was opposed by defendants upon the ground that there were
material modifications of the causes of action previously alleged, but respondent judge nevertheless
allowed the amendment reasoning that:

The present action is for accounting of real and personal properties as well as for the
recovery of the same with damages.

An objective consideration of pars. 13 and 15 of the amended complaint pointed out by the
defendants to sustain their opposition will show that the allegations of facts therein are
merely to amplify material averments constituting the cause of action in the original
complaint. It likewise include necessary and indispensable defendants without whom no
final determination can be had in the action and in order that complete relief is to be
accorded as between those already parties.

Considering that the amendments sought to be introduced do not change the main causes
of action in the original complaint and the reliefs demanded and to allow amendments is the
rule, and to refuse them the exception and in order that the real question between the
parties may be properly and justly threshed out in a single proceeding to avoid multiplicity
of actions. (Page 40, Record.)

In a single answer with counterclaim, over the signature of their common counsel, defendants denied
specifically not only the allegation that respondent Tan is the widow of Tee Hoon because, according to
them, his legitimate wife was Ang Siok Tin still living and with whom he had four (4) legitimate children, a
twin born in 1942, and two others born in 1949 and 1965, all presently residing in Hongkong, but also all
the allegations of fraud and conversion quoted above, the truth being, according to them, that proper
liquidation had been regularly made of the business of the partnership and Tee Hoon used to receive his
just share until his death, as a result of which the partnership was dissolved and what corresponded to
him were all given to his wife and children. To quote the pertinent portions of said answer:

AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES,

defendants hereby incorporate all facts averred and alleged in the answer, and further most
respectfully declare:

1. That in the event that plaintiff is filing the present complaint as an heir of Tee Hoon Lim
Po Chuan, then, she has no legal capacity to sue as such, considering that the legitimate
wife, namely: Ang Siok Tin, together with their children are still alive. Under Sec. 1, (d),
Rule 16 of the Revised Rules of Court, lack of legal capacity to sue is one of the grounds for
a motion to dismiss and so defendants prays that a preliminary hearing be conducted as
provided for in Sec. 5, of the same rule;

2. That in the alternative case or event that plaintiff is filing the present case under Art. 144
of the Civil Code, then, her claim or demand has been paid, waived abandoned or otherwise
extinguished as evidenced by the 'quitclaim' Annex 'A' hereof, the ground cited is another
ground for a motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a
preliminary hearing be made in connection therewith pursuant to Section 5 of the
aforementioned rule;

3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and were blessed with
the following children, to wit: Ching Siong Lim and Ching Hing Lim (twins) born on February
16, 1942; Lim Shing Ping born on March 3, 1949 and Lim Eng Lu born on June 25, 1965
and presently residing in Hongkong;

4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was no longer his
common law wife and even though she was not entitled to anything left by Tee Hoon Lim Po
Chuan, yet, out of the kindness and generosity on the part of the defendants, particularly
 Antonio Lain Tanhu, who, was inspiring to be monk and in fact he is now a monk, plaintiff
was given a substantial amount evidenced by the 'quitclaim' (Annex 'A');

5. That the defendants have acquired properties out of their own personal fund and
certainly not from the funds belonging to the partnership, just as Tee Hoon Lim Po Chuan
had acquired properties out of his personal fund and which are now in the possession of the
widow and neither the defendants nor the partnership have anything to do about said
properties;

6. That it would have been impossible to buy properties from funds belonging to the
partnership without the other partners knowing about it considering that the amount taken
allegedly is quite big and with such big amount withdrawn the partnership would have been
insolvent;

7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with children who would have
been lawfully entitled to succeed to the properties left by the latter together with the widow
and legitimate children;

8. That despite the fact that plaintiff knew that she was no longer entitled to anything of the
shares of the late Tee Hoon Lim Po Chuan, yet, this suit was filed against the defendant who
have to interpose the following —

COUNTERCLAIM

A. That the defendants hereby reproduced, by way of reference, all the allegations and
foregoing averments as part of this counterclaim; .

B. That plaintiff knew and was aware she was merely the common-law wife of Tee Hoon Lim
Po Chuan and that the lawful and legal is still living, together with the legitimate children,
and yet she deliberately suppressed this fact, thus showing her bad faith and is therefore
liable for exemplary damages in an amount which the Honorable Court may determine in
the exercise of its sound judicial discretion. In the event that plaintiff is married to Tee Hoon
Lim Po Chuan, then, her marriage is bigamous and should suffer the consequences thereof;

C. That plaintiff was aware and had knowledge about the 'quitclaim', even though she was
not entitled to it, and yet she falsely claimed that defendants refused even to see her and
for filing this unfounded, baseless, futile and puerile complaint, defendants suffered mental
anguish and torture conservatively estimated to be not less than P3,000.00;

D. That in order to defend their rights in court, defendants were constrained to engage the
services of the undersigned counsel, obligating themselves to pay P500,000.00 as
attorney's fees;

E. That by way of litigation expenses during the time that this case will be before this
Honorable Court and until the same will be finally terminated and adjudicated, defendants
will have to spend at least P5,000.00. (Pp. 44-47. Record.)

After unsuccessfully trying to show that this counterclaim is merely permissive and should be dismissed
for non-payment of the corresponding filing fee, and after being overruled by the court, in due time,
plaintiff answered the same, denying its material allegations.

On February 3, 1973, however, the date set for the pre-trial, both of the two defendants-spouses the Lim
Tanhus and Ng Suas, did not appear, for which reason, upon motion of plaintiff dated February 16, 1973,
in an order of March 12, 1973, they were all "declared in DEFAULT as of February 3, 1973 when they
failed to appear at the pre-trial." They sought to hive this order lifted thru a motion for reconsideration,
but the effort failed when the court denied it. Thereafter, the trial started, but at the stage thereof where
the first witness of the plaintiff by the name of Antonio Nuñez who testified that he is her adopted son,
was up for re-cross-examination, said plaintiff unexpectedly filed on October 19, 1974 the following simple
and unreasoned

MOTION TO DROP DEFENDANTS LIM TECK

CHUAN AND ENG CHONG LEONARDO

COMES now plaintiff, through her undersigned counsel, unto the Honorable Court most
respectfully moves to drop from the complaint the defendants Lim Teck Chuan and Eng
Chong Leonardo and to consider the case dismissed insofar as said defendants Lim Teck
Chuan and Eng Chong Leonardo are concerned.

WHEREFORE, it is most respectfully prayed of the Honorable Court to drop from the
complaint the defendants Lim Teck Chuan and Eng Chong Leonardo and to dismiss the case
against them without pronouncement as to costs. (Page 50, Record.)

which she set for hearing on December 21, 1974. According to petitioners, none of the
defendants declared in default were notified of said motion, in violation of Section 9 of Rule
13, since they had asked for the lifting of the order of default, albeit unsuccessfully, and as
regards the defendants not declared in default, the setting of the hearing of said motion on
October 21, 1974 infringed the three-day requirement of Section 4 of Rule 15, inasmuch as
Atty. Adelino Sitoy of Lim Teck Chuan was served with a copy of the motion personally only
on October 19, 1974, while Atty. Benjamin Alcudia of Eng Chong Leonardo was served by
registered mail sent only on the same date.

Evidently without even verifying the notices of service, just as simply as plaintiff had
couched her motion, and also without any legal grounds stated, respondent court granted
the prayer of the above motion thus:

ORDER

Acting on the motion of the plaintiff praying for the dismissal of the complaint as against
defendants Lim Teck Chuan and Eng Chong Leonardo. —

The same is hereby GRANTED. The complaint as against defendant Lim Teck Chuan and Eng
Chong Leonardo is hereby ordered DISMISSED without pronouncement as to costs.

Simultaneously, the following order was also issued:

Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay as well as
defendants Alfonso Ng Sua and his spouse Co Oyo have been declared in default for failure
to appear during the pre-trial and as to the other defendants the complaint had already
been ordered dismissed as against them.

Let the hearing of the plaintiff's evidence ex-parte be set on November 20, 1974, at 8:30
A.M. before the Branch Clerk of Court who is deputized for the purpose, to swear in
witnesses and to submit her report within ten (10) days thereafter. Notify the plaintiff.

SO ORDERED.

Cebu City, Philippines, October 21, 1974. (Page 52, Record.)

But, in connection with this last order, the scheduled ex-parte reception of evidence did not take place on
November 20, 1974, for on October 28, 1974, upon verbal motion of plaintiff, the court issued the
following self-explanatory order: .
 Acting favorably on the motion of the plaintiff dated October 18, 1974, the Court deputized
the Branch Clerk of Court to receive the evidence of the plaintiff ex-parte to be made on
November 20, 1974. However, on October 28, 1974, the plaintiff, together with her
witnesses, appeared in court and asked, thru counsel, that she be allowed to present her
evidence.

Considering the time and expenses incurred by the plaintiff in bringing her witnesses to the
court, the Branch Clerk of Court is hereby authorized to receive immediately the evidence of
the plaintiff ex-parte.

SO ORDERED.

Cebu City, Philippines, October 28, 1974. (Page 53. Record.)

Upon learning of these orders on October 23, 1973, the defendant Lim Teck Cheng, thru counsel, Atty.
Sitoy, filed a motion for reconsideration thereof, and on November 1, 1974, defendant Eng Chong
Leonardo, thru counsel Atty. Alcudia, filed also his own motion for reconsideration and clarification of the
same orders. These motions were denied in an order dated December 6, 1974 but received by the
movants only on December 23, 1974. Meanwhile, respondent court rendered the impugned decision on
December 20, 1974. It does not appear when the parties were served copies of this decision.

Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a motion to quash the order of
October 28, 1974. Without waiting however for the resolution thereof, on January 13, 1974, Lim Teck
Chuan and Eng Chong Leonardo went to the Court of Appeals with a petition for certiorari seeking the
annulment of the above-mentioned orders of October 21, 1974 and October 28, 1974 and decision of
December 20, 1974. By resolution of January 24, 1975, the Court of Appeals dismissed said petition,
holding that its filing was premature, considering that the motion to quash the order of October 28, 1974
was still unresolved by the trial court. This holding was reiterated in the subsequent resolution of February
5, 1975 denying the motion for reconsideration of the previous dismissal.

On the other hand, on January 20, 1975, the other defendants, petitioners herein, filed their notice of
appeal, appeal bond and motion for extension to file their record on appeal, which was granted, the
extension to expire after fifteen (15) days from January 26 and 27, 1975, for defendants Lim Tanhu and
Ng Suas, respectively. But on February 7, 1975, before the perfection of their appeal, petitioners filed the
present petition with this Court. And with the evident intent to make their procedural position clear,
counsel for defendants, Atty. Manuel Zosa, filed with respondent court a manifestation dated February 14,
1975 stating that "when the non-defaulted defendants Eng Chong Leonardo and Lim Teck Chuan filed their
petition in the Court of Appeals, they in effect abandoned their motion to quash the order of October 28,
1974," and that similarly "when Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed
their petition for certiorari and prohibition ... in the Supreme Court, they likewise abandoned their motion
to quash." This manifestation was acted upon by respondent court together with plaintiffs motion for
execution pending appeal in its order of the same date February 14, 1975 this wise:

ORDER

When these incidents, the motion to quash the order of October 28, 1974 and the motion
for execution pending appeal were called for hearing today, counsel for the defendants-
movants submitted their manifestation inviting the attention of this Court that by their filing
for certiorari and prohibition with preliminary injunction in the Court of Appeals which was
dismissed and later the defaulted defendants filed with the Supreme Court certiorari with
prohibition they in effect abandoned their motion to quash.

IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The resolution of the
motion for execution pending appeal shall be resolved after the petition for certiorari and
prohibition shall have been resolved by the Supreme Court.

SO ORDERED.
 Cebu City, Philippines, February 14, 1975. (Page 216, Record.)

Upon these premises, it is the position of petitioners that respondent court acted illegally, in violation of
the rules or with grave abuse of discretion in acting on respondent's motion to dismiss of October 18,
1974 without previously ascertaining whether or not due notice thereof had been served on the adverse
parties, as, in fact, no such notice was timely served on the non-defaulted defendants Lim Teck Chuan
and Eng Chong Leonardo and no notice at all was ever sent to the other defendants, herein petitioners,
and more so, in actually ordering the dismissal of the case by its order of October 21, 1974 and at the
same time setting the case for further hearing as against the defaulted defendants, herein pe titioners,
actually hearing the same ex-parte and thereafter rendering the decision of December 20, 1974 granting
respondent Tan even reliefs not prayed for in the complaint. According to the petitioners, to begin with,
there was compulsory counterclaim in the common answer of the defendants the nature of which is such
that it cannot be decided in an independent action and as to which the attention of respondent court was
duly called in the motions for reconsideration. Besides, and more importantly, under Section 4 of Rule 18,
respondent court had no authority to divide the case before it by dismissing the same as against the non-
defaulted defendants and thereafter proceeding to hear it ex-parte and subsequently rendering judgment
against the defaulted defendants, considering that in their view, under the said provision of the rules,
when a common cause of action is alleged against several defendants, the default of any of them is a
mere formality by which those defaulted are not allowed to take part in the proceedings, but otherwise, all
the defendants, defaulted and not defaulted, are supposed to have but a common fate, win or lose. In
other words, petitioners posit that in such a situation, there can only be one common judgment for or
against all the defendant, the non-defaulted and the defaulted. Thus, petitioners contend that the order of
dismissal of October 21, 1974 should be considered also as the final judgment insofar as they are
concerned, or, in the alternative, it should be set aside together with all the proceedings and decision held
and rendered subsequent thereto, and that the trial be resumed as of said date, with the defendants Lim
Teck Chuan and Eng Chong Leonardo being allowed to defend the case for all the defendants.

On the other hand, private respondent maintains the contrary view that inasmuch as petitioners had been
properly declared in default, they have no personality nor interest to question the dismissal of the case as
against their non-defaulted co-defendants and should suffer the consequences of their own default.
Respondent further contends, and this is the only position discussed in the memorandum submitted by her
counsel, that since petitioners have already made or at least started to make their appeal, as they are in
fact entitled to appeal, this special civil action has no reason for being. Additionally, she invokes the point
of prematurity upheld by the Court of Appeals in regard to the above-mentioned petition therein of the
non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo. Finally, she argues that in any event,
the errors attributed to respondent court are errors of judgment and may be reviewed only in an appeal.

After careful scrutiny of all the above-related proceedings, in the court below and mature deliberation, the
Court has arrived at the conclusion that petitioners should be granted relief, if only to stress emphatically
once more that the rules of procedure may not be misused and abused as instruments for the denial of
substantial justice. A review of the record of this case immediately discloses that here is another
demonstrative instance of how some members of the bar, availing of their proficiency in invoking the
letter of the rules without regard to their real spirit and intent, succeed in inducing courts to act contrary
to the dictates of justice and equity, and, in some instances, to wittingly or unwittingly abet unfair
advantage by ironically camouflaging their actuations as earnest efforts to satisfy the public clamor for
speedy disposition of litigations, forgetting all the while that the plain injunction of Section 2 of Rule 1 is
that the "rules shall be liberally construed in order to promote their object and to assist the parties in
obtaining not only 'speedy' but more imperatively, "just ... and inexpensive determination of every action
and proceeding." We cannot simply pass over the impression that the procedural maneuvers and tactics
revealed in the records of the case at bar were deliberately planned with the calculated end in view of
depriving petitioners and their co-defendants below of every opportunity to properly defend themselves
against a claim of more than substantial character, considering the millions of pesos worth of properties
involved as found by respondent judge himself in the impugned decision, a claim that appears, in the light
of the allegations of the answer and the documents already brought to the attention of the court at the
pre-trial, to be rather dubious. What is most regrettable is that apparently, all of these alarming
circumstances have escaped respondent judge who did not seem to have hesitated in acting favorably on
the motions of the plaintiff conducive to the deplorable objective just mentioned, and which motions, at
the very least, appeared to be 'of highly controversial' merit, considering that their obvious tendency and
immediate result would be to convert the proceedings into a one-sided affair, a situation that should be
readily condemnable and intolerable to any court of justice.

Indeed, a seeming disposition on the part of respondent court to lean more on the contentions of private
respondent may be discerned from the manner it resolved the attempts of defendants Dy Ochay and
Antonio Lim Tanhu to have the earlier order of default against them lifted. Notwithstanding that Dy
Ochay's motion of October 8, 1971, co-signed by her with their counsel, Atty. Jovencio Enjambre (Annex 2
of respondent answer herein) was over the jurat of the notary public before whom she took her oath, in
the order of November 2, 1971, (Annex 3 id.) it was held that "the oath appearing at the bottom of the
motion is not the one contemplated by the abovequoted pertinent provision (See. 3, Rule 18) of the rules.
It is not even a verification. (See. 6, Rule 7.) What the rule requires as interpreted by the Supreme Court
is that the motion must have to be accompanied by an affidavit of merits that the defendant has a
meritorious defense, thereby ignoring the very simple legal point that the ruling of the Supreme Court
in Ong Peng vs. Custodio, 1 SCRA 781, relied upon by His Honor, under which a separate affidavit of merit
is required refers obviously to instances where the motion is not over oath of the party concerned,
considering that what the cited provision literally requires is no more than a "motion under oath." Stated
otherwise, when a motion to lift an order of default contains the reasons for the failure to answer as well
as the facts constituting the prospective defense of the defendant and it is sworn to by said defendant,
neither a formal verification nor a separate affidavit of merit is necessary.

What is worse, the same order further held that the motion to lift the order of default "is an admission
that there was a valid service of summons" and that said motion could not amount to a challenge against
the jurisdiction of the court over the person of the defendant. Such a rationalization is patently specious
and reveals an evident failure to grasp the import of the legal concepts involved. A motion to lift an order
of default on the ground that service of summons has not been made in accordance with the rules is in
order and is in essence verily an attack against the jurisdiction of the court over the person of the
defendant, no less than if it were worded in a manner specifically embodying such a direct challenge.

And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the order of default as against
defendant Lim Tanhu, His Honor posited that said defendant "has a defense (quitclaim) which renders the
claim of the plaintiff contentious." We have read defendants' motion for reconsideration of November 25,
1971 (Annex 5, id.), but We cannot find in it any reference to a "quitclaim". Rather, the allegation of a
quitclaim is in the amended complaint (Pars. 15-16, Annex B of the petition herein) in which plaintiff
maintains that her signature thereto was secured through fraud and deceit. In truth, the motion for
reconsideration just mentioned, Annex 5, merely reiterated the allegation in Dy Ochay's earlier motion of
October 8, 1971, Annex 2, to set aside the order of default, that plaintiff Tan could be but the common
law wife only of Tee Hoon, since his legitimate wife was still alive, which allegation, His Honor held in the
order of November 2, 1971, Annex 3, to be "not good and meritorious defense". To top it all, whereas, as
already stated, the order of February 19, 1972, Annex 6, lifted the default against Lim Tanhu because of
the additional consideration that "he has a defense (quitclaim) which renders the claim of the plai ntiff
contentious," the default of Dy Ochay was maintained notwithstanding that exactly the same "contentions"
defense as that of her husband was invoked by her.

Such tenuous, if not altogether erroneous reasonings and manifest inconsistency in the legal postures in
the orders in question can hardly convince Us that the matters here in issue were accorded due and
proper consideration by respondent court. In fact, under the circumstances herein obtaining, it seems
appropriate to stress that, having in view the rather substantial value of the subject matter involved
together with the obviously contentious character of plaintiff's claim, which is discernible even on the face
of the complaint itself, utmost care should have been taken to avoid the slightest suspicion of improper
motivations on the part of anyone concerned. Upon the considerations hereunder to follow, the Court
expresses its grave concern that much has to be done to dispel the impression that herein petitioners and
their co-defendants are being railroaded out of their rights and properties without due process of law, on
the strength of procedural technicalities adroitly planned by counsel and seemingly unnoticed and
undetected by respondent court, whose orders, gauged by their tenor and the citations of supposedly
pertinent provisions and jurisprudence made therein, cannot be said to have proceeded from utter lack of
juridical knowledgeability and competence.

–1–
The first thing that has struck the Court upon reviewing the record is the seeming alacrity with which the
motion to dismiss the case against non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo
was disposed of, which definitely ought not to have been the case. The trial was proceeding with the
testimony of the first witness of plaintiff and he was still under re-cross-examination. Undoubtedly, the
motion to dismiss at that stage and in the light of the declaration of default against the rest of the
defendants was a well calculated surprise move, obviously designed to secure utmost advantage of the
situation, regardless of its apparent unfairness. To say that it must have been entirely unexpected by all
the defendants, defaulted and non-defaulted , is merely to rightly assume that the parties in a judicial
proceeding can never be the victims of any procedural waylaying as long as lawyers and judges are
imbued with the requisite sense of equity and justice.

But the situation here was aggravated by the indisputable fact that the adverse parties who were entitled
to be notified of such unanticipated dismissal motion did not get due notice thereof. Certainly, the non-
defaulted defendants had the right to the three-day prior notice required by Section 4 of Rule 15. How
could they have had such indispensable notice when the motion was set for hearing on Monday, October
21, 1974, whereas the counsel for Lim Teck Chuan, Atty. Sitoy was personally served with the notice only
on Saturday, October 19, 1974 and the counsel for Eng Chong Leonardo, Atty. Alcudia, was notified by
registered mail which was posted only that same Saturday, October 19, 1974? According to Chief Justice
Moran, "three days at least must intervene between the date of service of notice and the date set for the
hearing, otherwise the court may not validly act on the motion." (Comments on the Rules of Court by
Moran, Vol. 1, 1970 ed. p. 474.) Such is the correct construction of Section 4 of Rule 15. And in the
instant case, there can be no question that the notices to the non-defaulted defendants were short of the
requirement of said provision.

We can understand the over-anxiety of counsel for plaintiff, but what is incomprehensible is the seeming
inattention of respondent judge to the explicit mandate of the pertinent rule, not to speak of the
imperatives of fairness, considering he should have realized the far-reaching implications, specially from
the point of view he subsequently adopted, albeit erroneously, of his favorably acting on it. Actually, he
was aware of said consequences, for simultaneously with his order of dismissal, he immediately set the
case for the ex-parte hearing of the evidence against the defaulted defendants, which, incidentally, from
the tenor of his order which We have quoted above, appears to have been done by him motu propio As a
matter of fact, plaintiff's motion also quoted above did not pray for it.

Withal, respondent court's twin actions of October 21, 1974 further ignores or is inconsistent with a
number of known juridical principles concerning defaults, which We will here take occasion to reiterate and
further elucidate on, if only to avoid a repetition of the unfortunate errors committed in this case. Perhaps
some of these principles have not been amply projected and elaborated before, and such paucity of
elucidation could be the reason why respondent judge must have acted as he did. Still, the Court cannot
but express its vehement condemnation of any judicial actuation that unduly deprives any party of the
right to be heard without clear and specific warrant under the terms of existing rules or binding
jurisprudence. Extreme care must be the instant reaction of every judge when confronted with a situation
involving risks that the proceedings may not be fair and square to all the parties concerned. Indeed, a
keen sense of fairness, equity and justice that constantly looks for consistency between the letter of the
adjective rules and these basic principles must be possessed by every judge, If substance is to prevail, as
it must, over form in our courts. Literal observance of the rules, when it is conducive to unfair and undue
advantage on the part of any litigant before it, is unworthy of any court of justice and equity. Withal, only
those rules and procedure informed, with and founded on public policy deserve obedience in accord with
their unequivocal language or words..

Before proceeding to the discussion of the default aspects of this case, however, it should not be amiss to
advert first to the patent incorrectness, apparent on the face of the record, of the aforementioned order of
dismissal of October 21, 1974 of the case below as regards non-defaulted defendants Lim and Leonardo.
While it is true that said defendants are not petitioners herein, the Court deems it necessary for a full view
of the outrageous procedural strategy conceived by respondent's counsel and sanctioned by respondent
court to also make reference to the very evident fact that in ordering said dismissal respondent court
disregarded completely the existence of defendant's counterclaim which it had itself earlier held if
indirectly, to be compulsory in nature when it refused to dismiss the same on the ground alleged by
respondent Tan that he docketing fees for the filing thereof had not been paid by defendants.
Indeed, that said counterclaim is compulsory needs no extended elaboration. As may be noted in the
allegations hereof aforequoted, it arose out of or is necessarily connected with the occurrence that is the
subject matter of the plaintiff's claim, (Section 4, Rule 9) namely, plaintiff's allegedly being the widow of
the deceased Tee Hoon entitled, as such, to demand accounting of and to receive the share of her alleged
late husband as partner of defendants Antonio Lim Tanhu and Alfonso Leonardo Ng Sua in Glory
Commercial Company, the truth of which allegations all the defendants have denied. Defendants maintain
in their counterclaim that plaintiff knew of the falsity of said allegations even before she filed her
complaint, for she had in fact admitted her common-law relationship with said deceased in a document
she had jointly executed with him by way of agreement to terminate their illegitimate relationship, for
which she received P40,000 from the deceased, and with respect to her pretended share in the capital and
profits in the partnership, it is also defendants' posture that she had already quitclaimed, with the
assistance of able counsel, whatever rights if any she had thereto in November, 1967, for the sum of
P25,000 duly receipted by her, which quitclaim was, however, executed, according to respondent herself
in her amended complaint, through fraud. And having filed her complaint knowing, according to
defendants, as she ought to have known, that the material allegations thereof are false and baseless, she
has caused them to suffer damages. Undoubtedly, with such allegations, defendants' counterclaim is
compulsory, not only because the same evidence to sustain it will also refute the cause or causes of action
alleged in plaintiff's complaint, (Moran, supra p. 352) but also because from its very nature, it is obvious
that the same cannot "remain pending for independent adjudication by the court." (Section 2, Rule 17.)

The provision of the rules just cited specifically enjoins that "(i)f a counterclaim has been pleaded by a
defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not be
dismissed against the defendant's objection unless the counterclaim can remain pending for independent
adjudication by the court." Defendants Lim and Leonardo had no opportunity to object to the motion to
dismiss before the order granting the same was issued, for the simple reason that they were not
opportunity notified of the motion therefor, but the record shows clearly that at least defendant Lim
immediately brought the matter of their compulsory counterclaim to the attention of the trial court in his
motion for reconsideration of October 23, 1974, even as the counsel for the other defendant, Leonardo,
predicated his motion on other grounds. In its order of December 6, 1974, however, respondent court not
only upheld the plaintiffs supposed absolute right to choose her adversaries but also held that the
counterclaim is not compulsory, thereby virtually making unexplained and inexplicable 180-degree
turnabout in that respect.

There is another equally fundamental consideration why the motion to dismiss should not have been
granted. As the plaintiff's complaint has been framed, all the six defendants are charged with having
actually taken part in a conspiracy to misappropriate, conceal and convert to their own benefit the profits,
properties and all other assets of the partnership Glory Commercial Company, to the extent that they
have allegedly organized a corporation, Glory Commercial Company, Inc. with what they had illegally
gotten from the partnership. Upon such allegations, no judgment finding the existence of the alleged
conspiracy or holding the capital of the corporation to be the money of the partnership is legally possi ble
without the presence of all the defendants. The non-defaulted defendants are alleged to be stockholders of
the corporation and any decision depriving the same of all its assets cannot but prejudice the interests of
said defendants. Accordingly, upon these premises, and even prescinding from the other reasons to be
discussed anon it is clear that all the six defendants below, defaulted and non-defaulted, are indispensable
parties. Respondents could do no less than grant that they are so on page 23 of their answer. Such being
the case, the questioned order of dismissal is exactly the opposite of what ought to have been done.
Whenever it appears to the court in the course of a proceeding that an indispensable party has not been
joined, it is the duty of the court to stop the trial and to order the inclusion of such party. (The Revised
Rules of Court, Annotated & Commented by Senator Vicente J. Francisco, Vol. 1, p. 271, 1973 ed. See
also Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the "general rule with reference to
the making of parties in a civil action requires the joinder of all necessary parties wherever possible, and
the joinder of all indispensable parties under any and all conditions, the presence of those latter being
a sine qua non of the exercise of judicial power." (Borlasa vs. Polistico, 47 Phil. 345, at p. 347.) It is
precisely " when an indispensable party is not before the court (that) the action should be dismissed."
(People v. Rodriguez, 106 Phil. 325, at p. 327.) The absence of an indispensable party renders all
subsequent actuations of the court null and void, for want of authority to act, not only as to the absent
parties but even as to those present. In short, what respondent court did here was exactly the reverse of
what the law ordains — it eliminated those who by law should precisely be joined.
As may he noted from the order of respondent court quoted earlier, which resolved the motions for
reconsideration of the dismissal order filed by the non-defaulted defendants, His Honor rationalized his
position thus:

It is the rule that it is the absolute prerogative of the plaintiff to choose, the theory upon
which he predicates his right of action, or the parties he desires to sue, without dictation or
imposition by the court or the adverse party. If he makes a mistake in the choice of his right
of action, or in that of the parties against whom he seeks to enforce it, that is his own
concern as he alone suffers therefrom. The plaintiff cannot be compelled to choose his
defendants, He may not, at his own expense, be forced to implead anyone who, under the
adverse party's theory, is to answer for defendant's liability. Neither may the Court compel
him to furnish the means by which defendant may avoid or mitigate their liability. (Vaño vs.
Alo, 95 Phil. 495-496.)

This being the rule this court cannot compel the plaintiff to continue prosecuting her cause
of action against the defendants-movants if in the course of the trial she believes she can
enforce it against the remaining defendants subject only to the limitation provided in
Section 2, Rule 17 of the Rules of Court. ... (Pages 6263, Record.)

Noticeably, His Honor has employed the same equivocal terminology as in plaintiff's motion of October 18,
1974 by referring to the action he had taken as being "dismissal of the complaint against them or their
being dropped therefrom", without perceiving that the reason for the evidently intentional ambiguity is
transparent. The apparent idea is to rely on the theory that under Section 11 of Rule 3, parties may be
dropped by the court upon motion of any party at any stage of the action, hence "it is the absolute right
prerogative of the plaintiff to choose—the parties he desires to sue, without dictation or imposition by the
court or the adverse party." In other words, the ambivalent pose is suggested that plaintiff's motion of
October 18, 1974 was not predicated on Section 2 of Rule 17 but more on Section 11 of Rule 3. But the
truth is that nothing can be more incorrect. To start with, the latter rule does not comprehend whimsical
and irrational dropping or adding of parties in a complaint. What it really contemplates is erroneous or
mistaken non-joinder and misjoinder of parties. No one is free to join anybody in a complaint in court only
to drop him unceremoniously later at the pleasure of the plaintiff. The rule presupposes that the original
inclusion had been made in the honest conviction that it was proper and the subsequent dropping is
requested because it has turned out that such inclusion was a mistake. And this is the reason why the rule
ordains that the dropping be "on such terms as are just" — just to all the other parties. In the case at bar,
there is nothing in the record to legally justify the dropping of the non-defaulted defendants, Lim and
Leonardo. The motion of October 18, 1974 cites none. From all appearances, plaintiff just decided to ask
for it, without any relevant explanation at all. Usually, the court in granting such a motion inquires for the
reasons and in the appropriate instances directs the granting of some form of compensation for the
trouble undergone by the defendant in answering the complaint, preparing for or proceeding partially to
trial, hiring counsel and making corresponding expenses in the premises. Nothing of these, appears in the
order in question. Most importantly, His Honor ought to have considered that the outright dropping of the
non-defaulted defendants Lim and Leonardo, over their objection at that, would certainly be unjust not
only to the petitioners, their own parents, who would in consequence be entirely defenseless, but also to
Lim and Leonardo themselves who would naturally correspondingly suffer from the eventual judgment
against their parents. Respondent court paid no heed at all to the mandate that such dropping must be on
such terms as are just" — meaning to all concerned with its legal and factual effects.

Thus, it is quite plain that respondent court erred in issuing its order of dismissal of October 21, 1974 as
well as its order of December 6, 1974 denying reconsideration of such dismissal. As We make this ruling,
We are not oblivious of the circumstance that defendants Lim and Leonardo are not parties herein. But
such consideration is inconsequential. The fate of the case of petitioners is inseparably tied up with said
order of dismissal, if only because the order of ex-parte hearing of October 21, 1974 which directly affects
and prejudices said petitioners is predicated thereon. Necessarily, therefore, We have to pass on the
legality of said order, if We are to decide the case of herein petitioners properly and fairly.

The attitude of the non-defaulted defendants of no longer pursuing further their questioning of the
dismissal is from another point of view understandable. On the one hand, why should they insist on being
defendants when plaintiff herself has already release from her claims? On the other hand, as far as their
respective parents-co-defendants are concerned, they must have realized that they (their parents) could
even be benefited by such dismissal because they could question whether or not plaintiff can still
prosecute her case against them after she had secured the order of dismissal in question. And it is in
connection with this last point that the true and correct concept of default becomes relevant.

At this juncture, it may also be stated that the decision of the Court of Appeals of January 24, 1975 in G.
R. No. SP-03066 dismissing the petition for certiorari of non-defaulted defendants Lim and Leonardo
impugning the order of dismissal of October 21, 1974, has no bearing at all in this case, not only because
that dismissal was premised by the appellate court on its holding that the said petition was premature
inasmuch as the trial court had not yet resolved the motion of the defendants of October 28, 1974 praying
that said disputed order be quashed, but principally because herein petitioners were not parties in that
proceeding and cannot, therefore, be bound by its result. In particular, We deem it warranted to draw the
attention of private respondent's counsel to his allegations in paragraphs XI to XIV of his answer, which
relate to said decision of the Court of Appeals and which have the clear tendency to make it appear to the
Court that the appeals court had upheld the legality and validity of the actuations of the trial court being
questioned, when as a matter of indisputable fact, the dismissal of the petition was based solely and
exclusively on its being premature without in any manner delving into its merits. The Court must and does
admonish counsel that such manner of pleading, being deceptive and lacking in candor, has no place in
any court, much less in the Supreme Court, and if We are adopting a passive attitude in the premises, it is
due only to the fact that this is counsel's first offense. But similar conduct on his part in the future will
definitely be dealt with more severely. Parties and counsel would be well advised to avoid such attempts
to befuddle the issues as invariably then will be exposed for what they are, certainly unethical and
degrading to the dignity of the law profession. Moreover, almost always they only betray the inherent
weakness of the cause of the party resorting to them.

–2–

Coming now to the matter itself of default, it is quite apparent that the impugned orders must have
proceeded from inadequate apprehension of the fundamental precepts governing such procedure under
the Rules of Court. It is time indeed that the concept of this procedural device were fully understood by
the bench and bar, instead of being merely taken for granted as being that of a simple expedient of not
allowing the offending party to take part in the proceedings, so that after his adversary shall have
presented his evidence, judgment may be rendered in favor of such opponent, with hardly any chance of
said judgment being reversed or modified.

The Rules of Court contain a separate rule on the subject of default, Rule 18. But said rule is concerned
solely with default resulting from failure of the defendant or defendants to answer within the reglementary
period. Referring to the simplest form of default, that is, where there is only one defendant in the action
and he fails to answer on time, Section 1 of the rule provides that upon "proof of such failure, (the court
shall) declare the defendant in default. Thereupon the court shall proceed to receive the plaintiff's
evidence and render judgment granting him such relief as the complaint and the facts proven may
warrant." This last clause is clarified by Section 5 which says that "a judgment entered against a party in
default shall not exceed the amount or be different in kind from that prayed for."

Unequivocal, in the literal sense, as these provisions are, they do not readily convey the full import of
what they contemplate. To begin with, contrary to the immediate notion that can be drawn from their
language, these provisions are not to be understood as meaning that default or the failure of the
defendant to answer should be "interpreted as an admission by the said defendant that the plaintiff's
cause of action find support in the law or that plaintiff is entitled to the relief prayed for." (Moran, supra,
p. 535 citing Macondary & Co. v. Eustaquio, 64 Phil. 466, citing with approval Chaffin v. McFadden, 41
Ark. 42; Johnson v. Pierce, 12 Ark. 599; Mayden v. Johnson, 59 Ga. 105; People v. Rust, 292 111. 328;
Ken v. Leopold 21 111. A. 163; Chicago, etc. Electric R. Co. v. Krempel 116 111. A. 253.)

Being declared in default does not constitute a waiver of rights except that of being heard and of
presenting evidence in the trial court. According to Section 2, "except as provided in Section 9 of Rule 13,
a party declared in default shall not be entitled to notice of subsequent proceedings, nor to take part in
the trial." That provision referred to reads: "No service of papers other than substantially amended
pleadings and final orders or judgments shall be necessary on a party in default unless he files a motion to
set aside the order of default, in which event he shall be entitled to notice of all further proceedings
regardless of whether the order of default is set aside or not." And pursuant to Section 2 of Rule 41, "a
party who has been declared in default may likewise appeal from the judgment rendered against him as
contrary to the evidence or to the law, even if no petition for relief to set aside the order of default has
been presented by him in accordance with Rule 38.".

In other words, a defaulted defendant is not actually thrown out of court. While in a sense it may be said
that by defaulting he leaves himself at the mercy of the court, the rules see to it that any judgment
against him must be in accordance with law. The evidence to support the plaintiff's cause is, of course,
presented in his absence, but the court is not supposed to admit that which is basically incompetent.
Although the defendant would not be in a position to object, elementary justice requires that, only legal
evidence should be considered against him. If the evidence presented should not be sufficient to justify a
judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be
justifiable, it cannot exceed in amount or be different in kind from what is prayed for in the complaint.

Incidentally, these considerations argue against the present widespread practice of trial judges, as was
done by His Honor in this case, of delegating to their clerks of court the reception of the plaintiff's
evidence when the defendant is in default. Such a Practice is wrong in principle and orientation. It has no
basis in any rule. When a defendant allows himself to be declared in default, he relies on the faith that the
court would take care that his rights are not unduly prejudiced. He has a right to presume that the law
and the rules will still be observed. The proceedings are held in his forced absence, and it is but fair that
the plaintiff should not be allowed to take advantage of the situation to win by foul or illegal means or with
inherently incompetent evidence. Thus, in such instances, there is need for more attention from the court,
which only the judge himself can provide. The clerk of court would not be in a position much less have the
authority to act in the premises in the manner demanded by the rules of fair play and as contemplated in
the law, considering his comparably limited area of discretion and his presumably inferior preparation for
the functions of a judge. Besides, the default of the defendant is no excuse for the court to renounce the
opportunity to closely observe the demeanor and conduct of the witnesses of the plaintiff, the better to
appreciate their truthfulness and credibility. We therefore declare as a matter of judicial policy that there
being no imperative reason for judges to do otherwise, the practice should be discontinued.

Another matter of practice worthy of mention at this point is that it is preferable to leave enough
opportunity open for possible lifting of the order of default before proceeding with the reception of the
plaintiff's evidence and the rendition of the decision. "A judgment by default may amount to a positive and
considerable injustice to the defendant; and the possibility of such serious consequences necessitates a
careful and liberal examination of the grounds upon which the defendant may seek to set it aside."
(Moran, supra p. 534, citing Coombs vs. Santos, 24 Phil. 446; 449-450.) The expression, therefore, in
Section 1 of Rule 18 aforequoted which says that "thereupon the court shall proceed to receive the
plaintiff's evidence etc." is not to be taken literally. The gain in time and dispatch should the court
immediately try the case on the very day of or shortly after the declaration of default is far outweighed by
the inconvenience and complications involved in having to undo everything already done in the event the
defendant should justify his omission to answer on time.

The foregoing observations, as may be noted, refer to instances where the only defendant or all the
defendants, there being several, are declared in default. There are additional rules embodying more
considerations of justice and equity in cases where there are several defendants against whom a common
cause of action is averred and not all of them answer opportunely or are in default, particularly in
reference to the power of the court to render judgment in such situations. Thus, in addition to the
limitation of Section 5 that the judgment by default should not be more in amount nor different in kind
from the reliefs specifically sought by plaintiff in his complaint, Section 4 restricts the authority of the
court in rendering judgment in the situations just mentioned as follows:

Sec. 4. Judgment when some defendants answer, and other make difficult. — When a
complaint states a common cause of action against several defendant some of whom
answer, and the others fail to do so, the court shall try the case against all upon the answer
thus filed and render judgment upon the evidence presented. The same proceeding applies
when a common cause of action is pleaded in a counterclaim, cross-claim and third-party
claim.
Very aptly does Chief Justice Moran elucidate on this provision and the controlling jurisprudence
explanatory thereof this wise:

Where a complaint states a common cause of action against several defendants and some
appear to defend the case on the merits while others make default, the defense interposed
by those who appear to litigate the case inures to the benefit of those who fail to appear,
and if the court finds that a good defense has been made, all of the defendants must be
absolved. In other words, the answer filed by one or some of the defendants inures to the
benefit of all the others, even those who have not seasonably filed their answer. (Bueno v.
Ortiz, L-22978, June 27, 1968, 23 SCRA 1151.) The proper mode of proceeding where a
complaint states a common cause of action against several defendants, and one of them
makes default, is simply to enter a formal default order against him, and proceed with the
cause upon the answers of the others. The defaulting defendant merely loses his standing in
court, he not being entitled to the service of notice in the cause, nor to appear in the suit in
any way. He cannot adduce evidence; nor can he be heard at the final hearing, (Lim Toco v.
Go Fay, 80 Phil. 166.) although he may appeal the judgment rendered against him on the
merits. (Rule 41, sec. 2.) If the case is finally decided in the plaintiff's favor, a final decree
is then entered against all the defendants; but if the suit should be decided against the
plaintiff, the action will be dismissed as to all the defendants alike. (Velez v. Ramas, 40 Phil.
787-792; Frow v. de la Vega, 15 Wal. 552,21 L. Ed. 60.) In other words the judgment will
affect the defaulting defendants either favorably or adversely. (Castro v. Peña, 80 Phil.
488.)

Defaulting defendant may ask execution if judgment is in his favor. (Castro v. Peña, supra.)
(Moran, Rules of Court, Vol. 1, pp. 538-539.)

In Castro vs. Peña, 80 Phil. 488, one of the numerous cases cited by Moran, this Court
elaborated on the construction of the same rule when it sanctioned the execution, upon
motion and for the benefit of the defendant in default, of a judgment which was adverse to
the plaintiff. The Court held:

As above stated, Emilia Matanguihan, by her counsel, also was a movant in the petition for
execution Annex 1. Did she have a right to be such, having been declared in default?
In Frow vs. De la Vega, supra, cited as authority in Velez vs. Ramas, supra, the Supreme
Court of the United States adopted as ground for its own decision the following ruling of the
New York Court of Errors in Clason vs. Morris, 10 Jons., 524:

It would be unreasonable to hold that because one defendant had made default, the plaintiff
should have a decree even against him, where the court is satisfied from the proofs offered
by the other, that in fact the plaintiff is not entitled to a decree. (21 Law, ed., 61.)

The reason is simple: justice has to be consistent. The complaint stating a common cause of
action against several defendants, the complainant's rights — or lack of them — in the
controversy have to be the same, and not different, as against all the defendant's although
one or some make default and the other or others appear, join issue, and enter into trial.
For instance, in the case of Clason vs. Morris above cited, the New York Court of Errors in
effect held that in such a case if the plaintiff is not entitled to a decree, he will not be
entitled to it, not only as against the defendant appearing and resisting his action but also
as against the one who made default. In the case at bar, the cause of action in the plaintiff's
complaint was common against the Mayor of Manila, Emilia Matanguihan, and the other
defendants in Civil Case No. 1318 of the lower court. The Court of First Instance in its
judgment found and held upon the evidence adduced by the plaintiff and the defendant
mayor that as between said plaintiff and defendant Matanguihan the latter was the one
legally entitled to occupy the stalls; and it decreed, among other things, that said plaintiff
immediately vacate them. Paraphrasing the New York Court of Errors, it would be
unreasonable to hold now that because Matanguihan had made default, the said plaintiff
should be declared, as against her, legally entitled to the occupancy of the stalls, or to
remain therein, although the Court of First Instance was so firmly satisfied, from the proofs
 offered by the other defendant, that the same plaintiff was not entitled to such occupancy
that it peremptorily ordered her to vacate the stalls. If in the cases of Clason vs. Morris,
supra, Frow vs. De la Vega, supra, and Velez vs. Ramas, supra the decrees entered inured
to the benefit of the defaulting defendants, there is no reason why that entered in said case
No. 1318 should not be held also to have inured to the benefit of the defaulting defendant
Matanguihan and the doctrine in said three cases plainly implies that there is nothing in the
law governing default which would prohibit the court from rendering judgment favorable to
the defaulting defendant in such cases. If it inured to her benefit, it stands to reason that
she had a right to claim that benefit, for it would not be a benefit if the supposed beneficiary
were barred from claiming it; and if the benefit necessitated the execution of the decree,
she must be possessed of the right to ask for the execution thereof as she did when she, by
counsel, participated in the petition for execution Annex 1.

Section 7 of Rule 35 would seem to afford a solid support to the above considerations. It
provides that when a complaint states a common cause of action against several
defendants, some of whom answer, and the others make default, 'the court shall try the
case against all upon the answer thus filed and render judgment upon the evidence
presented by the parties in court'. It is obvious that under this provision the case is tried
jointly not only against the defendants answering but also against those defaulting, and the
trial is held upon the answer filed by the former; and the judgment, if adverse, will
prejudice the defaulting defendants no less than those who answer. In other words, the
defaulting defendants are held bound by the answer filed by their co-defendants and by the
judgment which the court may render against all of them. By the same token, and by all
rules of equity and fair play, if the judgment should happen to be favorable, totally or
partially, to the answering defendants, it must correspondingly benefit the defaulting ones,
for it would not be just to let the judgment produce effects as to the defaulting defendants
only when adverse to them and not when favorable.

In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under discussion in the following
words:

In answer to the charge that respondent Judge had committed a grave abuse of discretion
in rendering a default judgment against the PC, respondents allege that, not having filed its
answer within the reglementary period, the PC was in default, so that it was proper for
Patanao to forthwith present his evidence and for respondent Judge to render said
judgment. It should be noted, however, that in entering the area in question and seeking to
prevent Patanao from continuing his logging operations therein, the PC was merely
executing an order of the Director of Forestry and acting as his agent. Patanao's cause of
action against the other respondents in Case No. 190, namely, the Director of Forestry, the
District Forester of Agusan, the Forest Officer of Bayugan, Agusan, and the Secretary of
Agriculture and Natural Resources. Pursuant to Rule 18, Section 4, of the Rules of Court,
'when a complaint states a common cause of action against several defendants some of
whom answer and the others fail to do so, the court shall try the case against all upon the
answer thus filed (by some) and render judgment upon the evidence presented.' In other
words, the answer filed by one or some of the defendants inures to the benefit of all the
others, even those who have not seasonably filed their answer.

Indeed, since the petition in Case No. 190 sets forth a common cause of action against all of
the respondents therein, a decision in favor of one of them would necessarily favor the
others. In fact, the main issue, in said case, is whether Patanao has a timber license to
undertake logging operations in the disputed area. It is not possible to decide such issue in
the negative, insofar as the Director of Forestry, and to settle it otherwise, as regards the
PC, which is merely acting as agent of the Director of Forestry, and is, therefore, his alter
ego, with respect to the disputed forest area.

Stated differently, in all instances where a common cause of action is alleged against several defendants,
some of whom answer and the others do not, the latter or those in default acquire a vested right not only
to own the defense interposed in the answer of their co- defendant or co-defendants not in default but
also to expect a result of the litigation totally common with them in kind and in amount whether favorable
or unfavorable. The substantive unity of the plaintiff's cause against all the defendants is carried through
to its adjective phase as ineluctably demanded by the homogeneity and indivisibility of justice itself.
Indeed, since the singleness of the cause of action also inevitably implies that all the defendants are
indispensable parties, the court's power to act is integral and cannot be split such that it cannot relieve
any of them and at the same time render judgment against the rest. Considering the tenor of the section
in question, it is to be assumed that when any defendant allows himself to be declared in default knowing
that his defendant has already answered, he does so trusting in the assurance implicit in the rule that his
default is in essence a mere formality that deprives him of no more than the right to take part in the trial
and that the court would deem anything done by or for the answering defendant as done by or for him.
The presumption is that otherwise he would not -have seen to that he would not be in default. Of course,
he has to suffer the consequences of whatever the answering defendant may do or fail to do, regardless of
possible adverse consequences, but if the complaint has to be dismissed in so far as the answering
defendant is concerned it becomes his inalienable right that the same be dismissed also as to him. It does
not matter that the dismissal is upon the evidence presented by the plaintiff or upon the latter's mere
desistance, for in both contingencies, the lack of sufficient legal basis must be the cause. The integrity of
the common cause of action against all the defendants and the indispensability of all of them in the
proceedings do not permit any possibility of waiver of the plaintiff's right only as to one or some of them,
without including all of them, and so, as a rule, withdrawal must be deemed to be a confession of
weakness as to all. This is not only elementary justice; it also precludes the concomitant hazard that
plaintiff might resort to the kind of procedural strategem practiced by private respondent herein that
resulted in totally depriving petitioners of every opportunity to defend themselves against her claims
which, after all, as will be seen later in this opinion, the record does not show to be invulnerable, both in
their factual and legal aspects, taking into consideration the tenor of the pleadings and the probative value
of the competent evidence which were before the trial court when it rendered its assailed decision where
all the defendants are indispensable parties, for which reason the absence of any of them in the case
would result in the court losing its competency to act validly, any compromise that the plaintiff might wish
to make with any of them must, as a matter of correct procedure, have to await until after the rendition of
the judgment, at which stage the plaintiff may then treat the matter of its execution and the satisfaction
of his claim as variably as he might please. Accordingly, in the case now before Us together with the
dismissal of the complaint against the non-defaulted defendants, the court should have ordered also the
dismissal thereof as to petitioners.

Indeed, there is more reason to apply here the principle of unity and indivisibility of the action just
discussed because all the defendants here have already joined genuine issues with plaintiff. Their default
was only at the pre-trial. And as to such absence of petitioners at the pre-trial, the same could be
attributed to the fact that they might not have considered it necessary anymore to be present, since their
respective children Lim and Leonardo, with whom they have common defenses, could take care of their
defenses as well. Anything that might have had to be done by them at such pre-trial could have been
done for them by their children, at least initially, specially because in the light of the pleadings before the
court, the prospects of a compromise must have appeared to be rather remote. Such attitude of
petitioners is neither uncommon nor totally unjustified. Under the circumstances, to declare them
immediately and irrevocably in default was not an absolute necessity. Practical considerations and reasons
of equity should have moved respondent court to be more understanding in dealing with the situation.
After all, declaring them in default as respondent court did not impair their right to a common fate with
their children.

–3–

Another issue to be resolved in this case is the question of whether or not herein petitioners were entitled
to notice of plaintiff's motion to drop their co-defendants Lim and Leonardo, considering that petitioners
had been previously declared in default. In this connection, the decisive consideration is that according to
the applicable rule, Section 9, Rule 13, already quoted above, (1) even after a defendant has been
declared in default, provided he "files a motion to set aside the order of default, — he shall be entitled to
notice of all further proceedings regardless of whether the order of default is set aside or not" and (2) a
party in default who has not filed such a motion to set aside must still be served with all "substantially
amended or supplemented pleadings." In the instant case, it cannot be denied that petitioners had all filed
their motion for reconsideration of the order declaring them in default. Respondents' own answer to the
petition therein makes reference to the order of April 3, 1973, Annex 8 of said answer, which denied said
motion for reconsideration. On page 3 of petitioners' memorandum herein this motion is referred to as "a
motion to set aside the order of default." But as We have not been favored by the parties with a copy of
the said motion, We do not even know the excuse given for petitioners' failure to appear at the pre-trial,
and We cannot, therefore, determine whether or not the motion complied with the requirements of
Section 3 of Rule 18 which We have held to be controlling in cases of default for failure to answer on time.
(The Philippine-British Co. Inc. etc. et al. vs. The Hon. Walfrido de los Angeles etc. et al., 63 SCRA 50.)

We do not, however, have here, as earlier noted, a case of default for failure to answer but one for failure
to appear at the pre-trial. We reiterate, in the situation now before Us, issues have already been joined. In
fact, evidence had been partially offered already at the pre-trial and more of it at the actual trial which
had already begun with the first witness of the plaintiff undergoing re-cross-examination. With these facts
in mind and considering that issues had already been joined even as regards the defaulted defendants, it
would be requiring the obvious to pretend that there was still need for an oath or a verification as to the
merits of the defense of the defaulted defendants in their motion to reconsider their default. Inasmuch as
none of the parties had asked for a summary judgment there can be no question that the issues joined
were genuine, and consequently, the reason for requiring such oath or verification no longer holds.
Besides, it may also be reiterated that being the parents of the non-defaulted defendants, petitioners
must have assumed that their presence was superfluous, particularly because the cause of action against
them as well as their own defenses are common. Under these circumstances, the form of the motion by
which the default was sought to be lifted is secondary and the requirements of Section 3 of Rule 18 need
not be strictly complied with, unlike in cases of default for failure to answer. We can thus hold as We do
hold for the purposes of the revival of their right to notice under Section 9 of Rule 13, that petitioner's
motion for reconsideration was in substance legally adequate regardless of whether or not it was under
oath.

In any event, the dropping of the defendants Lim and Leonardo from plaintiff's amended complaint was
virtually a second amendment of plaintiffs complaint. And there can be no doubt that such amendment
was substantial, for with the elimination thereby of two defendants allegedly solidarily liable with their co-
defendants, herein petitioners, it had the effect of increasing proportionally what each of the remaining
defendants, the said petitioners, would have to answer for jointly and severally. Accordingly, notice to
petitioners of the plaintiff's motion of October 18, 1974 was legally indispensable under the rule above-
quoted. Consequently, respondent court had no authority to act on the motion, to dismiss, pursuant to
Section 6 of Rule 15, for according to Senator Francisco, "(t) he Rules of Court clearly provide that no
motion shall be acted upon by the Court without the proof of service of notice thereof, together with a
copy of the motion and other papers accompanying it, to all parties concerned at least three days before
the hearing thereof, stating the time and place for the hearing of the motion. (Rule 26, section 4, 5 and 6,
Rules of Court (now Sec. 15, new Rules). When the motion does not comply with this requireme nt, it is
not a motion. It presents no question which the court could decide. And the Court acquires no jurisdiction
to consider it. (Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla,
42 Phil., 81.) (Laserna vs. Javier, et al., CA-G.R. No. 7885, April 22, 1955; 21 L.J. 36, citing Roman
Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.)
(Francisco. The Revised Rules of Court in the Philippines, pp. 861-862.) Thus, We see again, from a
different angle, why respondent court's order of dismissal of October 21, 1974 is fatally ineffective.

–4–

The foregoing considerations notwithstanding, it is respondents' position that certiorari is not the proper
remedy of petitioners. It is contended that inasmuch as said petitioners have in fact made their appeal
already by filing the required notice of appeal and appeal bond and a motion for extension to file their
record on appeal, which motion was granted by respondent court, their only recourse is to prosecute that
appeal. Additionally, it is also maintained that since petitioners have expressly withdrawn their motion to
quash of January 4, 1975 impugning the order of October 28, 1974, they have lost their right to assail by
certiorari the actuations of respondent court now being questioned, respondent court not having been
given the opportunity to correct any possible error it might have committed.

We do not agree. As already shown in the foregoing discussion, the proceedings in the court below have
gone so far out of hand that prompt action is needed to restore order in the entangled situation created by
the series of plainly illegal orders it had issued. The essential purpose of certiorari is to keep the
proceedings in lower judicial courts and tribunals within legal bounds, so that due process and the rule of
law may prevail at all times and arbitrariness, whimsicality and unfairness which justice abhors may
immediately be stamped out before graver injury, juridical and otherwise, ensues. While generally these
objectives may well be attained in an ordinary appeal, it is undoubtedly the better rule to allow the special
remedy of certiorari at the option of the party adversely affected, when the irregularity committed by the
trial court is so grave and so far reaching in its consequences that the long and cumbersome procedure of
appeal will only further aggravate the situation of the aggrieved party because other untoward actuations
are likely to materialize as natural consequences of those already perpetrated. If the law were otherwise,
certiorari would have no reason at all for being.

No elaborate discussion is needed to show the urgent need for corrective measures in the case at bar.
Verily, this is one case that calls for the exercise of the Supreme Court's inherent power of supervision
over all kinds of judicial actions of lower courts. Private respondent's procedural technique designed to
disable petitioners to defend themselves against her claim which appears on the face of the record itself to
be at least highly controversial seems to have so fascinated respondent court that none would be
surprised should her pending motion for immediate execution of the impugned judgment receive similar
ready sanction as her previous motions which turned the proceedings into a one-sided affair. The stakes
here are high. Not only is the subject matter considerably substantial; there is the more important aspect
that not only the spirit and intent of the rules but even the basic rudiments of fair play have been
disregarded. For the Court to leave unrestrained the obvious tendency of the proceedings below would be
nothing short of wittingly condoning inequity and injustice resulting from erroneous construction and
unwarranted application of procedural rules.

–5–

The sum and total of all the foregoing disquisitions is that the decision here in question is legally
anomalous. It is predicated on two fatal malactuations of respondent court namely (1) the dismissal of the
complaint against the non-defaulted defendants Lim and Leonardo and (2) the ex-parte reception of the
evidence of the plaintiff by the clerk of court, the subsequent using of the same as basis for its judgment
and the rendition of such judgment.

For at least three reasons which We have already fully discussed above, the order of dismissal of October
21, 1974 is unworthy of Our sanction: (1) there was no timely notice of the motion therefor to the non-
defaulted defendants, aside from there being no notice at all to herein petitioners; (2) the common
answer of the defendants, including the non-defaulted, contained a compulsory counterclaim incapable of
being determined in an independent action; and (3) the immediate effect of such dismissal was the
removal of the two non-defaulted defendants as parties, and inasmuch as they are both indispensable
parties in the case, the court consequently lost the" sine qua non of the exercise of judicial power",
per Borlasa vs. Polistico, supra. This is not to mention anymore the irregular delegation to the clerk of
court of the function of receiving plaintiff's evidence. And as regards the ex-parte reception of plaintiff's
evidence and subsequent rendition of the judgment by default based thereon, We have seen that it was
violative of the right of the petitioners, under the applicable rules and principles on default, to a common
and single fate with their non-defaulted co-defendants. And We are not yet referring, as We shall do this
anon to the numerous reversible errors in the decision itself.

It is to be noted, however, that the above-indicated two fundamental flaws in respondent court's
actuations do not call for a common corrective remedy. We cannot simply rule that all the impugned
proceedings are null and void and should be set aside, without being faced with the insurmountable
obstacle that by so doing We would be reviewing the case as against the two non-defaulted defendants
who are not before Us not being parties hereto. Upon the other hand, for Us to hold that the order of
dismissal should be allowed to stand, as contended by respondents themselves who insist that the same is
already final, not only because the period for its finality has long passed but also because allegedly, albeit
not very accurately, said 'non-defaulted defendants unsuccessfully tried to have it set aside by the Court
of Appeals whose decision on their petition is also already final, We would have to disregard whatever
evidence had been presented by the plaintiff against them and, of course, the findings of respondent court
based thereon which, as the assailed decision shows, are adverse to them. In other words, whichever of
the two apparent remedies the Court chooses, it would necessarily entail some kind of possible juridical
imperfection. Speaking of their respective practical or pragmatic effects, to annul the dismissal would
inevitably prejudice the rights of the non-defaulted defendants whom We have not heard and who even
respondents would not wish to have anything anymore to do with the case. On the other hand, to include
petitioners in the dismissal would naturally set at naught every effort private respondent has made to
establish or prove her case thru means sanctioned by respondent court. In short, We are confronted with
a legal para-dilemma. But one thing is certain — this difficult situations has been brought about by none
other than private respondent who has quite cynically resorted to procedural maneuvers without realizing
that the technicalities of the adjective law, even when apparently accurate from the literal point of view,
cannot prevail over the imperatives of the substantive law and of equity that always underlie them and
which have to be inevitably considered in the construction of the pertinent procedural rules.

All things considered, after careful and mature deliberation, the Court has arrived at the conclusion that as
between the two possible alternatives just stated, it would only be fair, equitable and proper to uphold the
position of petitioners. In other words, We rule that the order of dismissal of October 21, 1974 is in law a
dismissal of the whole case of the plaintiff, including as to petitioners herein. Consequently, all
proceedings held by respondent court subsequent thereto including and principally its decision of
December 20, 1974 are illegal and should be set aside.

This conclusion is fully justified by the following considerations of equity:

1. It is very clear to Us that the procedural maneuver resorted to by private respondent in securing the
decision in her favor was ill-conceived. It was characterized by that which every principle of law and equity
disdains — taking unfair advantage of the rules of procedure in order to unduly deprive the other party of
full opportunity to defend his cause. The idea of "dropping" the non-defaulted defendants with the end in
view of completely incapacitating their co-defendants from making any defense, without considering that
all of them are indispensable parties to a common cause of action to which they have countered with a
common defense readily connotes an intent to secure a one-sided decision, even improperly. And when, in
this connection, the obvious weakness of plaintiff's evidence is taken into account, one easily understands
why such tactics had to be availed of. We cannot directly or indirectly give Our assent to the commission
of unfairness and inequity in the application of the rules of procedure, particularly when the propriety of
reliance thereon is not beyond controversy.

2. The theories of remedial law pursued by private respondents, although approved by His Honor, run
counter to such basic principles in the rules on default and such elementary rules on dismissal of actions
and notice of motions that no trial court should be unaware of or should be mistaken in applying. We are
at a loss as to why His Honor failed to see through counsel's inequitous strategy, when the provisions (1)
on the three-day rule on notice of motions, Section 4 of Rule 15, (2) against dismissal of actions on
motion of plaintiff when there is a compulsory counterclaim, Section 2, Rule 17, (3) against permitting the
absence of indispensable parties, Section 7, Rule 3, (4) on service of papers upon defendants in default
when there are substantial amendments to pleadings, Section 9, Rule 13, and (5) on the unity and
integrity of the fate of defendants in default with those not in default where the cause of action against
them and their own defenses are common, Section 4, Rule 18, are so plain and the jurisprudence
declaratory of their intent and proper construction are so readily comprehensible that any error as to their
application would be unusual in any competent trial court.

3. After all, all the malactuations of respondent court are traceable to the initiative of private respondent
and/or her counsel. She cannot, therefore, complain that she is being made to unjustifiably suffer the
consequences of what We have found to be erroneous orders of respondent court. It is only fair that she
should not be allowed to benefit from her own frustrated objective of securing a one-sided decision.

4. More importantly, We do not hesitate to hold that on the basis of its own recitals, the decision in
question cannot stand close scrutiny. What is more, the very considerations contained therein reveal
convincingly the inherent weakness of the cause of the plaintiff. To be sure, We have been giving serious
thought to the idea of merely returning this case for a resumption of trial by setting aside the order of
dismissal of October 21, 1974, with all its attendant difficulties on account of its adverse effects on parties
who have not been heard, but upon closer study of the pleadings and the decision and other
circumstances extant in the record before Us, We are now persuaded that such a course of action would
only lead to more legal complications incident to attempts on the part of the parties concerned to
desperately squeeze themselves out of a bad situation. Anyway, We feel confident that by and large, there
is enough basis here and now for Us to rule out the claim of the plaintiff.

Even a mere superficial reading of the decision would immediately reveal that it is littered on its face with
deficiencies and imperfections which would have had no reason for being were there less haste and more
circumspection in rendering the same. Recklessness in jumping to unwarranted conclusions, both factual
and legal, is at once evident in its findings relative precisely to the main bases themselves of the reliefs
granted. It is apparent therein that no effort has been made to avoid glaring inconsistencies. Where
references are made to codal provisions and jurisprudence, inaccuracy and inapplicability are at once
manifest. It hardly commends itself as a deliberate and consciencious adjudication of a litigation which,
considering the substantial value of the subject matter it involves and the unprecedented procedure that
was followed by respondent's counsel, calls for greater attention and skill than the general run of cases
would.

Inter alia, the following features of the decision make it highly improbable that if We took another course
of action, private respondent would still be able to make out any case against petitioners, not to speak of
their co-defendants who have already been exonerated by respondent herself thru her motion to dismiss:

1. According to His Honor's own statement of plaintiff's case, "she is the widow of the late Tee Hoon Po
Chuan (Po Chuan, for short) who was then one of the partners in the commercial partnership, Glory
Commercial Co. with defendants Antonio Lim Tanhu (Lim Tanhu, for short) and Alfonso Leonardo Ng Sua
(Ng Sua, for short) as co-partners; that after the death of her husband on March 11, 1966 she is entitled
to share not only in the capital and profits of the partnership but also in the other assets, both real and
personal, acquired by the partnership with funds of the latter during its lifetime."

Relatedly, in the latter part of the decision, the findings are to the following effect: .

That the herein plaintiff Tan Put and her late husband Po Chuan married at the Philippine
Independent Church of Cebu City on December, 20, 1949; that Po Chuan died on March 11,
1966; that the plaintiff and the late Po Chuan were childless but the former has a foster son
Antonio Nuñez whom she has reared since his birth with whom she lives up to the present;
that prior to the marriage of the plaintiff to Po Chuan the latter was already managing the
partnership Glory Commercial Co. then engaged in a little business in hardware at Manalili
St., Cebu City; that prior to and just after the marriage of the plaintiff to Po Chuan she was
engaged in the drugstore business; that not long after her marriage, upon the suggestion of
Po Chuan the plaintiff sold her drugstore for P125,000.00 which amount she gave to her
husband in the presence of defendant Lim Tanhu and was invested in the partnership Glory
Commercial Co. sometime in 1950; that after the investment of the above-stated amount in
the partnership its business flourished and it embarked in the import business and also
engaged in the wholesale and retail trade of cement and GI sheets and under huge profits;

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business of the partnership
Glory Commercial Co. he was the one who made the final decisions and approved the
appointments of new personnel who were taken in by the partnership; that the late Po
Chuan and defendants Lim Tanhu and Ng Sua are brothers, the latter two (2) being the
elder brothers of the former; that defendants Lim Tanhu and Ng Sua are both naturalized
Filipino citizens whereas the late Po Chuan until the time of his death was a Chinese citizen;
that the three (3) brothers were partners in the Glory Commercial Co. but Po Chuan was
practically the owner of the partnership having the controlling interest; that defendants Lim
Tanhu and Ng Sua were partners in name but they were mere employees of Po Chuan ....
(Pp. 89-91, Record.)

How did His Honor arrive at these conclusions? To start with, it is not clear in the decision whether or not
in making its findings of fact the court took into account the allegations in the pleadings of the parties and
whatever might have transpired at the pre-trial. All that We can gather in this respect is that references
are made therein to pre-trial exhibits and to Annex A of the answer of the defendants to plaintiff's
amended complaint. Indeed, it was incumbent upon the court to consider not only the evidence formally
offered at the trial but also the admissions, expressed or implied, in the pleadings, as well as whatever
might have been placed before it or brought to its attention during the pre-trial. In this connection, it is to
be regretted that none of the parties has thought it proper to give Us an idea of what took place at the
pre-trial of the present case and what are contained in the pre-trial order, if any was issued pursuant to
Section 4 of Rule 20.

The fundamental purpose of pre-trial, aside from affording the parties every opportunity to compromise or
settle their differences, is for the court to be apprised of the unsettled issues between the parties and of
their respective evidence relative thereto, to the end that it may take corresponding measures that would
abbreviate the trial as much as possible and the judge may be able to ascertain the facts with the least
observance of technical rules. In other words whatever is said or done by the parties or their counsel at
the pre- trial serves to put the judge on notice of their respective basic positions, in order that in
appropriate cases he may, if necessary in the interest of justice and a more accurate determination of the
facts, make inquiries about or require clarifications of matters taken up at the pre-trial, before finally
resolving any issue of fact or of law. In brief, the pre-trial constitutes part and parcel of the proceedings,
and hence, matters dealt with therein may not be disregarded in the process of decision making.
Otherwise, the real essence of compulsory pre-trial would be insignificant and worthless.

Now, applying these postulates to the findings of respondent court just quoted, it will be observed that the
court's conclusion about the supposed marriage of plaintiff to the deceased Tee Hoon Lim Po Chuan is
contrary to the weight of the evidence brought before it during the trial and the pre-trial.

Under Article 55 of the Civil Code, the declaration of the contracting parties that they take each other as
husband and wife "shall be set forth in an instrument" signed by the parties as well as by their witnesses
and the person solemnizing the marriage. Accordingly, the primary evidence of a marriage must be an
authentic copy of the marriage contract. While a marriage may also be proved by other competent
evidence, the absence of the contract must first be satisfactorily explained. Surely, the certification of the
person who allegedly solemnized a marriage is not admissible evidence of such marriage unless proof of
loss of the contract or of any other satisfactory reason for its non-production is first presented to the
court. In the case at bar, the purported certification issued by a Mons. Jose M. Recoleto, Bishop, Philippine
Independent Church, Cebu City, is not, therefore, competent evidence, there being absolutely no showing
as to unavailability of the marriage contract and, indeed, as to the authenticity of the signature of said
certifier, the jurat allegedly signed by a second assistant provincial fiscal not being authorized by law,
since it is not part of the functions of his office. Besides, inasmuch as the bishop did not testify, the same
is hearsay.

As regards the testimony of plaintiff herself on the same point and that of her witness Antonio Nuñez,
there can be no question that they are both self-serving and of very little evidentiary value, it having been
disclosed at the trial that plaintiff has already assigned all her rights in this case to said Nuñez, thereby
making him the real party in interest here and, therefore, naturally as biased as herself. Besides, in the
portion of the testimony of Nuñez copied in Annex C of petitioner's memorandum, it appears admitted that
he was born only on March 25, 1942, which means that he was less than eight years old at the supposed
time of the alleged marriage. If for this reason alone, it is extremely doubtful if he could have been
sufficiently aware of such event as to be competent to testify about it.

Incidentally, another Annex C of the same memorandum purports to be the certificate of birth of one
Antonio T. Uy supposed to have been born on March 23, 1937 at Centro Misamis, Misamis Occidental, the
son of one Uy Bien, father, and Tan Put, mother. Significantly, respondents have not made any adverse
comment on this document. It is more likely, therefore, that the witness is really the son of plaintiff by her
husband Uy Kim Beng. But she testified she was childless. So which is which? In any event, if on the
strength of this document, Nuñez is actually the legitimate son of Tan Put and not her adopted son, he
would have been but 13 years old in 1949, the year of her alleged marriage to Po Chuan, and even then,
considering such age, his testimony in regard thereto would still be suspect.

Now, as against such flimsy evidence of plaintiff, the court had before it, two documents of great weight
belying the pretended marriage. We refer to (1) Exhibit LL, the income tax return of the deceased Tee
Hoon Lim Po Chuan indicating that the name of his wife was Ang Sick Tin and (2) the quitclaim, Annex A
of the answer, wherein plaintiff Tan Put stated that she had been living with the deceased without benefit
of marriage and that she was his "common-law wife". Surely, these two documents are far more reliable
than all the evidence of the plaintiff put together.

Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is evidence offered to the judge
himself, not to the clerk of court, and should have at least moved him to ask plaintiff to explain if not
rebut it before jumping to the conclusion regarding her alleged marriage to the deceased, Po Chuan. And
in regard to the quitclaim containing the admission of a common-law relationship only, it is to be observed
that His Honor found that "defendants Lim Tanhu and Ng Sua had the plaintiff execute a quitclaim on
November 29, 1967 (Annex "A", Answer) where they gave plaintiff the amount of P25,000 as her share in
the capital and profits of the business of Glory Commercial Co. which was engaged in the hardware
business", without making mention of any evidence of fraud and misrepresentation in its execution,
thereby indicating either that no evidence to prove that allegation of the plaintiff had been presented by
her or that whatever evidence was actually offered did not produce persuasion upon the court. Stated
differently, since the existence of the quitclaim has been duly established without any circumstance to
detract from its legal import, the court should have held that plaintiff was bound by her admission therein
that she was the common-law wife only of Po Chuan and what is more, that she had already renounced
for valuable consideration whatever claim she might have relative to the partnership Glory Commercial Co.

And when it is borne in mind that in addition to all these considerations, there are mentioned and
discussed in the memorandum of petitioners (1) the certification of the Local Civil Registrar of Cebu City
and (2) a similar certification of the Apostolic Prefect of the Philippine Independent Church, Parish of Sto.
Niño, Cebu City, that their respective official records corresponding to December 1949 to December 1950
do not show any marriage between Tee Hoon Lim Po Chuan and Tan Put, neither of which certifications
have been impugned by respondent until now, it stands to reason that plaintiff's claim of marriage is really
unfounded. Withal, there is still another document, also mentioned and discussed in the same
memorandum and unimpugned by respondents, a written agreement executed in Chinese, but purportedly
translated into English by the Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan to
the following effect:

CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines

TRANSLATION

This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr. Lim Po Chuan
alias TeeHoon since 1949 but it recently occurs that we are incompatible with each other
and are not in the position to keep living together permanently. With the mutual
concurrence, we decided to terminate the existing relationship of common law-marriage and
promised not to interfere each other's affairs from now on. The Forty Thousand Pesos
(P40,000.00) has been given to me by Mr. Lim Po Chuan for my subsistence.

Witnesses:

Mr. Lim Beng Guan Mr. Huang Sing Se

Signed on the 10 day of the 7th month of the 54th year of the Republic of China
(corresponding to the year 1965).

(SGD) TAN KI ENG

Verified from the records. JORGE TABAR (Pp. 283-284, Record.)

Indeed, not only does this document prove that plaintiff's relation to the deceased was that of a common-
law wife but that they had settled their property interests with the payment to her of P40,000.

In the light of all these circumstances, We find no alternative but to hold that plaintiff Tan Put's allegation
that she is the widow of Tee Hoon Lim Po Chuan has not been satisfactorily established and that, on the
contrary, the evidence on record convincingly shows that her relation with said deceased was that of a
common-law wife and furthermore, that all her claims against the company and its surviving partners as
well as those against the estate of the deceased have already been settled and paid. We take judicial
notice of the fact that the respective counsel who assisted the parties in the quitclaim, Attys. H.
Hermosisima and Natalio Castillo, are members in good standing of the Philippine Bar, with the
particularity that the latter has been a member of the Cabinet and of the House of Representatives of the
Philippines, hence, absent any credible proof that they had allowed themselves to be parties to a
fraudulent document His Honor did right in recognizing its existence, albeit erring in not giving due legal
significance to its contents.

2. If, as We have seen, plaintiff's evidence of her alleged status as legitimate wife of Po Chuan is not only
unconvincing but has been actually overcome by the more competent and weighty evidence in favor of the
defendants, her attempt to substantiate her main cause of action that defendants Lim Tanhu and Ng Sua
have defrauded the partnership Glory Commercial Co. and converted its properties to themselves is even
more dismal. From the very evidence summarized by His Honor in the decision in question, it is clear that
not an iota of reliable proof exists of such alleged misdeeds.

Of course, the existence of the partnership has not been denied, it is actually admitted impliedly in
defendants' affirmative defense that Po Chuan's share had already been duly settled with and paid to both
the plaintiff and his legitimate family. But the evidence as to the actual participation of the defendants Lim
Tanhu and Ng Sua in the operation of the business that could have enabled them to make the extractions
of funds alleged by plaintiff is at best confusing and at certain points manifestly inconsistent.

In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is entitled to
¹/3 share of the assets and properties of the partnership. In fact, her prayer in said complaint is, among
others, for the delivery to her of such ¹/ 3 share. His Honor's statement of the case as well as his findings
and judgment are all to that same effect. But what did she actually try to prove at the ex- parte hearing?

According to the decision, plaintiff had shown that she had money of her own when she "married" Po
Chuan and "that prior to and just after the marriage of the plaintiff to Po Chuan, she was engaged in the
drugstore business; that not long after her marriage, upon the suggestion of Po Chuan, the plaintiff sold
her drugstore for P125,000 which amount she gave to her husband in the presence of Tanhu and was
invested in the partnership Glory Commercial Co. sometime in 1950; that after the investment of the
above-stated amount in the partnership, its business flourished and it embarked in the import business
and also engaged in the wholesale and retail trade of cement and GI sheets and under (sic) huge profits."
(pp. 25-26, Annex L, petition.)

To begin with, this theory of her having contributed of P125,000 to the capital of the partnership by
reason of which the business flourished and amassed all the millions referred to in the decision has not
been alleged in the complaint, and inasmuch as what was being rendered was a judgment by default, such
theory should not have been allowed to be the subject of any evidence. But inasmuch as it was the clerk
of court who received the evidence, it is understandable that he failed to observe the rule. Then, on the
other hand, if it was her capital that made the partnership flourish, why would she claim to be entitled to
only to ¹/ 3 of its assets and profits? Under her theory found proven by respondent court, she was actually
the owner of everything, particularly because His Honor also found "that defendants Lim Tanhu and Ng
Sua were partners in the name but they were employees of Po Chuan that defendants Lim Tanhu and Ng
Sua had no means of livelihood at the time of their employment with the Glory Commercial Co. under the
management of the late Po Chuan except their salaries therefrom; ..." (p. 27, id.) Why then does she
claim only ¹/3 share? Is this an indication of her generosity towards defendants or of a concocted cause of
action existing only in her confused imagination engendered by the death of her common-law husband
with whom she had settled her common-law claim for recompense of her services as common law wife for
less than what she must have known would go to his legitimate wife and children?

Actually, as may be noted from the decision itself, the trial court was confused as to the participation of
defendants Lim Tanhu and Ng Sua in Glory Commercial Co. At one point, they were deemed partners, at
another point mere employees and then elsewhere as partners-employees, a newly found concept, to be
sure, in the law on partnership. And the confusion is worse comfounded in the judgment which allows
these "partners in name" and "partners-employees" or employees who had no means of livelihood and
who must not have contributed any capital in the business, "as Po Chuan was practically the owner of the
partnership having the controlling interest", ¹/ 3 each of the huge assets and profits of the partnership.
Incidentally, it may be observed at this juncture that the decision has made Po Chuan play the
inconsistent role of being "practically the owner" but at the same time getting his capital from the
P125,000 given to him by plaintiff and from which capital the business allegedly "flourished."

Anent the allegation of plaintiff that the properties shown by her exhibits to be in the names of defendants
Lim Tanhu and Ng Sua were bought by them with partnership funds, His Honor confirmed the same by
finding and holding that "it is likewise clear that real properties together with the improvements in the
names of defendants Lim Tanhu and Ng Sua were acquired with partnership funds as these defendants
were only partners-employees of deceased Po Chuan in the Glory Commercial Co. until the time of his
death on March 11, 1966." (p. 30, id.) It Is Our considered view, however, that this conclusion of His
Honor is based on nothing but pure unwarranted conjecture. Nowhere is it shown in the decision how said
defendants could have extracted money from the partnership in the fraudulent and illegal manner
pretended by plaintiff. Neither in the testimony of Nuñez nor in that of plaintiff, as these are summarized
in the decision, can there be found any single act of extraction of partnership funds committed by any of
said defendants. That the partnership might have grown into a multi-million enterprise and that the
properties described in the exhibits enumerated in the decision are not in the names of Po Chuan, who
was Chinese, but of the defendants who are Filipinos, do not necessarily prove that Po Chuan had not
gotten his share of the profits of the business or that the properties in the names of the defendants were
bought with money of the partnership. In this connection, it is decisively important to consider that on the
basis of the concordant and mutually cumulative testimonies of plaintiff and Nuñez, respondent court
found very explicitly that, and We reiterate:

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business of the partnership
Glory Commercial Co. he was the one who made the final decisions and approved the
appointments of new Personnel who were taken in by the partnership; that the late Po
Chuan and defendants Lim Tanhu and Ng Sua are brothers, the latter to (2) being the elder
brothers of the former; that defendants Lim Tanhu and Ng Sua are both naturalized Filipino
citizens whereas the late Po Chuan until the time of his death was a Chinese citizen; that
the three (3) brothers were partners in the Glory Commercial Co. but Po Chuan was
practically the owner of the partnership having the controlling interest; that defendants Lim
Tanhu and Ng Sua were partners in name but they were mere employees of Po Chuan; ....
(Pp. 90-91, Record.)

If Po Chuan was in control of the affairs and the running of the partnership, how could the defendants
have defrauded him of such huge amounts as plaintiff had made his Honor believe? Upon the other hand,
since Po Chuan was in control of the affairs of the partnership, the more logical inference is that if
defendants had obtained any portion of the funds of the partnership for themselves, it must have been
with the knowledge and consent of Po Chuan, for which reason no accounting could be demanded from
them therefor, considering that Article 1807 of the Civil Code refers only to what is taken by a partner
without the consent of the other partner or partners. Incidentally again, this theory about Po Chuan
having been actively managing the partnership up to his death is a substantial deviation from the
allegation in the amended complaint to the effect that "defendants Antonio Lim Tanhu, Alfonso Leonardo
Ng Sua, Lim Teck Chuan and Eng Chong Leonardo, through fraud and machination, took actual and active
management of the partnership and although Tee Hoon Lim Po Chuan was the manager of Glory
Commercial Co., defendants managed to use the funds of the partnership to purchase lands and buildings
etc. (Par. 4, p. 2 of amended complaint, Annex B of petition) and should not have been permitted to be
proven by the hearing officer, who naturally did not know any better.

Moreover, it is very significant that according to the very tax declarations and land titles listed in the
decision, most if not all of the properties supposed to have been acquired by the defendants Lim Tanhu
and Ng Sua with funds of the partnership appear to have been transferred to their names only in 1969 or
later, that is, long after the partnership had been automatically dissolved as a result of the death of Po
Chuan. Accordingly, defendants have no obligation to account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust of Po Chuan during the existence of the
partnership. (See Hanlon vs. Hansserman and. Beam, 40 Phil. 796.)

There are other particulars which should have caused His Honor to readily disbelieve plaintiffs'
pretensions. Nuñez testified that "for about 18 years he was in charge of the GI sheets and sometimes
attended to the imported items of the business of Glory Commercial Co." Counting 18 years back from
1965 or 1966 would take Us to 1947 or 1948. Since according to Exhibit LL, the baptismal certificate
produced by the same witness as his birth certificate, shows he was born in March, 1942, how could he
have started managing Glory Commercial Co. in 1949 when he must have been barely six or seven years
old? It should not have escaped His Honor's attention that the photographs showing the premises of
Philippine Metal Industries after its organization "a year or two after the establishment of Cebu Can
Factory in 1957 or 1958" must have been taken after 1959. How could Nuñez have been only 13 years old
then as claimed by him to have been his age in those photographs when according to his "birth
certificate", he was born in 1942? His Honor should not have overlooked that according to the same
witness, defendant Ng Sua was living in Bantayan until he was directed to return to Cebu after the fishing
business thereat floundered, whereas all that the witness knew about defendant Lim Teck Chuan's arrival
from Hongkong and the expenditure of partnership money for him were only told to him allegedly by Po
Chuan, which testimonies are veritably exculpatory as to Ng Sua and hearsay as to Lim Teck Chuan.
Neither should His Honor have failed to note that according to plaintiff herself, "Lim Tanhu was employed
by her husband although he did not go there always being a mere employee of Glory Commercial Co." (p.
22, Annex the decision.)

The decision is rather emphatic in that Lim Tanhu and Ng Sua had no known income except their salaries.
Actually, it is not stated, however, from what evidence such conclusion was derived in so far as Ng Sua is
concerned. On the other hand, with respect to Lim Tanhu, the decision itself states that according to
Exhibit NN-Pre trial, in the supposed income tax return of Lim Tanhu for 1964, he had an income of
P4,800 as salary from Philippine Metal Industries alone and had a total assess sable net income of
P23,920.77 that year for which he paid a tax of P4,656.00. (p. 14. Annex L, id.) And per Exhibit GG-
Pretrial in the year, he had a net income of P32,000 for which be paid a tax of P3,512.40. ( id.) As early as
1962, "his fishing business in Madridejos Cebu was making money, and he reported "a net gain from
operation (in) the amount of P865.64" (id., per Exhibit VV-Pre-trial.) From what then did his Honor gather
the conclusion that all the properties registered in his name have come from funds malversed from the
partnership?

It is rather unusual that His Honor delved into financial statements and books of Glory Commercial Co.
without the aid of any accountant or without the same being explained by any witness who had prepared
them or who has knowledge of the entries therein. This must be the reason why there are apparent
inconsistencies and inaccuracies in the conclusions His Honor made out of them. In Exhibit SS-Pre-trial,
the reported total assets of the company amounted to P2,328,460.27 as of December, 1965, and yet,
Exhibit TT-Pre-trial, according to His Honor, showed that the total value of goods available as of the same
date was P11,166,327.62. On the other hand, per Exhibit XX-Pre-trial, the supposed balance sheet of the
company for 1966, "the value of inventoried merchandise, both local and imported", as found by His
Honor, was P584,034.38. Again, as of December 31, 1966, the value of the company's goods available for
sale was P5,524,050.87, per Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pre-trial, the supposed
Book of Account, whatever that is, of the company showed its "cash analysis" was P12,223,182.55. We do
not hesitate to make the observation that His Honor, unless he is a certified public accountant, was hardly
qualified to read such exhibits and draw any definite conclusions therefrom, without risk of erring and
committing an injustice. In any event, there is no comprehensible explanation in the decision of the
conclusion of His Honor that there were P12,223,182.55 cash money defendants have to account for,
particularly when it can be very clearly seen in Exhibits 11-4, 11-4- A, 11-5 and 11-6-Pre-trial, Glory
Commercial Co. had accounts payable as of December 31, 1965 in the amount of P4,801,321.17. (p.
15, id.) Under the circumstances, We are not prepared to permit anyone to predicate any claim or right
from respondent court's unaided exercise of accounting knowledge.

Additionally, We note that the decision has not made any finding regarding the allegation in the amended
complaint that a corporation denominated Glory Commercial Co., Inc. was organized after the death of Po
Chuan with capital from the funds of the partnership. We note also that there is absolutely no finding
made as to how the defendants Dy Ochay and Co Oyo could in any way be accountable to plaintiff, just
because they happen to be the wives of Lim Tanhu and Ng Sua, respectively. We further note that while
His Honor has ordered defendants to deliver or pay jointly and severally to the plaintiff P4,074,394.18 or
¹/3 of the P12,223,182.55, the supposed cash belonging to the partnership as of December 31, 1965, in
the same breath, they have also been sentenced to partition and give ¹/3 share of the properties
enumerated in the dispositive portion of the decision, which seemingly are the very properties allegedly
purchased from the funds of the partnership which would naturally include the P12,223,182.55 defendants
have to account for. Besides, assuming there has not yet been any liquidation of the partnership, contrary
to the allegation of the defendants, then Glory Commercial Co. would have the status of a partnership in
liquidation and the only right plaintiff could have would be to what might result after such liquidation to
belong to the deceased partner, and before this is finished, it is impossible to determine, what rights or
interests, if any, the deceased had (Bearneza vs. Dequilla 43 Phil. 237). In other words, no specific
amounts or properties may be adjudicated to the heir or legal representative of the deceased partner
without the liquidation being first terminated.

Indeed, only time and the fear that this decision would be much more extended than it is already prevent
us from further pointing out the inexplicable deficiencies and imperfections of the decision in question.
After all, what have been discussed should be more than sufficient to support Our conclusion that not only
must said decision be set aside but also that the action of the plaintiff must be totally dismissed, and,
were it not seemingly futile and productive of other legal complications, that plaintiff is liable on
defendants' counterclaims. Resolution of the other issues raised by the parties albeit important and
perhaps pivotal has likewise become superfluous.

IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings held in respondent court in its
Civil Case No. 12328 subsequent to the order of dismissal of October 21, 1974 are hereby annulled and
set aside, particularly the ex-parte proceedings against petitioners and the decision on December 20,
1974. Respondent court is hereby ordered to enter an order extending the effects of its order of dismissal
of the action dated October 21, 1974 to herein petitioners Antonio Lim Tanhu, Dy Ochay, Alfonso
Leonardo Ng Sua and Co Oyo. And respondent court is hereby permanently enjoined from taking any
further action in said civil case gave and except as herein indicated. Costs against private respondent.

G.R. No. 114398 October 24, 1997

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, represented by the Solicitor General, respondents.

ROMERO, J.:

Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon
City, in an information which reads as follows.

That on or between the month of May 19, 1988 and August, 1988 in Quezon City,
Philippines and within the jurisdiction of this Honorable Court, the said accused, with intent
of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully,
unlawfully and feloniously defraud one ISIDORA ROSALES, in the following manner, to wit:
on the date and in the place aforementioned, said accused received in trust from the
offended party cash money amounting to P536,650.00, Philippine Currency, with the
express obligation involving the duty to act as complainant's agent in purchasing local
cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several stores, to give
her commission corresponding to 40% of the profits; and to return the aforesaid amount of
offended party, but said accused, far from complying her aforesaid obligation, and once in
possession thereof, misapplied, misappropriated and converted the same to her personal
use and benefit, despite repeated demands made upon her, accused failed and refused and
still fails and refuses to deliver and/or return the same to the damage and prejudice of the
said ISIDORA ROSALES, in the aforementioned amount and in such other amount as may
be awarded under the provision of the Civil Code.

CONTRARY TO LAW.
The antecedent facts are as follows:

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant
Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes.
Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would
give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a
corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to
Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to
P633,650.00.

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the
progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain
information regarding their business proved futile.

Alarmed by this development and believing that the amounts she advanced were being misappropriated,
Rosales filed a case of estafa against Liwanag.

After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty
as charged. The dispositive portion of the decision reads thus:

WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused,
beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS
OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF
PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.

The accused is likewise ordered to reimburse the private complainant the sum of
P526,650.00, without subsidiary imprisonment, in case of insolvency.

SO ORDERED.

Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29,
1993, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with
the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT
(8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14)
YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects,
the decision is AFFIRMED.

SO ORDERED.

Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the
instant petition, submitting the following assignment of errors:

1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE CONVICTION

OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE
CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS
EITHER THAT OF A SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE
THE NON RETURN OF THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND
NOT CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-

PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE "EQUIPOISE RULE".

Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership,
wherein Rosales would contribute the funds while she would buy and sell the cigarettes, and later divide
the profits between
them. 1 She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending
to her the amount stated on an installment basis. 2

The Court of Appeals correctly rejected these pretenses.

While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the
Supreme Court, and carry more weight when these affirm the factual findings of the trial court, 3 we deem
it more expedient to resolve the instant petition on its merits.

Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means
of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts.4

From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded
another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary
estimation is caused to the offended party or third party, 5 and it is essential that there be a fiduciary
relation between them either in the form of a trust, commission or administration. 6

The receipt signed by Liwanag states thus:

May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND
AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets
(sic) (Philip & Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not
sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P.
Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988.

(SGD & Thumbedmarked) (sic)

CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City

Signed in the presence of:

(Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was
for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be
sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between the parties,
we have ruled that when money or property have been received by a partner for a specific purpose (such
as that obtaining
in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7

Neither can the transaction be considered a loan, since in a contract of loan once the money is received by
the debtor, ownership over the same is transferred. 8 Being the owner, the borrower can dispose of it for
whatever purpose he may deem proper.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased
because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if
this was not possible then to return the money to Rosales. Since in this case there was no transfer of
ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. l(b) of the Revised
Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29,
1993, is AFFIRMED. Costs against petitioner. SO ORDERED.

G.R. No. 5840 September 17, 1910

THE UNITED STATES, plaintiff-appellee, vs. EUSEBIO CLARIN, defendant-appellant.

ARELLANO, C.J.:

Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in company with Eusebio Clarin and
Carlos de Guzman, might buy and sell mangoes, and, believing that he could make some money in this
business, the said Larin made an agreement with the three men by which the profits were to be divided
equally between him and them.

Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in mangoes and obtained P203 from
the business, but did not comply with the terms of the contract by delivering to Larin his half of the
profits; neither did they render him any account of the capital.

Larin charged them with the crime of estafa, but the provincial fiscal filed an information only against
Eusebio Clarin in which he accused him of appropriating to himself not only the P172 but also the share of
the profits that belonged to Larin, amounting to P15.50.

Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and assumed that the facts
presented concerned the defendant and themselves together.

The trial court, that of First Instance of Pampanga, sentenced the defendant, Eusebio Clarin, to six
months' arresto mayor, to suffer the accessory penalties, and to return to Pedro Larin P172, besides
P30.50 as his share of the profits, or to subsidiary imprisonment in case of insolvency, and to pay the
costs. The defendant appealed, and in deciding his appeal we arrive at the following conclusions:

When 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, a contract is formed which is called
partnership. (Art. 1665, Civil Code.)

When Larin put the P172 into the partnership which he formed with Tarug, Clarin, and Guzman, he
invested his capital in the risks or benefits of the business of the purchase and sale of mangoes, and, even
though he had reserved the capital and conveyed only the usufruct of his money, it would not devolve
upon of his three partners to return his capital to him, but upon the partnership of which he himself
formed part, or if it were to be done by one of the three specifically, it would be Tarug, who, according to
the evidence, was the person who received the money directly from Larin.

The P172 having been received by the partnership, the business commenced and profits accrued, the
action that lies with the partner who furnished the capital for the recovery of his money is not a criminal
action for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership
and a levy on its assets if there should be any.

No. 5 of article 535 of the Penal Code, according to which those are guilty of estafa "who, to the prejudice
of another, shall appropriate or misapply any money, goods, or any kind of personal property which they
may have received as a deposit on commission for administration or in any other character producing the
obligation to deliver or return the same," (as, for example, in commodatum, precarium, and other
unilateral contracts which require the return of the same thing received) does not include money received
for a partnership; otherwise the result would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the
ownership of the money brought in by him, it would have to answer to the charge of estafa, for which it
would be sufficient to argue that the partnership had received the money under obligation to return it.
We therefore freely acquit Eusebio Clarin, with the costs de oficio. The complaint for estafa is dismissed
without prejudice to the institution of a civil action.

G.R. No. L-16318 October 21, 1921

PANG LIM and BENITO GALVEZ, plaintiffs-appellees, vs. LO SENG, defendant-appellant.

STREET, J.:

For several years prior to June 1, 1916, two of the litigating parties herein, namely, Lo Seng and Pang
Lim, Chinese residents of the City of Manila, were partners, under the firm name of Lo Seng and Co., in
the business of running a distillery, known as "El Progreso," in the Municipality of Paombong, in the
Province of Bulacan. The land on which said distillery is located as well as the buildings and improvements
originally used in the business were, at the time to which reference is now made, the property of another
Chinaman, who resides in Hongkong, named Lo Yao, who, in September, 1911, leased the same to the
firm of Lo Seng and Co. for the term of three years.

Upon the expiration of this lease a new written contract, in the making of which Lo Yao was represented
by one Lo Shui as attorney in fact, became effective whereby the lease was extended for fifteen years.
The reason why the contract was made for so long a period of time appears to have been that the Bureau
of Internal Revenue had required sundry expensive improvements to be made in the distillery, and it was
agreed that these improvements should be effected at the expense of the lessees. In conformity with this
understanding many thousands of pesos were expended by Lo Seng and Co., and later by Lo Seng alone,
in enlarging and improving the plant.

Among the provisions contained in said lease we note the following:

Know all men by these presents:

xxx xxx xxx

1. That I, Lo Shui, as attorney in fact in charge of the properties of Mr. Lo Yao of

Hongkong, cede by way of lease for fifteen years more said distillery "El Progreso" to
Messrs. Pang Lim and Lo Seng (doing business under the firm name of Lo Seng and
Co.), after the termination of the previous contract, because of the fact that they are
required, by the Bureau of Internal Revenue, to rearrange, alter and clean up the
distillery.

2. That all the improvements and betterments which they may introduce, such as
machinery, apparatus, tanks, pumps, boilers and buildings which the business may
require, shall be, after the termination of the fifteen years of lease, for the benefit of
Mr. Lo Yao, my principal, the buildings being considered as improvements.

3. That the monthly rent of said distillery is P200, as agreed upon in the previous
contract of September 11, 1911, acknowledged before the notary public D. Vicente
Santos; and all modifications and repairs which may be needed shall be paid for by
Messrs. Pang Lim and Lo Seng.

We, Pang Lim and Lo Seng, as partners in said distillery "El Progreso," which we are at
present conducting, hereby accept this contract in each and all its parts, said contract to be
effective upon the termination of the contract of September 11, 1911.

Neither the original contract of lease nor the agreement extending the same was inscribed in the property
registry, for the reason that the estate which is the subject of the lease has never at any time been so
inscribed.
On June 1, 1916, Pang Lim sold all his interest in the distillery to his partner Lo Seng, thus placing the
latter in the position of sole owner; and on June 28, 1918, Lo Shui, again acting as attorney in fact of Lo
Yao, executed and acknowledged before a notary public a deed purporting to convey to Pang Lim and
another Chinaman named Benito Galvez, the entire distillery plant including the land used in connection
therewith. As in case of the lease this document also was never recorded in the registry of property.
Thereafter Pang Lim and Benito Galvez demanded possession from Lo Seng, but the latter refused to
yield; and the present action of unlawful detainer was thereupon initiated by Pang Lim and Benito Galvez
in the court of the justice of the peace of Paombong to recover possession of the premises. From the
decision of the justice of the peace the case was appealed to the Court of First Instance, where judgment
was rendered for the plaintiffs; and the defendant thereupon appealed to the Supreme Court.

The case for the plaintiffs is rested exclusively on the provisions of article 1571 of the Civil Code, which
reads in part as follows:

ART. 1571. The purchaser of a leased estate shall be entitled to terminate any lease in force at the
time of making the sale, unless the contrary is stipulated, and subject to the provisions of the
Mortgage Law.

In considering this provision it may be premised that a contract of lease is personally binding on all who
participate in it regardless of whether it is recorded or not, though of course the unrecorded lease creates
no real charge upon the land to which it relates. The Mortgage Law was devised for the protection of third
parties, or those who have not participated in the contracts which are by that law required to be
registered; and none of its provisions with reference to leases interpose any obstacle whatever to the
giving of full effect to the personal obligations incident to such contracts, so far as concerns the immediate
parties thereto. This is rudimentary, and the law appears to be so understood by all commentators, there
being, so far as we are aware, no authority suggesting the contrary. Thus, in the commentaries of the
authors Galindo and Escosura, on the Mortgage Law, we find the following pertinent observation: "The
Mortgage Law is enacted in aid of and in respect to third persons only; it does not affect the relations
between the contracting parties, nor their capacity to contract. Any question affecting the former will be
determined by the dispositions of the special law [i.e., the Mortgage Law], while any question affecting the
latter will be determined by the general law." (Galindo y Escosura, Comentarios a la Legislacion
Hipotecaria, vol. I, p. 461.)

Although it is thus manifest that, under the Mortgage Law, as regards the personal obligations expressed
therein, the lease in question was from the beginning, and has remained, binding upon all the parties
thereto — among whom is to be numbered Pang Lim, then a member of the firm of Lo Seng and Co. —
this does not really solve the problem now before us, which is, whether the plaintiffs herein, as purchasers
of the estate, are at liberty to terminate the lease, assuming that it was originally binding upon all parties
participating in it.

Upon this point the plaintiffs are undoubtedly supported, prima facie, by the letter of article 1571 of the
Civil Code; and the position of the defendant derives no assistance from the mere circumstance that the
lease was admittedly binding as between the parties thereto. 1awph!l.net

The words "subject to the provisions of the Mortgage Law," contained in article 1571, express a
qualification which evidently has reference to the familiar proposition that recorded instruments are
effective against third persons from the date of registration (Co-Tiongco vs. Co-Guia, 1 Phil., 210); from
whence it follows that a recorded lease must be respected by any purchaser of the estate whomsoever.
But there is nothing in the Mortgage Law which, so far as we now see, would prevent a purchaser from
exercising the precise power conferred in article 1571 of the Civil Code, namely, of terminating any lease
which is unrecorded; nothing in that law that can be considered as arresting the force of article 1571 as
applied to the lease now before us.

Article 1549 of the Civil Code has also been cited by the attorneys for the appellant as supplying authority
for the proposition that the lease in question cannot be terminated by one who, like Pang Lim, has taken
part in the contract. That provision is practically identical in terms with the first paragraph of article 23 of
the Mortgage Law, being to the effect that unrecorded leases shall be of no effect as against third
persons; and the same observation will suffice to dispose of it that was made by us above in discussing
the Mortgage Law, namely, that while it recognizes the fact that an unrecorded lease is binding on all
persons who participate therein, this does not determine the question whether, admitting the lease to be
so binding, it can be terminated by the plaintiffs under article 1571.

Having thus disposed of the considerations which arise in relation with the Mortgage Law, as well as article
1549 of the Civil Coded — all of which, as we have seen, are undecisive — we are brought to consider the
aspect of the case which seems to us conclusive. This is found in the circumstance that the plaintiff Pang
Lim has occupied a double role in the transactions which gave rise to this litigation, namely, first, as one
of the lessees; and secondly, as one of the purchasers now seeking to terminate the lease. These two
positions are essentially antagonistic and incompatible. Every competent person is by law bond to
maintain in all good faith the integrity of his own obligations; and no less certainly is he bound to respect
the rights of any person whom he has placed in his own shoes as regards any contract previously entered
into by himself.

While yet a partner in the firm of Lo Seng and Co., Pang Lim participated in the creation of this lease, and
when he sold out his interest in that firm to Lo Seng this operated as a transfer to Lo Seng of Pang Lim's
interest in the firm assets, including the lease; and Pang Lim cannot now be permitted, in the guise of a
purchaser of the estate, to destroy an interest derived from himself, and for which he has received full
value.

The bad faith of the plaintiffs in seeking to deprive the defendant of this lease is strikingly revealed in the
circumstance that prior to the acquisition of this property Pang Lim had been partner with Lo Seng and
Benito Galvez an employee. Both therefore had been in relations of confidence with Lo Seng and in that
position had acquired knowledge of the possibilities of the property and possibly an experience which
would have enabled them, in case they had acquired possession, to exploit the distillery with profit. On
account of his status as partner in the firm of Lo Seng and Co., Pang Lim knew that the original lease had
been extended for fifteen years; and he knew the extent of valuable improvements that had been made
thereon. Certainly, as observed in the appellant's brief, it would be shocking to the moral sense if the
condition of the law were found to be such that Pang Lim, after profiting by the sale of his interest in a
business, worthless without the lease, could intervene as purchaser of the property and confiscate for his
own benefit the property which he had sold for a valuable consideration to Lo Seng. The sense of justice
recoils before the mere possibility of such eventuality.

Above all other persons in business relations, partners are required to exhibit towards each other the
highest degree of good faith. In fact the relation between partners is essentially fiduciary, each being
considered in law, as he is in fact, the confidential agent of the other. It is therefore accepted as
fundamental in equity jurisprudence that one partner cannot, to the detriment of another, apply
exclusively to his own benefit the results of the knowledge and information gained in the character of
partner. Thus, it has been held that if one partner obtains in his own name and for his own benefit the
renewal of a lease on property used by the firm, to commence at a date subsequent to the expiration of
the firm's lease, the partner obtaining the renewal is held to be a constructive trustee of the firm as to
such lease. (20 R. C. L., 878-882.) And this rule has even been applied to a renewal taken in the name of
one partner after the dissolution of the firm and pending its liquidation. (16 R. C. L., 906; Knapp vs. Reed,
88 Neb., 754; 32 L. R. A. [N. S.], 869; Mitchell vs. Reed 61 N. Y., 123; 19 Am. Rep., 252.)

An additional consideration showing that the position of the plaintiff Pang Lim in this case is untenable is
deducible from articles 1461 and 1474 of the Civil Code, which declare that every person who sells
anything is bound to deliver and warrant the subject-matter of the sale and is responsible to the vendee
for the legal and lawful possession of the thing sold. The pertinence of these provisions to the case now
under consideration is undeniable, for among the assets of the partnership which Pang Lim transferred to
Lo Seng, upon selling out his interest in the firm to the latter, was this very lease; and while it cannot be
supposed that the obligation to warrant recognized in the articles cited would nullify article 1571, if the
latter article had actually conferred on the plaintiffs the right to terminate this lease, nevertheless said
articles (1461, 1474), in relation with other considerations, reveal the basis of an estoppel which in our
opinion precludes Pang Lim from setting up his interest as purchaser of the estate to the detriment of Lo
Seng.
It will not escape observation that the doctrine thus applied is analogous to the doctrine recognized in
courts of common law under the head of estoppel by deed, in accordance with which it is held that if a
person, having no title to land, conveys the same to another by some one or another of the recognized
modes of conveyance at common law, any title afterwards acquired by the vendor will pass to the
purchaser; and the vendor is estopped as against such purchaser from asserting such after-acquired title.
The indenture of lease, it may be further noted, was recognized as one of the modes of conveyance at
common law which created this estoppel. (8 R. C. L., 1058, 1059.)

From what has been said it is clear that Pang Lim, having been a participant in the contract of lease now
in question, is not in a position to terminate it: and this is a fatal obstacle to the maintenance of the action
of unlawful detainer by him. Moreover, it is fatal to the maintenance of the action brought jointly by Pang
Lim and Benito Galvez. The reason is that in the action of unlawful detainer, under section 80 of the Code
of Civil Procedure, the only question that can be adjudicated is the right to possession; and in order to
maintain the action, in the form in which it is here presented, the proof must show that occupant's
possession is unlawful, i. e., that he is unlawfully withholding possession after the determination of the
right to hold possession. In the case before us quite the contrary appears; for, even admitting that Pang
Lim and Benito Galvez have purchased the estate from Lo Yao, the original landlord, they are, as between
themselves, in the position of tenants in common or owners pro indiviso, according to the proportion of
their respective contribution to the purchase price. But it is well recognized that one tenant in common
cannot maintain a possessory action against his cotenant, since one is as much entitled to have
possession as the other. The remedy is ordinarily by an action for partition. (Cornista vs. Ticson, 27 Phil.,
80.) It follows that as Lo Seng is vested with the possessory right as against Pang Lim, he cannot be
ousted either by Pang Lim or Benito Galvez. Having lawful possession as against one cotenant, he is
entitled to retain it against both. Furthermore, it is obvious that partition proceedings could not be
maintained at the instance of Benito Galvez as against Lo Seng, since partition can only be effected where
the partitioners are cotenants, that is, have an interest of an identical character as among themselves.
(30 Cyc., 178-180.) The practical result is that both Pang Lim and Benito Galvez are bound to respect Lo
Seng's lease, at least in so far as the present action is concerned.

We have assumed in the course of the preceding discussion that the deed of sale under which the
plaintiffs acquired the right of Lo Yao, the owner of the fee, is competent proof in behalf of the plaintiffs. It
is, however, earnestly insisted by the attorney for Lo Seng that this document, having never been
recorded in the property registry, cannot under article 389 of the Mortgage Law, be used in court against
him because as to said instrument he is a third party. The important question thus raised is not absolutely
necessary to the decision of this case, and we are inclined to pass it without decision, not only because
the question does not seem to have been ventilated in the Court of First Instance but for the further
reason that we have not had the benefit of any written brief in this case in behalf of the appellees.

The judgment appealed from will be reversed, and the defendant will be absolved from the complaint. It is
so ordered, without express adjudication as to costs.

[No. L-11648. April 22, 1959]

THE DIRECTOR OF LANDS, petitioner, vs. LOPE ALBA, ET AL., claimants. ELIGIO CATALAN, movant and
appellee, vs. RAMON GATCHALIAN, oppositor and appellant.

Appeal from the order of the Court of First Instance of Tacloban City. It appears that Eligio Catalan and
Ramon Gatchalian, as partners, mortgaged to Dr. Dionisio Marave two lots in Tacloban City, including the
improvements thereon, all belonging to the partnership, to secure the payment of a loan. The partnership
failed to pay the loan; the mortgage was foreclosed and the properties were sold at public auction to Dr.
Marave. Before the expiration of the one year period of redemption, Catalan, on his own behalf, redeemed
the properties with his private funds. The Sheriff issued the corresponding certificate of redemption in
favor of Catalan. Upon Catalan's petition, the lower court ordered the cancellation of the title in the name
of the partnership and to issue in its stead another in the name of Catalan.

Held: The theory of Catalan, accepted by the trial court, that he became the absolute owner of
the properties in question upon making the redemption because he was subrogated to the
rights of Dr. Marave who made the purchase at public auction, is untenable. Under general principles of
law, a partner is an agent of the partnership. (Art. 1818, new Civil Code). Furthermore, every partner
becomes a trustee for his copartner with regard to any benefits or profits derived from his act as partner
(Art. 1807, new Civil Code). Consequently, when Catalan redeemed the properties in question, he became
a trustee and held the same in trust for his copartner Gatchalian, subject to his right to demand from the
latter his contribution to the amount of redemption. The principle of subrogation cannot be applied
because at the time Catalan redeemed the property, Dr. Marave, the purchaser at public auction, had not
yet become the absolute owner of said properties. He never received the definite and formal certificate of
sale constituting muniment of title, for the reason that redemption was made. Consequently, there was no
title to the properties which he could convey to Catalan as
redemptioner.

Judgment reversed. Montemayor, J., ponente

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs.

THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV
No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R.
No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay
plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from
July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is
further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary damages in the amount
of P184,878.84 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two
Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and

another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
 required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good
faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and
that they were required to file a counterbond in order to dissolve the attachment, is not an
act of bad faith. When a man tries to protect his rights, he should not be saddled with moral
or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant,
for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance
company would be liable for damages in performing an act which is clearly within its power
and which is the reason for its being, then nobody would engage in the insurance business.
No further claim or counter-claim for or against anybody is declared by this Court. (Rollo -
G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal,
Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed
some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline business. They exe cuted
two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify
and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives should or may pay
or cause to be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as
deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff
of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-
owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that
they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for
being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase
of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL

OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT
CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its
risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to
Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the
amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the
real party in interest to institute the instant action as it does not stand to be benefited or
injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even
present any evidence that it is the attorney-in-fact of the reinsurance company, authorized
to institute an action for and in behalf of the latter. To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be the present
real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who
would be benefited or injured by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant
a present substantial interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424;
Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.
 In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and
its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged
chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by the reinsurance company of
the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties
herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo,
p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had
any interest in the matter since the reinsurance is strictly between the petitioner and the re -insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is
entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment
is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid
to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by
the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed
in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid
with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is
plain that on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is
suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of
all, Pioneer has no right to institute and maintain in its own name an action for the benefit
of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own
name instead of that of the principal will not prosper, and this is so even where the name of
the principal is disclosed in the complaint.
 Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must
be prosecuted in the name of the real party in interest.' This provision is
mandatory. The real party in interest is the party who would be benefitted or
injured by the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real
party in interest, that there is no law permitting an action to be brought by an
attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco
v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer
may sue defendants, assuming that the indemnity agreement is still valid and effective. But
since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still
overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record
on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers
to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the
reinsurance contract as this is strictly between the petitioner as insured and the reinsuring company
pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old
Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court
of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it
is provided in said article that the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint
as against the respondents for the reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent
"Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed
to issue the bond provided that the same would be mortgaged to it, but this was not
possible because the planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be
cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired
and rendered insufficient the security under the chattel mortgage and there is
thus no other sufficient security for the claim sought to be enforced by this
action.

This is judicial admission and aside from the chattel mortgage there is no other security for
the claim sought to be enforced by this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this action was instituted.
Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure

precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the
rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the
provision be validly opposed on the ground that these defendants and defendant Maglana
are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months
interval installments, the first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and payable on the 26th day x x
x of each succeeding three months and the last of which shall be due and
payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim
and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month
interval installments the first of which shall be due and payable 4 September
1965, the remainder of which ... shall be due and payable on the 4th day ...
of each succeeding months and the last of which shall be due and payable 4th
June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity
dates different from that fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the rest of the installments, the 15th
of each succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these defendants
Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these
defendants and defendant Maglana knew of and consented to the modification of the
obligations. But if that were so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these defendants, and there are
no such document. The consequence of this was the extinguishment of the obligations and
of the surety bond secured by the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co.
v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension time referred to herein, (New Civil
Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
 surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of
Lim or SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of
G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they
had chosen to invest? How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not through the corporate form?
This Petition presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must share
in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the
total amount of P184,878.74 as correctly found by the trial court, with interest from the
filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-
half of the said amount to Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's
participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In
addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and the
laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under the corporate
name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615,
Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles
 to purchase property to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they become in legal effect partners
inter se, and their rights as members of the company to the property acquired by the
company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555;
Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed land to
the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each
(Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied
only when necessary to do justice between the parties; thus, one who takes no part except
to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged
partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa
23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer, the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing
the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru
the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the
effect that they were induced and lured by the petitioner to make contributions to a proposed corporation
which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-
claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the
necessary certificates of public convenience and necessity as well as the required permits
for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime
on or about August 9,1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account. Since then up to the
filing of this answer, Lim has refused, failed and still refuses to set up the corporation or
return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and
third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E-
 1). Contrary to the agreement among the defendants, defendant Lim in connivance with the
plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in
his personal capacity as the alleged proprietor of the SAL. The answering defendants
learned for the first time of this trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses,
to defendant Lim, to surrender the possession of the two planes and their accessories and
or return the amount advanced by the former amounting to an aggregate sum of P
178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and
refused to comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own
and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare
parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED. SO ORDERED.

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.

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 Co-partnership
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 Co-partnership," 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).

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;

(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.

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.:ñé+.£ªwph!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: têñ.£îhqwâ£

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.

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: têñ.£îhqwâ£

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 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: têñ.£îhqwâ£

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 plaintiff-
appellant Mariano E. Pecson:

(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.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S
COMPULSORY COUNTERCLAIM FOR DAMAGES.

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: têñ.£îhqwâ£

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: têñ.£îhqwâ£

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 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: têñ.£îhqwâ£

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: têñ.£îhqwâ£

(a) P 7,000 — the amount of the PNB check given by Pecson to

Moran representing Pecson's investment in Moran's other
project (the publication and printing of the 'Voice of the
Veterans');

(b) P10,000 — to cover the return of Pecson's contribution in

the project of the Posters;

(c) P3,000 — representing Pecson's commission for three

months (April, May, June, 1971).

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- têñ.£îhqwâ£

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. 20-21, 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 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.

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: têñ.£îhqwâ£

Q During the pre-trial 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 printing of the "Voice of the Veterans".

Q What is this "Voice of the Veterans", Mr. Pecson?

A It is a book.têñ.£îhqwâ£

(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the promissory note,
Exhibit 2, represent?

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.

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?

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 têñ.£îhqwâ£Mark it as Exhibit 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?

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. SO
ORDERED.1äwphï1.ñët

G.R. No. L-5236 January 10, 1910

PEDRO MARTINEZ, plaintiff-appellee, vs. ONG PONG CO and ONG LAY, defendants.
ONG PONG CO., appellant.

ARELLANO, C.J.:

On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants who, in a private
document, acknowledged that they had received the same with the agreement, as stated by them, "that
we are to invest the amount in a store, the profits or losses of which we are to divide with the former, in
equal shares."

The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to render him an
accounting of the partnership as agreed to, or else to refund him the P1,500 that he had given them for
the said purpose. Ong Pong Co alone appeared to answer the complaint; he admitted the fact of the
agreement and the delivery to him and to Ong Lay of the P1,500 for the purpose aforesaid, but he alleged
that Ong Lay, who was then deceased, was the one who had managed the business, and that nothing had
resulted therefrom save the loss of the capital of P1,500, to which loss the plaintiff agreed.

The judge of the Court of First Instance of the city of Manila who tried the case ordered Ong Pong Co to
return to the plaintiff one-half of the said capital of P1,500 which, together with Ong Lay, he had received
from the plaintiff, to wit, P750, plus P90 as one-half of the profits, calculated at the rate of 12 per cent per
annum for the six months that the store was supposed to have been open, both sums in Philippine
currency, making a total of P840, with legal interest thereon at the rate of 6 per cent per annum, from the
12th of June, 1901, when the business terminated and on which date he ought to have returned the said
amount to the plaintiff, until the full payment thereof with costs.

From this judgment Ong Pong Co appealed to this court, and assigned the following errors:

1. For not having taken into consideration the fact that the reason for the closing of the store was
the ejectment from the premises occupied by it.

2. For not having considered the fact that there were losses.

3. For holding that there should have been profits.

4. For having applied article 1138 of the Civil Code.

5. and 6. For holding that the capital ought to have yielded profits, and that the latter should be
calculated 12 per cent per annum; and

7. The findings of the ejectment.

As to the first assignment of error, the fact that the store was closed by virtue of ejectment proceedings is
of no importance for the effects of the suit. The whole action is based upon the fact that the defendants
received certain capital from the plaintiff for the purpose of organizing a company; they, according to the
agreement, were to handle the said money and invest it in a store which was the object of the
association; they, in the absence of a special agreement vesting in one sole person the management of
the business, were the actual administrators thereof; as such administrators they were the agent of the
company and incurred the liabilities peculiar to every agent, among which is that of rendering account to
the principal of their transactions, and paying him everything they may have received by virtue of
the mandatum. (Arts. 1695 and 1720, Civil Code.) Neither of them has rendered such account nor proven
the losses referred to by Ong Pong Co; they are therefore obliged to refund the money that they received
for the purpose of establishing the said store — the object of the association. This was the principal
pronouncement of the judgment.

With regard to the second and third assignments of error, this court, like the court below, finds no
evidence that the entire capital or any part thereof was lost. It is no evidence of such loss to aver, without
proof, that the effects of the store were ejected. Even though this were proven, it could not be inferred
therefrom that the ejectment was due to the fact that no rents were paid, and that the rent was not paid
on account of the loss of the capital belonging to the enterprise.

With regard to the possible profits, the finding of the court below are based on the statements of the
defendant Ong Pong Co, to the effect that "there were some profits, but not large ones." This court,
however, does not find that the amount thereof has been proven, nor deem it possible to estimate them
to be a certain sum, and for a given period of time; hence, it can not admit the estimate, made in the
judgment, of 12 per cent per annum for the period of six months.

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a
partner who acted as agent in receiving money for a given purpose, for which he has rendered no
accounting, such agent is responsible only for the losses which, by a violation of the provisions of the law,
he incurred. This being an obligation to pay in cash, there are no other losses than the legal interest,
which interest is not due except from the time of the judicial demand, or, in the present case, from the
filing of the complaint. (Arts. 1108 and 1100, Civil Code.) We do not consider that article 1688 is
applicable in this case, in so far as it provides "that the partnership is liable to every partner for the
amounts he may have disbursed on account of the same and for the proper interest," for the reason that
no other money than that contributed as is involved.

As in the partnership there were two administrators or agents liable for the above-named amount, article
1138 of the Civil Code has been invoked; this latter deals with debts of a partnership where the obligation
is not a joint one, as is likewise provided by article 1723 of said code with respect to the liability of two or
more agents with respect to the return of the money that they received from their principal. Therefore,
the other errors assigned have not been committed.

In view of the foregoing judgment appealed from is hereby affirmed, provided, however, that the
defendant Ong Pong Co shall only pay the plaintiff the sum of P750 with the legal interest thereon at the
rate of 6 per cent per annum from the time of the filing of the complaint, and the costs, without special
ruling as to the costs of this instance. So ordered.

G.R. No. L-3745 October 26, 1907

JUAN AGUSTIN, ET AL., plaintiffs; VICTOR DEL ROSARIO, appellant, vs.

BARTOLOME INOCENCIO, defendant-appellee.

TRACEY, J.:

The parties to this controversy, who had been conducting a partnership as industrial partners without
capital, contributed from its profits the sum of P807.28 as a fund toward the construction of a casco for
use in their business, to which they added P3,500, borrowed from Maria del Rosario, the wife of the
defendant, Bartolome Inocencio, he being the managing partner. It is admitted that this total, a little over
P4,300, was the estimated cost of the casco, but in the progress of the work the defendant found that it
called for additional funds, which he advanced to the amount of P2,024.49. It is satisfactorily appears
from the evidence that this amount is necessary in order to complete the work undertaken. Although it
would seem that he failed to notify his partners of the various items from time to time going to make up
this sum, it is shown that the books were at all times open to their inspection, and that, being asked to
examine them, they omitted to do so, and that the plaintiff Juan Agustin, representing all the partners,
was also present at the construction of the casco, in charge of the practical work and cognizant of its
needs and its progress.
The work done in the casco having been within the scope of the association and necessary to carry out its
express object, the borrowing of the money required to carry it on, with the acquiescence if not with the
affirmative consent of his associates, was not outside the powers of the managing partner and constitutes
a debt for which all the associates are liable.

The note passed into the hands of the defendant by reason of the successive deaths of his wife and of
their only child, each without debts, and for the amount thereof he became a creditor, subject, however,
to the deduction therefrom of his proportionate part of the indebtedness.

The trial court treated his claim on this note, as well as the sum of P2,024.49 furnished by him, as an
addition to his capital in the firm, rather than as a loan, and this constitutes one of the grounds of error
stated by the appellant. We do not deem it necessary to pass upon this objection, for the reason that,
considered as a loan, this sum would place the defendant as a creditor in a stronger position as against his
associates than if regarded as a mere contribution to capital. The error, if it be an error, is not, therefore,
prejudicial to the plaintiff, but is rather beneficial to him. The respondent did not except to it. lawphil.net

Various small sums have been paid out of the profits to some of the partners and these were properly
allowed him in the judgment.

On the theory on which the action was disposed of, the trial court committed no error in the computation
of the various shares.

Of the four parties plaintiff, but one, Victor del Rosario, is interested in this appeal, which has been
dismissed as to the others, and as to him the judgment of the trial court must be affirmed, with costs of
this instance. So ordered.
G.R. No. L-24332 January 31, 1978 (4) Sentencing the defendant Juan T. Borromeo, administrator of the Estate of Simeon
RAMON RALLOS, Administrator of the Estate of CONCEPCION RALLOS, petitioner, Rallos, to pay to plaintiff in concept of reasonable attorney's fees the sum of
vs. P1,000.00; and
FELIX GO CHAN & SONS REALTY CORPORATION and COURT OF APPEALS, respondents.
Seno, Mendoza & Associates for petitioner.
(5) Ordering both defendants to pay the costs jointly and severally.
Ramon Duterte for private respondent.

B. On GO CHANTS Cross-Claim:
MUÑOZ PALMA, J.:
(1) Sentencing the co-defendant Juan T. Borromeo, administrator of the Estate of
Simeon Rallos, to pay to defendant Felix Co Chan & Sons Realty Corporation the sum
This is a case of an attorney-in-fact, Simeon Rallos, who after of his death of his principal, Concepcion Rallos, sold the latter's
of P5,343.45, representing the price of one-half (1/2) share of lot 5983;
undivided share in a parcel of land pursuant to a power of attorney which the principal had executed in favor. The administrator
of the estate of went to court to have the sale declared uneanforceable and to recover the disposed share. The trial court
granted the relief prayed for, but upon appeal the Court of Appeals uphold the validity of the sale and the complaint. (2) Ordering co-defendant Juan T. Borromeo, administrator of the Estate of Simeon
Rallos, to pay in concept of reasonable attorney's fees to Felix Go Chan & Sons
Realty Corporation the sum of P500.00.
Hence, this Petition for Review on certiorari.

C. On Third-Party Complaint of defendant Juan T. Borromeo administrator of Estate of Simeon Rallos,

The following facts are not disputed. Concepcion and Gerundia both surnamed Rallos were sisters and registered co-owners of
against Josefina Rallos special administratrix of the Estate of Gerundia Rallos:
a parcel of land known as Lot No. 5983 of the Cadastral Survey of Cebu covered by Transfer Certificate of Title No. 11116 of
the Registry of Cebu. On April 21, 1954, the sisters executed a special power of attorney in favor of their brother, Simeon
Rallos, authorizing him to sell for and in their behalf lot 5983. On March 3, 1955, Concepcion Rallos died. On September 12, (1) Dismissing the third-party complaint without prejudice to filing either a complaint against the regular
1955, Simeon Rallos sold the undivided shares of his sisters Concepcion and Gerundia in lot 5983 to Felix Go Chan & Sons administrator of the Estate of Gerundia Rallos or a claim in the Intestate-Estate of Cerundia Rallos,
Realty Corporation for the sum of P10,686.90. The deed of sale was registered in the Registry of Deeds of Cebu, TCT No. covering the same subject-matter of the third-party complaint, at bar. (pp. 98-100, Record on Appeal)
11118 was cancelled, and a new transfer certificate of Title No. 12989 was issued in the named of the vendee.
Felix Go Chan & Sons Realty Corporation appealed in due time to the Court of Appeals from the foregoing judgment insofar as
On May 18, 1956 Ramon Rallos as administrator of the Intestate Estate of Concepcion Rallos filed a complaint docketed as it set aside the sale of the one-half (1/2) share of Concepcion Rallos. The appellate tribunal, as adverted to earlier, resolved the
Civil Case No. R-4530 of the Court of First Instance of Cebu, praying (1) that the sale of the undivided share of the deceased appeal on November 20, 1964 in favor of the appellant corporation sustaining the sale in question. 1 The appellee
Concepcion Rallos in lot 5983 be d unenforceable, and said share be reconveyed to her estate; (2) that the Certificate of 'title administrator, Ramon Rallos, moved for a reconsider of the decision but the same was denied in a resolution of March 4,
issued in the name of Felix Go Chan & Sons Realty Corporation be cancelled and another title be issued in the names of the 1965. 2
corporation and the "Intestate estate of Concepcion Rallos" in equal undivided and (3) that plaintiff be indemnified by way of
attorney's fees and payment of costs of suit. Named party defendants were Felix Go Chan & Sons Realty Corporation, Simeon
Rallos, and the Register of Deeds of Cebu, but subsequently, the latter was dropped from the complaint. The complaint was What is the legal effect of an act performed by an agent after the death of his principal? Applied more particularly to the instant
amended twice; defendant Corporation's Answer contained a crossclaim against its co-defendant, Simon Rallos while the latter case, We have the query. is the sale of the undivided share of Concepcion Rallos in lot 5983 valid although it was executed by
filed third-party complaint against his sister, Gerundia Rallos While the case was pending in the trial court, both Simon and his the agent after the death of his principal? What is the law in this jurisdiction as to the effect of the death of the principal on the
authority of the agent to act for and in behalf of the latter? Is the fact of knowledge of the death of the principal a mater ial factor
sister Gerundia died and they were substituted by the respective administrators of their estates.
in determining the legal effect of an act performed after such death?

After trial the court a quo rendered judgment with the following dispositive portion:
Before proceedings to the issues, We shall briefly restate certain principles of law relevant to the matter tinder consideration.

A. On Plaintiffs Complaint —
1. It is a basic axiom in civil law embodied in our Civil Code that no one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him. 3 A contract entered into in the name of another by
(1) Declaring the deed of sale, Exh. "C", null and void insofar as the one-half pro- one who has no authority or the legal representation or who has acted beyond his powers, shall be unenforceable, unless it is
indiviso share of Concepcion Rallos in the property in question, — Lot 5983 of the ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
Cadastral Survey of Cebu — is concerned; contracting party. 4 Article 1403 (1) of the same Code also provides:

(2) Ordering the Register of Deeds of Cebu City to cancel Transfer Certificate of Title ART. 1403. The following contracts are unenforceable, unless they are justified:
No. 12989 covering Lot 5983 and to issue in lieu thereof another in the names of
FELIX GO CHAN & SONS REALTY CORPORATION and the Estate of Concepcion
(1) Those entered into in the name of another person by one who hi - been given no authority or legal
Rallos in the proportion of one-half (1/2) share each pro-indiviso;
representation or who has acted beyond his powers; ...

(3) Ordering Felix Go Chan & Sons Realty Corporation to deliver the possession of an
undivided one-half (1/2) share of Lot 5983 to the herein plaintiff; Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one party, caged
the principal (mandante), authorizes another, called the agent (mandatario), to act for and in his behalf in transactions with third
persons. The essential elements of agency are: (1) there is consent, express or implied of the parties to establish the
relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the agents acts as a representative Article 1931 is the applicable law. Under this provision, an act done by the agent after the death of his principal is valid and
and not for himself, and (4) the agent acts within the scope of his authority. 5 effective only under two conditions, viz: (1) that the agent acted without knowledge of the death of the principal and (2) that the
third person who contracted with the agent himself acted in good faith. Good faith here means that the third person was not
aware of the death of the principal at the time he contracted with said agent. These two requisites must concur the absence of
Agency is basically personal representative, and derivative in nature. The authority of the agent to act emanates from the
one will render the act of the agent invalid and unenforceable.
powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per
alium facit se. "He who acts through another acts himself". 6
In the instant case, it cannot be questioned that the agent, Simeon Rallos, knew of the death of his principal at the time he sold
the latter's share in Lot No. 5983 to respondent corporation. The knowledge of the death is clearly to be inferred from the
2. There are various ways of extinguishing agency, but her We are concerned only with one cause — death of the principal
7
pleadings filed by Simon Rallos before the trial court. 12 That Simeon Rallos knew of the death of his sister Concepcion is also
Paragraph 3 of Art. 1919 of the Civil Code which was taken from Art. 1709 of the Spanish Civil Code provides:
a finding of fact of the court a quo 13 and of respondent appellate court when the latter stated that Simon Rallos 'must have
known of the death of his sister, and yet he proceeded with the sale of the lot in the name of both his sisters Concepcion and
ART. 1919. Agency is extinguished. Gerundia Rallos without informing appellant (the realty corporation) of the death of the former. 14

xxx xxx xxx On the basis of the established knowledge of Simon Rallos concerning the death of his principal Concepcion Rallos, Article
1931 of the Civil Code is inapplicable. The law expressly requires for its application lack of knowledge on the part of the agent
of the death of his principal; it is not enough that the third person acted in good faith. Thus in Buason & Reyes v. Panuyas, the
3. By the death, civil interdiction, insanity or insolvency of the principal or of the agent; ... (Emphasis
Court applying Article 1738 of the old Civil rode now Art. 1931 of the new Civil Code sustained the validity , of a sale made
supplied)
after the death of the principal because it was not shown that the agent knew of his principal's demise. 15 To the same effect is
the case of Herrera, et al., v. Luy Kim Guan, et al., 1961, where in the words of Justice Jesus Barrera the Court stated:
By reason of the very nature of the relationship between Principal and agent, agency is extinguished by the death of the
principal or the agent. This is the law in this jurisdiction. 8 ... even granting arguemendo that Luis Herrera did die in 1936, plaintiffs presented no proof and there is
no indication in the record, that the agent Luy Kim Guan was aware of the death of his principal at the time
Manresa commenting on Art. 1709 of the Spanish Civil Code explains that the rationale for the law is found in the juridical he sold the property. The death 6f the principal does not render the act of an agent unenforceable, where
basis of agency which is representation Them being an in. integration of the personality of the principal integration that of the the latter had no knowledge of such extinguishment of the agency. (1 SCRA 406, 412)
agent it is not possible for the representation to continue to exist once the death of either is establish. Pothier agrees with
Manresa that by reason of the nature of agency, death is a necessary cause for its extinction. Laurent says that the juridical tie 4. In sustaining the validity of the sale to respondent consideration the Court of Appeals reasoned out that there is no provision
between the principal and the agent is severed ipso jure upon the death of either without necessity for the heirs of the fact to in the Code which provides that whatever is done by an agent having knowledge of the death of his principal is void even with
notify the agent of the fact of death of the former. 9 respect to third persons who may have contracted with him in good faith and without knowledge of the death of the principal. 16

The same rule prevails at common law — the death of the principal effects instantaneous and absolute revocation of the
We cannot see the merits of the foregoing argument as it ignores the existence of the general rule enunciated in Article 1919
authority of the agent unless the Power be coupled with an interest. 10 This is the prevalent rule in American Jurisprudence that the death of the principal extinguishes the agency. That being the general rule it follows a fortiorithat any act of an agent
where it is well-settled that a power without an interest confer. red upon an agent is dissolved by the principal's death, and any after the death of his principal is void ab initio unless the same fags under the exception provided for in the aforementioned
attempted execution of the power afterward is not binding on the heirs or representatives of the deceased. 11 Articles 1930 and 1931. Article 1931, being an exception to the general rule, is to be strictly construed, it is not to be gi ven an
interpretation or application beyond the clear import of its terms for otherwise the courts will be involved in a process of
3. Is the general rule provided for in Article 1919 that the death of the principal or of the agent extinguishes the agency, subject legislation outside of their judicial function.
to any exception, and if so, is the instant case within that exception? That is the determinative point in issue in this litigation. It
is the contention of respondent corporation which was sustained by respondent court that notwithstanding the death of the 5. Another argument advanced by respondent court is that the vendee acting in good faith relied on the power of attorney
principal Concepcion Rallos the act of the attorney-in-fact, Simeon Rallos in selling the former's sham in the property is valid which was duly registered on the original certificate of title recorded in the Register of Deeds of the province of Cebu, that no
and enforceable inasmuch as the corporation acted in good faith in buying the property in question. notice of the death was aver annotated on said certificate of title by the heirs of the principal and accordingly they must suffer
the consequences of such omission. 17
Articles 1930 and 1931 of the Civil Code provi de the exceptions to the general rule afore-mentioned.
To support such argument reference is made to a portion in Manresa's Commentaries which We quote:
ART. 1930. The agency shall remain in full force and effect even after the death of the principal, if it has
been constituted in the common interest of the latter and of the agent, or in the interest of a third person If the agency has been granted for the purpose of contracting with certain persons, the revocation must be
who has accepted the stipulation in his favor. made known to them. But if the agency is general iii nature, without reference to particular person with
whom the agent is to contract, it is sufficient that the principal exercise due diligence to make the
ART. 1931. Anything done by the agent, without knowledge of the death of the principal or of any other revocation of the agency publicity known.
cause which extinguishes the agency, is valid and shall be fully effective with respect to third persons who
may have contracted with him in good. faith. In case of a general power which does not specify the persons to whom represents' on should be made, it
is the general opinion that all acts, executed with third persons who contracted in good faith, Without
Article 1930 is not involved because admittedly the special power of attorney executed in favor of Simeon Rallos was not knowledge of the revocation, are valid. In such case, the principal may exercise his right against the agent,
coupled with an interest. who, knowing of the revocation, continued to assume a personality which he no longer had. (Manresa Vol.
11, pp. 561 and 575; pp. 15-16, rollo)
The above discourse however, treats of revocation by an act of the principal as a mode of terminating an agency which is to be The production of the owner's duplicate certificate whenever any voluntary instrument is presented for
distinguished from revocation by operation of law such as death of the principal which obtains in this case. On page six of this registration shall be conclusive authority from the registered owner to the register of deeds to enter a new
Opinion We stressed that by reason of the very nature of the relationship between principal and agent, agency is certificate or to make a memorandum of registration in accordance with such instruments, and the new
extinguished ipso jure upon the death of either principal or agent. Although a revocation of a power of attorney to be effective certificate or memorandum Shall be binding upon the registered owner and upon all persons claiming
must be communicated to the parties concerned, 18 yet a revocation by operation of law, such as by death of the principal is, as under him in favor of every purchaser for value and in good faith: Provided however, That in all cases of
a rule, instantaneously effective inasmuch as "by legal fiction the agent's exercise of authority is regarded as an execution of registration provided by fraud, the owner may pursue all his legal and equitable remedies against the
the principal's continuing will. 19 With death, the principal's will ceases or is the of authority is extinguished. parties to such fraud without prejudice, however, to the right, of any innocent holder for value of a
certificate of title. ... (Act No. 496 as amended)
The Civil Code does not impose a duty on the heirs to notify the agent of the death of the principal What the Code provides i n
Article 1932 is that, if the agent die his heirs must notify the principal thereof, and in the meantime adopt such measures as the 7. One last point raised by respondent corporation in support of the appealed decision is an 1842 ruling of the Supreme Court
circumstances may demand in the interest of the latter. Hence, the fact that no notice of the death of the principal was of Pennsylvania in Cassiday v. McKenzie wherein payments made to an agent after the death of the principal were held to be
registered on the certificate of title of the property in the Office of the Register of Deeds, is not fatal to the cause of the estate of "good", "the parties being ignorant of the death". Let us take note that the Opinion of Justice Rogers was premised on the
the principal statement that the parties were ignorant of the death of the principal. We quote from that decision the following:

6. Holding that the good faith of a third person in said with an agent affords the former sufficient protection, respondent c ourt ... Here the precise point is, whether a payment to an agent when the Parties are ignorant of the death is a
drew a "parallel" between the instant case and that of an innocent purchaser for value of a land, stating that if a person good payment. in addition to the case in Campbell before cited, the same judge Lord Ellenboruogh, has
purchases a registered land from one who acquired it in bad faith — even to the extent of foregoing or falsifying the deed of decided in 5 Esp. 117, the general question that a payment after the death of principal is not good. Thus, a
sale in his favor — the registered owner has no recourse against such innocent purchaser for value but only agains t the payment of sailor's wages to a person having a power of attorney to receive them, has been held void
forger. 20 when the principal was dead at the time of the payment. If, by this case, it is meant merely to decide the
general proposition that by operation of law the death of the principal is a revocation of the powers of the
attorney, no objection can be taken to it. But if it intended to say that his principle applies where there was
To support the correctness of this respondent corporation, in its brief, cites the case of Blondeau, et al., v. Nano and Vallejo, 61
110 notice of death, or opportunity of twice I must be permitted to dissent from it.
Phil. 625. We quote from the brief:

... That a payment may be good today, or bad tomorrow, from the accident circumstance of the death of
In the case of Angel Blondeau et al. v. Agustin Nano et al., 61 Phil. 630, one Vallejo was a co-owner of
the principal, which he did not know, and which by no possibility could he know? It would be unjust to the
lands with Agustin Nano. The latter had a power of attorney supposedly executed by Vallejo Nano in his
agent and unjust to the debtor. In the civil law, the acts of the agent, done bona fide in ignorance of the
favor. Vallejo delivered to Nano his land titles. The power was registered in the Office of the Register of
death of his principal are held valid and binding upon the heirs of the latter. The same rule holds in the
Deeds. When the lawyer-husband of Angela Blondeau went to that Office, he found all in order including
Scottish law, and I cannot believe the common law is so unreasonable... (39 Am. Dec. 76, 80, 81;
the power of attorney. But Vallejo denied having executed the power The lower court sustained Vallejo and
emphasis supplied)
the plaintiff Blondeau appealed. Reversing the decision of the court a quo, the Supreme Court, quoting the
ruling in the case of Eliason v. Wilborn, 261 U.S. 457, held:
To avoid any wrong impression which the Opinion in Cassiday v. McKenzie may evoke, mention may be made that the above
represents the minority view in American jurisprudence. Thus in Clayton v. Merrett, the Court said.—
But there is a narrower ground on which the defenses of the defendant- appellee must
be overruled. Agustin Nano had possession of Jose Vallejo's title papers. Without
those title papers handed over to Nano with the acquiescence of Vallejo, a fraud could There are several cases which seem to hold that although, as a general principle, death revokes an
not have been perpetuated. When Fernando de la Canters, a member of the agency and renders null every act of the agent thereafter performed, yet that where a payment has been
Philippine Bar and the husband of Angela Blondeau, the principal plaintiff, searched made in ignorance of the death, such payment will be good. The leading case so holding is that
the registration record, he found them in due form including the power of attorney of of Cassiday v. McKenzie, 4 Watts & S. (Pa) 282, 39 Am. 76, where, in an elaborate opinion, this view ii
Vallajo in favor of Nano. If this had not been so and if thereafter the proper notation of broadly announced. It is referred to, and seems to have been followed, in the case of Dick v. Page, 17 Mo.
the encumbrance could not have been made, Angela Blondeau would not have sent 234, 57 AmD 267; but in this latter case it appeared that the estate of the deceased principal had received
P12,000.00 to the defendant Vallejo.' An executed transfer of registered lands placed the benefit of the money paid, and therefore the representative of the estate might well have been held to
by the registered owner thereof in the hands of another operates as a representation be estopped from suing for it again. . . . These cases, in so far, at least, as they announce the doctrine
to a third party that the holder of the transfer is authorized to deal with the land. under discussion, are exceptional. The Pennsylvania Case, supra (Cassiday v. McKenzie 4 Watts & S.
282, 39 AmD 76), is believed to stand almost, if not quite, alone in announcing the principle in its broadest
scope. (52, Misc. 353, 357, cited in 2 C.J. 549)
As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of coincidence bear the loss.
(pp. 19-21) So also in Travers v. Crane, speaking of Cassiday v. McKenzie, and pointing out that the opinion, except so far as it related to
the particular facts, was a mere dictum, Baldwin J. said:
The Blondeau decision, however, is not on all fours with the case before Us because here We are confronted with one who
admittedly was an agent of his sister and who sold the property of the latter after her death with full knowledge of such death. The opinion, therefore, of the learned Judge may be regarded more as an extrajudicial indication of his
The situation is expressly covered by a provision of law on agency the terms of which are clear and unmistakable leaving no views on the general subject, than as the adjudication of the Court upon the point in question. But
room for an interpretation contrary to its tenor, in the same manner that the ruling in Blondeau and the cases c ited therein accordingly all power weight to this opinion, as the judgment of a of great respectability, it stands alone
found a basis in Section 55 of the Land Registration Law which in part provides: among common law authorities and is opposed by an array too formidable to permit us to following it. (15
Cal. 12,17, cited in 2 C.J. 549)
xxx xxx xxx
Whatever conflict of legal opinion was generated by Cassiday v. McKenzie in American jurisprudence, no such conflict exists in On January 31, 1990, petitioner replied that it could not allow any further withdrawals of sugar against SLDR No. 1214M
our own for the simple reason that our statute, the Civil Code, expressly provides for two exceptions to the general rule that because STM had already dwithdrawn all the sugar covered by the cleared checks. 6
death of the principal revokes ipso jure the agency, to wit: (1) that the agency is coupled with an interest (Art 1930), and (2)
that the act of the agent was executed without knowledge of the death of the principal and the third person who contracted wi th On March 2, 1990, CSC sent petitioner a letter demanding the release of the balance of 23,000 bags.
the agent acted also in good faith (Art. 1931). Exception No. 2 is the doctrine followed in Cassiday, and again We stress the
indispensable requirement that the agent acted without knowledge or notice of the death of the principal In the case before Us Seven days later, petitioner reiterated that all the sugar corresponding to the amount of STM's cleared checks had been fully
the agent Ramon Rallos executed the sale notwithstanding notice of the death of his principal Accordingly, the agent's act is withdrawn and hence, there would be no more deliveries of the commodity to STM's account. Petitioner also noted that CSC
unenforceable against the estate of his principal. had represented itself to be STM's agent as it had withdrawn the 2,000 bags against SLDR No. 1214M "for and in behalf" of
STM.

IN VIEW OF ALL THE FOREGOING, We set aside the ecision of respondent appellate court, and We affirm en toto the On April 27, 1990, CSC filed a complaint for specific performance, docketed as Civil Case No. 90-1118. Defendants were
judgment rendered by then Hon. Amador E. Gomez of the Court of First Instance of Cebu, quoted in pages 2 and 3 of this Teresita Ng Sy (doing business under the name of St. Therese Merchandising) and herein petitioner. Since the former could
Opinion, with costs against respondent realty corporation at all instances. not be served with summons, the case proceeded only against the latter. During the trial, it was discovered that Teresita Ng Go
who testified for CSC was the same Teresita Ng Sy who could not be reached through summons. 7 CSC, however, did not
bother to pursue its case against her, but instead used her as its witness.
So Ordered.
CSC's complaint alleged that STM had fully paid petitioner for the sugar covered by SLDR No. 1214M. Therefore, the latter had
no justification for refusing delivery of the sugar. CSC prayed that petitioner be ordered to deliver the 23,000 bags covered by
SLDR No. 1214M and sought the award of P1,104,000.00 in unrealized profits, P3,000,000.00 as exemplary damages,
P2,200,000.00 as attorney's fees and litigation expenses.
G.R. No. 117356 June 19, 2000
VICTORIAS MILLING CO., INC., petitioner, Petitioner's primary defense a quo was that it was an unpaid seller for the 23,000 bags.8 Since STM had already drawn in full
vs. all the sugar corresponding to the amount of its cleared checks, it could no longer authorize further delivery of sugar to CSC.
COURT OF APPEALS and CONSOLIDATED SUGAR CORPORATION, respondents. Petitioner also contended that it had no privity of contract with CSC.
DECISION
Petitioner explained that the SLDRs, which it had issued, were not documents of title, but mere delivery receipts issued
QUISUMBING, J.: pursuant to a series of transactions entered into between it and STM. The SLDRs prescribed delivery of the sugar to the party
specified therein and did not authorize the transfer of said party's rights and interests.
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals
dated February 24, 1994, in CA-G.R. CV No. 31717, as well as the respondent court's resolution of September 30, 1994 Petitioner also alleged that CSC did not pay for the SLDR and was actually STM's co-conspirator to defraud it through a
modifying said decision. Both decision and resolution amended the judgment dated February 13, 1991, of the Regional Trial misrepresentation that CSC was an innocent purchaser for value and in good faith. Petitioner then prayed that CSC be ordered
Court of Makati City, Branch 147, in Civil Case No. 90-118. to pay it the following sums: P10,000,000.00 as moral damages; P10,000,000.00 as exemplary damages; and P1,500,000.00
as attorney's fees. Petitioner also prayed that cross-defendant STM be ordered to pay it P10,000,000.00 in exemplary
The facts of this case as found by both the trial and appellate courts are as follows: damages, and P1,500,000.00 as attorney's fees.
St. Therese Merchandising (hereafter STM) regularly bought sugar from petitioner Victorias Milling Co., Inc., (VMC). In the Since no settlement was reached at pre-trial, the trial court heard the case on the merits.
course of their dealings, petitioner issued several Shipping List/Delivery Receipts (SLDRs) to STM as proof of purchases.
Among these was SLDR No. 1214M, which gave rise to the instant case. Dated October 16, 1989, SLDR No. 1214M covers As earlier stated, the trial court rendered its judgment favoring private respondent CSC, as follows:
25,000 bags of sugar. Each bag contained 50 kilograms and priced at P638.00 per bag as "per sales order VMC Marketing No.
042 dated October 16, 1989."1 The transaction it covered was a "direct sale." 2 The SLDR also contains an additional note which "WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against defendant
reads: "subject for (sic) availability of a (sic) stock at NAWACO (warehouse)." 3 Victorias Milling Company:

On October 25, 1989, STM sold to private respondent Consolidated Sugar Corporation (CSC) its rights in SLDR No. 1214M for "1) Ordering defendant Victorias Milling Company to deliver to the plaintiff 23,000 bags of refined sugar due under
P 14,750,000.00. CSC issued one check dated October 25, 1989 and three checks postdated November 13, 1989 in payment. SLDR No. 1214;
That same day, CSC wrote petitioner that it had been authorized by STM to withdraw the sugar covered by SLDR No. 1214M.
Enclosed in the letter were a copy of SLDR No. 1214M and a letter of authority from STM authorizing CSC "to withdraw for and "2) Ordering defendant Victorias Milling Company to pay the amount of P920,000.00 as unrealized profits, the
in our behalf the refined sugar covered by Shipping List/Delivery Receipt-Refined Sugar (SDR) No. 1214 dated October 16, amount of P800,000.00 as exemplary damages and the amount of P1,357,000.00, which is 10% of the acquisition
1989 in the total quantity of 25,000 bags." 4 value of the undelivered bags of refined sugar in the amount of P13,570,000.00, as attorney's fees, plus the costs.

On October 27, 1989, STM issued 16 checks in the total amount of P31,900,000.00 with petitioner as payee. The latter, in turn, "SO ORDERED."9
issued Official Receipt No. 33743 dated October 27, 1989 acknowledging receipt of the said checks in payment of 50,000
bags. Aside from SLDR No. 1214M, said checks also covered SLDR No. 1213. It made the following observations:

Private respondent CSC surrendered SLDR No. 1214M to the petitioner's NAWACO warehouse and was allowed to withdraw "[T]he testimony of plaintiff's witness Teresita Ng Go, that she had fully paid the purchase price of P15,950,000.00 of the
sugar. However, after 2,000 bags had been released, petitioner refused to allow further withdrawals of sugar against SLDR No. 25,000 bags of sugar bought by her covered by SLDR No. 1214 as well as the purchase price of P15,950,000.00 for the
1214M. CSC then sent petitioner a letter dated January 23, 1990 informing it that SLDR No. 1214M had been "sold and 25,000 bags of sugar bought by her covered by SLDR No. 1213 on the same date, October 16, 1989 (date of the two SLDRs)
endorsed" to it but that it had been refused further withdrawals of sugar from petitioner's warehouse despite the fact that only is duly supported by Exhibits C to C-15 inclusive which are post-dated checks dated October 27, 1989 issued by St. Therese
2,000 bags had been withdrawn. 5 CSC thus inquired when it would be allowed to withdraw the remaining 23,000 bags. Merchandising in favor of Victorias Milling Company at the time it purchased the 50,000 bags of sugar covered by SLDR No.
1213 and 1214. Said checks appear to have been honored and duly credited to the account of Victorias Milling Company
because on October 27, 1989 Victorias Milling Company issued official receipt no. 34734 in favor of St. Therese Merchandising
for the amount of P31,900,000.00 (Exhibits B and B-1). The testimony of Teresita Ng Go is further supported by Exhibit F, "Exhibit ‘F' We relied upon in fixing the number of bags of sugar which remained undelivered as 12,586 cannot be made the
which is a computer printout of defendant Victorias Milling Company showing the quantity and value of the purchases made by basis for such a finding. The rule is explicit that courts should consider the evidence only for the purpose for which it was
St. Therese Merchandising, the SLDR no. issued to cover the purchase, the official reciept no. and the status of payment. It is offered. (People v. Abalos, et al, 1 CA Rep 783). The rationale for this is to afford the party against whom the evidence is
clear in Exhibit 'F' that with respect to the sugar covered by SLDR No. 1214 the same has been fully paid as indicated by the presented to object thereto if he deems it necessary. Plaintiff-appellee is, therefore, correct in its argument that Exhibit ‘F'
word 'cleared' appearing under the column of 'status of payment.' which was offered to prove that checks in the total amount of P15,950,000.00 had been cleared. (Formal Offer of Evidence for
Plaintiff, Records p. 58) cannot be used to prove the proposition that 12,586 bags of sugar remained undelivered.
"On the other hand, the claim of defendant Victorias Milling Company that the purchase price of the 25,000 bags of sugar
purchased by St. Therese Merchandising covered by SLDR No. 1214 has not been fully paid is supported only by the "Testimonial evidence (Testimonies of Teresita Ng [TSN, 10 October 1990, p. 33] and Marianito L. Santos [TSN, 17 October
testimony of Arnulfo Caintic, witness for defendant Victorias Milling Company. The Court notes that the testimony of Arnulfo 1990, pp. 16, 18, and 36]) presented by plaintiff-appellee was to the effect that it had withdrawn only 2,000 bags of sugar from
Caintic is merely a sweeping barren assertion that the purchase price has not been fully paid and is not corroborated by any SLDR after which it was not allowed to withdraw anymore. Documentary evidence (Exhibit I, Id., p. 78, Exhibit K, Id., p.
positive evidence. There is an insinuation by Arnulfo Caintic in his testimony that the postdated checks issued by the buyer in 80) show that plaintiff-appellee had sent demand letters to defendant-appellant asking the latter to allow it to withdraw the
payment of the purchased price were dishonored. However, said witness failed to present in Court any dishonored check or remaining 23,000 bags of sugar from SLDR 1214M. Defendant-appellant, on the other hand, alleged that sugar delivery to the
any replacement check. Said witness likewise failed to present any bank record showing that the checks issued by the buyer, STM corresponded only to the value of cleared checks; and that all sugar corresponded to cleared checks had been
Teresita Ng Go, in payment of the purchase price of the sugar covered by SLDR No. 1214 were dishonored." 10 withdrawn. Defendant-appellant did not rebut plaintiff-appellee's assertions. It did not present evidence to show how many
bags of sugar had been withdrawn against SLDR No. 1214M, precisely because of its theory that all sales in question were a
Petitioner appealed the trial court’s decision to the Court of Appeals. series of one single transaction and withdrawal of sugar depended on the clearing of checks paid therefor.
On appeal, petitioner averred that the dealings between it and STM were part of a series of transactions involving only one "After a second look at the evidence, We see no reason to overturn the findings of the trial court on this point." 13
account or one general contract of sale. Pursuant to this contract, STM or any of its authorized agents could withdraw bags of
sugar only against cleared checks of STM. SLDR No. 21214M was only one of 22 SLDRs issued to STM and since the latter Hence, the instant petition, positing the following errors as grounds for review:
had already withdrawn its full quota of sugar under the said SLDR, CSC was already precluded from seeking delivery of the
23,000 bags of sugar. "1. The Court of Appeals erred in not holding that STM's and private respondent's specially informing petitioner that
respondent was authorized by buyer STM to withdraw sugar against SLDR No. 1214M "for and in our (STM) behalf,"
Private respondent CSC countered that the sugar purchases involving SLDR No. 1214M were separate and independent (emphasis in the original) private respondent's withdrawing 2,000 bags of sugar for STM, and STM's empowering
transactions and that the details of the series of purchases were contained in a single statement with a consolidated summary other persons as its agents to withdraw sugar against the same SLDR No. 1214M, rendered respondent like the
of cleared check payments and sugar stock withdrawals because this a more convenient system than issuing separate other persons, an agent of STM as held in Rallos v. Felix Go Chan & Realty Corp., 81 SCRA 252, and precluded it
statements for each purchase. from subsequently claiming and proving being an assignee of SLDR No. 1214M and from suing by itself for its
enforcement because it was conclusively presumed to be an agent (Sec. 2, Rule 131, Rules of Court) and estopped
The appellate court considered the following issues: (a) Whether or not the transaction between petitioner and STM involving from doing so. (Art. 1431, Civil Code).
SLDR No. 1214M was a separate, independent, and single transaction; (b) Whether or not CSC had the capacity to sue on its
own on SLDR No. 1214M; and (c) Whether or not CSC as buyer from STM of the rights to 25,000 bags of sugar covered by "2. The Court of Appeals erred in manifestly and arbitrarily ignoring and disregarding certain relevant and undisputed
SLDR No. 1214M could compel petitioner to deliver 23,000 bags allegedly unwithdrawn. facts which, had they been considered, would have shown that petitioner was not liable, except for 69 bags of sugar,
and which would justify review of its conclusion of facts by this Honorable Court.
On February 24, 1994, the Court of Appeals rendered its decision modifying the trial court's judgment, to wit:
"3. The Court of Appeals misapplied the law on compensation under Arts. 1279, 1285 and 1626 of the Civil Code
"WHEREFORE, the Court hereby MODIFIES the assailed judgment and orders defendant-appellant to: when it ruled that compensation applied only to credits from one SLDR or contract and not to those from two or more
distinct contracts between the same parties; and erred in denying petitioner's right to setoff all its credits arising prior
"1) Deliver to plaintiff-appellee 12,586 bags of sugar covered by SLDR No. 1214M; to notice of assignment from other sales or SLDRs against private respondent's claim as assignee under SLDR No.
1214M, so as to extinguish or reduce its liability to 69 bags, because the law on compensation applies precisely to
"2) Pay to plaintiff-appellee P792,918.00 which is 10% of the value of the undelivered bags of refined sugar, as two or more distinct contracts between the same parties (emphasis in the original).
attorneys fees;
"4. The Court of Appeals erred in concluding that the settlement or liquidation of accounts in Exh. ‘F’ between
"3) Pay the costs of suit. petitioner and STM, respondent's admission of its balance, and STM's acquiescence thereto by silence for almost
one year did not render Exh. `F' an account stated and its balance binding.
"SO ORDERED."11
"5. The Court of Appeals erred in not holding that the conditions of the assigned SLDR No. 1214, namely, (a) its
Both parties then seasonably filed separate motions for reconsideration.
subject matter being generic, and (b) the sale of sugar being subject to its availability at the Nawaco warehouse,
In its resolution dated September 30, 1994, the appellate court modified its decision to read: made the sale conditional and prevented STM or private respondent from acquiring title to the sugar; and the non-
availability of sugar freed petitioner from further obligation.
"WHEREFORE, the Court hereby modifies the assailed judgment and orders defendant-appellant to:
"6. The Court of Appeals erred in not holding that the "clean hands" doctrine precluded respondent from seeking
"(1) Deliver to plaintiff-appellee 23,000 bags of refined sugar under SLDR No. 1214M; judicial reliefs (sic) from petitioner, its only remedy being against its assignor." 14

"(2) Pay costs of suit. Simply stated, the issues now to be resolved are:

"SO ORDERED."12 (1)....Whether or not the Court of Appeals erred in not ruling that CSC was an agent of STM and hence, estopped to
sue upon SLDR No. 1214M as an assignee.
The appellate court explained the rationale for the modification as follows:
(2)....Whether or not the Court of Appeals erred in applying the law on compensation to the transaction under SLDR
"There is merit in plaintiff-appellee's position. No. 1214M so as to preclude petitioner from offsetting its credits on the other SLDRs.
 (3)....Whether or not the Court of Appeals erred in not ruling that the sale of sugar under SLDR No. 1214M was a one account contrary to petitioner's insistence. Evidence on record shows, without being rebutted, that petitioner had been paid
conditional sale or a contract to sell and hence freed petitioner from further obligations. for the sugar purchased under SLDR No. 1214M. Petitioner clearly had the obligation to deliver said commodity to STM or its
assignee. Since said sugar had been fully paid for, petitioner and CSC, as assignee of STM, were not mutually creditors and
(4)....Whether or not the Court of Appeals committed an error of law in not applying the "clean hands doc trine" to debtors of each other. No reversible error could thereby be imputed to respondent appellate court when, it refused to apply
preclude CSC from seeking judicial relief. Article 1279 of the Civil Code to the present case.
The issues will be discussed in seriatim. Regarding the third issue, petitioner contends that the sale of sugar under SLDR No. 1214M is a conditional sale or a contract
to sell, with title to the sugar still remaining with the vendor. Noteworthy, SLDR No. 1214M contains the following terms and
Anent the first issue, we find from the records that petitioner raised this issue for the first time on appeal.1avvphi1 It is settled conditions:
that an issue which was not raised during the trial in the court below could not be raised for the first time on appeal as to do so
would be offensive to the basic rules of fair play, justice, and due process. 15 Nonetheless, the Court of Appeals opted to "It is understood and agreed that by payment by buyer/trader of refined sugar and/or receipt of this document by the
address this issue, hence, now a matter for our consideration. buyer/trader personally or through a representative, title to refined sugar is transferred to buyer/trader and delivery to him/it is
deemed effected and completed (stress supplied) and buyer/trader assumes full responsibility therefore…" 29
Petitioner heavily relies upon STM's letter of authority allowing CSC to withdraw sugar against SLDR No. 1214M to show that
the latter was STM's agent. The pertinent portion of said letter reads: The aforequoted terms and conditions clearly show that petitioner transferred title to the sugar to the buyer or his assignee
upon payment of the purchase price. Said terms clearly establish a contract of sale, not a contract to sell. Petitioner is no w
"This is to authorize Consolidated Sugar Corporation or its representative to withdraw for and in our behalf (stress supplied) the estopped from alleging the contrary. The contract is the law between the contracting parties. 30 And where the terms and
refined sugar covered by Shipping List/Delivery Receipt = Refined Sugar (SDR) No. 1214 dated October 16, 1989 in the total conditions so stipulated are not contrary to law, morals, good customs, public policy or public order, the contract is valid and
quantity of 25, 000 bags."16 must be upheld.31 Having transferred title to the sugar in question, petitioner is now obliged to deliver it to the purchaser or its
assignee.
The Civil Code defines a contract of agency as follows:
As to the fourth issue, petitioner submits that STM and private respondent CSC have entered into a conspiracy to defraud it of
"Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on its sugar. This conspiracy is allegedly evidenced by: (a) the fact that STM's selling price to CSC was below its purchasing price;
behalf of another, with the consent or authority of the latter."
(b) CSC's refusal to pursue its case against Teresita Ng Go; and (c) the authority given by the latter to other persons to
withdraw sugar against SLDR No. 1214M after she had sold her rights under said SLDR to CSC. Petitioner prays that the
It is clear from Article 1868 that the basis of agency is representation. 17 On the part of the principal, there must be an actual
doctrine of "clean hands" should be applied to preclude CSC from seeking judicial relief. However, despite careful scrutiny, we
intention to appoint18 or an intention naturally inferable from his words or actions; 19 and on the part of the agent, there must be
find here the records bare of convincing evidence whatsoever to support the petitioner's allegations of fraud. We are now
an intention to accept the appointment and act on it, 20 and in the absence of such intent, there is generally no agency. 21 One
constrained to deem this matter purely speculative, bereft of concrete proof.
factor which most clearly distinguishes agency from other legal concepts is control; one person - the agent - agrees to act
under the control or direction of another - the principal. Indeed, the very word "agency" has come to connote control by the WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.
principal.22 The control factor, more than any other, has caused the courts to put contracts between principal and agent in a
separate category. 23 The Court of Appeals, in finding that CSC, was not an agent of STM, opined: SO ORDERED.
"This Court has ruled that where the relation of agency is dependent upon the acts of the parties, the law makes no Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
presumption of agency, and it is always a fact to be proved, with the burden of proof resting upon the persons alleging the
agency, to show not only the fact of its existence, but also its nature and extent (Antonio vs. Enriquez [CA], 51 O.G. 3536].
Here, defendant-appellant failed to sufficiently establish the existence of an agency relation between plaintiff -appellee and
STM. The fact alone that it (STM) had authorized withdrawal of sugar by plaintiff-appellee "for and in our (STM's) behalf" G.R. No. 156262 July 14, 2005
should not be eyed as pointing to the existence of an agency relation ...It should be viewed in the context of all the MARIA TUAZON, ALEJANDRO P. TUAZON, MELECIO P. TUAZON, Spouses ANASTACIO and MARY T.
circumstances obtaining. Although it would seem STM represented plaintiff-appellee as being its agent by the use of the BUENAVENTURA, Petitioners,
phrase "for and in our (STM's) behalf" the matter was cleared when on 23 January 1990, plaintiff-appellee informed defendant- vs.
appellant that SLDFR No. 1214M had been "sold and endorsed" to it by STM (Exhibit I, Records, p. 78). Further, plaintiff - HEIRS OF BARTOLOME RAMOS, Respondents.
appellee has shown that the 25, 000 bags of sugar covered by the SLDR No. 1214M were sold and transferred by STM to
it ...A conclusion that there was a valid sale and transfer to plaintiff-appellee may, therefore, be made thus capacitating plaintiff-
DECISION
appellee to sue in its own name, without need of joining its imputed principal STM as co-plaintiff."24

In the instant case, it appears plain to us that private respondent CSC was a buyer of the SLDFR form, and not an agent of PANGANIBAN, J.:
STM. Private respondent CSC was not subject to STM's control. The question of whether a contract is one of sale or agency
depends on the intention of the parties as gathered from the whole scope and effect of the language employed. 25 That the
authorization given to CSC contained the phrase "for and in our (STM's) behalf" did not establish an agency. Ultimately, what is Stripped of nonessentials, the present case involves the collection of a sum of money. Specifically, this case arose from the
decisive is the intention of the parties. 26 That no agency was meant to be established by the CSC and STM is clearly shown by failure of petitioners to pay respondents’ predecessor-in-interest. This fact was shown by the non-encashment of checks issued
CSC's communication to petitioner that SLDR No. 1214M had been "sold and endorsed" to it. 27 The use of the words "sold and by a third person, but indorsed by herein Petitioner Maria Tuazon in favor of the said predecessor. Under these circumstances,
endorsed" means that STM and CSC intended a contract of sale, and not an agency. Hence, on this score, no error was to enable respondents to collect on the indebtedness, the check drawer need not be impleaded in the Complaint. Thus, the suit
committed by the respondent appellate court when it held that CSC was not STM's agent and could independently sue is directed, not against the drawer, but against the debtor who indorsed the checks in payment of the obligation.
petitioner.
The Case
On the second issue, proceeding from the theory that the transactions entered into between petitioner and STM are but serial
parts of one account, petitioner insists that its debt has been offset by its claim for STM's unpaid purchases, pursuant to Article
1279 of the Civil Code. 28 However, the trial court found, and the Court of Appeals concurred, that the purchase of sugar Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the July 31, 2002 Decision 2 of the Court of
covered by SLDR No. 1214M was a separate and independent transaction; it was not a serial part of a single transaction or of Appeals (CA) in CA-GR CV No. 46535. The decretal portion of the assailed Decision reads:
"WHEREFORE, the appeal is DISMISSED and the appealed decision is AFFIRMED." The corresponding civil and criminal cases were filed by respondents against Spouses Tuazon. Those cases were later
consolidated and amended to include Spouses Anastacio and Mary Buenaventura, with Alejandro Tuazon and Melecio Tuazon
as additional defendants. Having passed away before the pretrial, Bartolome Ramos was substituted by his heirs, herein
On the other hand, the affirmed Decision3 of Branch 34 of the Regional Trial Court (RTC) of Gapan, Nueva Ecija, disposed as
respondents.
follows:

Contending that Evangeline Santos was an indispensable party in the case, petitioners moved to file a third-party complaint
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, ordering the defe ndants
against her. Allegedly, she was primarily liable to respondents, because she was the one who had purchased the merchandise
spouses Leonilo Tuazon and Maria Tuazon to pay the plaintiffs, as follows:
from their predecessor, as evidenced by the fact that the checks had been drawn in her name. The RTC, however, denied
petitioners’ Motion.
"1. The sum of ₱1,750,050.00, with interests from the filing of the second amended complaint;
"2. The sum of ₱50,000.00, as attorney’s fees;
Since the trial court acquitted petitioners in all three of the consolidated criminal cases, they appealed only its decision finding
"3. The sum of ₱20,000.00, as moral damages
them civilly liable to respondents.
"4. And to pay the costs of suit.
x x x x x x x x x"4
Ruling of the Court of Appeals
The Facts
Sustaining the RTC, the CA held that petitioners had failed to prove the existence of an agency between respondents and
Spouses Tuazon. The appellate court disbelieved petitioners’ contention that Evangeline Santos should have been impleaded
The facts are narrated by the CA as follows:
as an indispensable party. Inasmuch as all the checks had been indorsed by Maria Tuazon, who thereby became liable to
subsequent holders for the amounts stated in those checks, there was no need to implead Santos.
"[Respondents] alleged that between the period of May 2, 1988 and June 5, 1988, spouses Leonilo and Maria Tuazon
purchased a total of 8,326 cavans of rice from [the deceased Bartolome] Ramos [predecessor-in-interest of respondents]. That
Hence, this Petition. 6
of this [quantity,] x x x only 4,437 cavans [have been paid for so far], leaving unpaid 3,889 cavans valued at ₱1,211,919.00. In
payment therefor, the spouses Tuazon issued x x x [several] Traders Royal Bank checks.
Issues
xxxxxxxxx
Petitioners raise the following issues for our consideration:
[B]ut when these [checks] were encashed, all of the checks bounced due to insufficiency of funds. [Respondents] advanced
that before issuing said checks[,] spouses Tuazon already knew that they had no available fund to support the checks, and "1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners are not agents of the respondents.
they failed to provide for the payment of these despite repeated demands made on them.
"2. Whether or not the Honorable Court of Appeals erred in rendering judgment against the petitioners despite x x x the failure
"[Respondents] averred that because spouses Tuazon anticipated that they would be sued, they conspired with the other of the respondents to include in their action Evangeline Santos, an indispensable party to the suit." 7
[defendants] to defraud them as creditors by executing x x x fictitious sales of their properties. They executed x x x simulated
sale[s] [of three lots] in favor of the x x x spouses Buenaventura x x x[,] as well as their residential lot and the house th ereon[,]
The Court’s Ruling
all located at Nueva Ecija, and another simulated deed of sale dated July 12, 1988 of a Stake Toyota r egistered with the Land
Transportation Office of Cabanatuan City on September 7, 1988. [Co-petitioner] Melecio Tuazon, a son of spouses Tuazon,
registered a fictitious Deed of Sale on July 19, 1988 x x x over a residential lot located at Nueva Ecija. Another simulated sale The Petition is unmeritorious.
of a Toyota Willys was executed on January 25, 1988 in favor of their other son, [co-petitioner] Alejandro Tuazon x x x. As a
result of the said sales, the titles of these properties issued in the names of spouses Tuazon were cancelled an d new ones
were issued in favor of the [co-]defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon. Resultantly, by the First Issue:
said ante-dated and simulated sales and the corresponding transfers there was no more property left registered in the names
of spouses Tuazon answerable to creditors, to the damage and prejudice of [respondents]. Agency

"For their part, defendants denied having purchased x x x rice from [Bartolome] Ramos. They alleged that it was Magdalena Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule 45 is limited to reviewing errors of law
Ramos, wife of said deceased, who owned and traded the merchandise and Maria Tuazon was merely her agent. They argued allegedly committed by the Court of Appeals. Factual findings of the trial court, especially when affirmed by the CA, are
that it was Evangeline Santos who was the buyer of the rice and issued the checks to Maria Tuazon as payments therefor. In conclusive on the parties and this Court. 8 Petitioners have not given us sufficient reasons to deviate from this rule.
good faith[,] the checks were received [by petitioner] from Evangeline Santos and turned over to Ramos without knowing that
these were not funded. And it is for this reason that [petitioners] have been insisting on the inclusion of Evangeline Santos as
an indispensable party, and her non-inclusion was a fatal error. Refuting that the sale of several properties were fictitious or In a contract of agency, one binds oneself to render some service or to do something in representation or on behalf of another,
simulated, spouses Tuazon contended that these were sold because they were then meeting financial difficulties but the with the latter’s consent or authority. 9 The following are the elements of agency: (1) the parties’ consent, express or implied, to
disposals were made for value and in good faith and done before the filing of the instant suit. To dispute the contention of establish the relationship; (2) the object, which is the execution of a juridical act in relation to a third person; (3)
plaintiffs that they were the buyers of the rice, they argued that there was no sales invoice, official receipts or like evidence to the representation, by which the one who acts as an agent does so, not for oneself, but as a representative; (4)
prove this. They assert that they were merely agents and should not be held answerable."5 the limitation that the agent acts within the scope of his or her authority. 10 As the basis of agency is representation, there must
be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from the principal’s words or
actions. In the same manner, there must be an intention on the part of the agent to accept the appointment and act upon it.
Absent such mutual intent, there is generally no agency. 11
G.R. No. 167552 April 23, 2007
This Court finds no reversible error in the findings of the courts a quo that petitioners were the rice buyers themselves; they EUROTECH INDUSTRIAL TECHNOLOGIES, INC., Petitioner,
were not mere agents of respondents in their rice dealership. The question of whether a contract is one of sale or of agency vs.
depends on the intention of the parties. 12 EDWIN CUIZON and ERWIN CUIZON, Respondents.

The declarations of agents alone are generally insufficient to establish the fact or extent of their authority. 13 The law makes no DECISION
presumption of agency; proving its existence, nature and extent is incumbent upon the person alleging it. 14 In the present case,
petitioners raise the fact of agency as an affirmative defense, yet fail to prove its existence.
CHICO-NAZARIO, J.:

The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the amounts represented by the
Before Us is a petition for review by certiorari assailing the Decision 1 of the Court of Appeals dated 10 August 2004 and its
bounced checks, in a separate civil case that they sought to be consolidated with the current one. If, as they claim, they were
Resolution2 dated 17 March 2005 in CA-G.R. SP No. 71397 entitled, "Eurotech Industrial Technologies, Inc. v. Hon. Antonio T.
mere agents of respondents, petitioners should have brought the suit against Santos for and on behalf of their alleged
Echavez." The assailed Decision and Resolution affirmed the Order 3 dated 29 January 2002 rendered by Judge Antonio T.
principal, in accordance with Section 2 of Rule 3 of the Rules on Civil Procedure. 15 Their filing a suit against her in their own
Echavez ordering the dropping of respondent EDWIN Cuizon (EDWIN) as a party defendant in Civil Case No. CEB-19672.
names negates their claim that they acted as mere agents in selling the rice obtained from Bartolome Ramos.

The generative facts of the case are as follows:

Second Issue:

Petitioner is engaged in the business of importation and distribution of various European industrial equipment for customers
Indispensable Party
here in the Philippines. It has as one of its customers Impact Systems Sales ("Impact Systems") which is a sole proprietorshi p
owned by respondent ERWIN Cuizon (ERWIN). Respondent EDWIN is the sales manager of Impact Systems and was
Petitioners argue that the lower courts erred in not allowing Evangeline Santos to be impleaded as an indispensable party. impleaded in the court a quo in said capacity.
They insist that respondents’ Complaint against them is based on the bouncing checks she issued; hence, they point to her as
the person primarily liable for the obligation.
From January to April 1995, petitioner sold to Impact Systems various products allegedly amounting to ninety-one thousand
three hundred thirty-eight (₱91,338.00) pesos. Subsequently, respondents sought to buy from petitioner one unit of sludge
We hold that respondents’ cause of action is clearly founded on petitioners’ failure to pay the purchase price of the rice. The pump valued at ₱250,000.00 with respondents making a down payment of fifty thousand pesos (₱50,000.00). 4 When the
trial court held that Petitioner Maria Tuazon had indorsed the questioned checks in favor of respondents, in accordance with sludge pump arrived from the United Kingdom, petitioner refused to deliver the same to respondents without their having fully
Sections 31 and 63 of the Negotiable Instruments Law. 16 That Santos was the drawer of the checks is thus immaterial to the settled their indebtedness to petitioner. Thus, on 28 June 1995, respondent EDWIN and Alberto de Jesus, general manager of
respondents’ cause of action. petitioner, executed a Deed of Assignment of receivables in favor of petitioner, the pertinent part of which states:

As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks were to be accepted or paid, or both, 1.) That ASSIGNOR5 has an outstanding receivables from Toledo Power Corporation in the amount of THREE
according to their tenor; and that in case they were dishonored, she would pay the corresponding amount. 17After an instrument HUNDRED SIXTY FIVE THOUSAND (₱365,000.00) PESOS as payment for the purchase of one unit of Selwood
is dishonored by nonpayment, indorsers cease to be merely secondarily liable; they become principal debtors whose liability Spate 100D Sludge Pump;
becomes identical to that of the original obligor. The holder of a negotiable instrument need not even proceed against the
maker before suing the indorser. 18 Clearly, Evangeline Santos -- as the drawer of the checks -- is not an indispensable party in
2.) That said ASSIGNOR does hereby ASSIGN, TRANSFER, and CONVEY unto the ASSIGNEE 6 the said
an action against Maria Tuazon, the indorser of the checks.
receivables from Toledo Power Corporation in the amount of THREE HUNDRED SIXTY FIVE THOUSAND
(₱365,000.00) PESOS which receivables the ASSIGNOR is the lawful recipient;
Indispensable parties are defined as "parties in interest without whom no final determination can be had." 19 The instant case
was originally one for the collection of the purchase price of the rice bought by Maria Tuazon from respondents’ predecessor.
3.) That the ASSIGNEE does hereby accept this assignment. 7
In this case, it is clear that there is no privity of contract between respondents and Santos. Henc e, a final determination of the
rights and interest of the parties may be made without any need to implead her.
Following the execution of the Deed of Assignment, petitioner delivered to respondents the sludge pump as shown by Invoice
No. 12034 dated 30 June 1995. 8
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioners.

Allegedly unbeknownst to petitioner, respondents, despite the existence of the Deed of Assignment, proceeded to collect from
SO ORDERED.
Toledo Power Company the amount of ₱365,135.29 as evidenced by Check Voucher No. 0933 9prepared by said power
company and an official receipt dated 15 August 1995 issued by Impact Systems. 10Alarmed by this development, petitioner
ARTEMIO V. PANGANIBAN made several demands upon respondents to pay their obligations. As a result, respondents were able to make partial
payments to petitioner. On 7 October 1996, petitioner’s counsel sent respondents a final demand letter wherein it was stated
that as of 11 June 1996, respondents’ total obligations stood at ₱295,000.00 excluding interests and attorney’s fees.11 Because
of respondents’ failure to abide by said final demand letter, petitioner instituted a complaint for sum of money, damages, with
application for preliminary attachment against herein respondents before the Regional Trial Court of Cebu City. 12
On 8 January 1997, the trial court granted petitioner’s prayer for the issuance of writ of preliminary attachment. 13 THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT RULED THAT RESPONDENT EDWIN
CUIZON, AS AGENT OF IMPACT SYSTEMS SALES/ERWIN CUIZON, IS NOT PERSONALLY LIABLE, BECAUSE HE HAS
NEITHER ACTED BEYOND THE SCOPE OF HIS AGENCY NOR DID HE PARTICIPATE IN THE PERPETUATION OF A
On 25 June 1997, respondent EDWIN filed his Answer 14 wherein he admitted petitioner’s allegations with respect to the sale
FRAUD.25
transactions entered into by Impact Systems and petitioner between January and April 1995. 15 He, however, disputed the total
amount of Impact Systems’ indebtedness to petitioner which, according to him, amounted to only ₱220,000.00. 16
To support its argument, petitioner points to Article 1897 of the New Civil Code which states:
By way of special and affirmative defenses, respondent EDWIN alleged that he is not a real party i n interest in this case.
According to him, he was acting as mere agent of his principal, which was the Impact Systems, in his transaction with petitioner Art. 1897. The agent who acts as such is not personally liable to the party with whom he contracts, unless he expressly binds
and the latter was very much aware of this fact. In support of this argument, petitioner points to par agraphs 1.2 and 1.3 of himself or exceeds the limits of his authority without giving such party sufficient notice of his powers.
petitioner’s Complaint stating –
Petitioner contends that the Court of Appeals failed to appreciate the effect of ERWIN’s act of collecting the receivables from
1.2. Defendant Erwin H. Cuizon, is of legal age, married, a resident of Cebu City. He is the proprietor of a single the Toledo Power Corporation notwithstanding the existence of the Deed of Assignment signed by EDWIN on behalf of Impact
proprietorship business known as Impact Systems Sales ("Impact Systems" for brevity), with office located at 46-A Systems. While said collection did not revoke the agency relations of respondents, petitioner insists that ERWIN’s action
del Rosario Street, Cebu City, where he may be served summons and other processes of the Honorable Court. repudiated EDWIN’s power to sign the Deed of Assignment. As EDWIN did not sufficiently notify it of the extent of his powers
as an agent, petitioner claims that he should be made personally liable for the obligations of his principal. 26
1.3. Defendant Edwin B. Cuizon is of legal age, Filipino, married, a resident of Cebu City. He is the Sales Manager of
Impact Systems and is sued in this action in such capacity.17 Petitioner also contends that it fell victim to the fraudulent scheme of respondents who induced it into selling the one unit of
sludge pump to Impact Systems and signing the Deed of Assignment. Petitioner directs the attention of this Court to the fact
that respondents are bound not only by their principal and agent relationship but are in fact full-blooded brothers whose
On 26 June 1998, petitioner filed a Motion to Declare Defendant ERWIN in Default with Motion for Summary Judgment. The
successive contravening acts bore the obvious signs of conspiracy to defraud petitioner. 27
trial court granted petitioner’s motion to declare respondent ERWIN in default "for his failure to answer within the prescribed
period despite the opportunity granted"18 but it denied petitioner’s motion for summary judgment in its Order of 31 August 2001
and scheduled the pre-trial of the case on 16 October 2001. 19 However, the conduct of the pre-trial conference was deferred In his Comment,28 respondent EDWIN again posits the argument that he is not a real party in interest in this case and it was
pending the resolution by the trial court of the special and affirmative defenses raised by respondent EDWIN. 20 proper for the trial court to have him dropped as a defendant. He insists that he was a mere agent of Impact Systems which is
owned by ERWIN and that his status as such is known even to petitioner as it is alleged in the Complaint that he is being sue d
in his capacity as the sales manager of the said business venture. Likewise, respondent EDWIN points to the Deed of
After the filing of respondent EDWIN’s Memorandum21 in support of his special and affirmative defenses and petitioner’s
Assignment which clearly states that he was acting as a representative of Impact Systems in said transaction.
opposition22 thereto, the trial court rendered its assailed Order dated 29 January 2002 dropping respondent EDWIN as a party
defendant in this case. According to the trial court –
We do not find merit in the petition.
A study of Annex "G" to the complaint shows that in the Deed of Assignment, defendant Edwin B. Cuizon acted in behalf of or
represented [Impact] Systems Sales; that [Impact] Systems Sale is a single proprietorship entity and the complaint shows that In a contract of agency, a person binds himself to render some service or to do something in representation or on behalf of
defendant Erwin H. Cuizon is the proprietor; that plaintiff corporation is represented by its general manager Alberto de Jesu s in another with the latter’s consent.29 The underlying principle of the contract of agency is to accomplish results by using the
the contract which is dated June 28, 1995. A study of Annex "H" to the complaint reveals that [Impact] Systems Sales which is services of others – to do a great variety of things like selling, buying, manufacturing, and transporting. 30 Its purpose is to
owned solely by defendant Erwin H. Cuizon, made a down payment of ₱50,000.00 that Annex "H" is dated June 30, 1995 or extend the personality of the principal or the party for whom another acts and from whom he or she derives the authority to
two days after the execution of Annex "G", thereby showing that [Impact] Systems Sales ratified the act of Edwin B. Cuizon; the act.31 It is said that the basis of agency is representation, that is, the agent acts for and on behalf of the principal on matters
records further show that plaintiff knew that [Impact] Systems Sales, the principal, ratified the act of Edwin B. Cuizon, the within the scope of his authority and said acts have the same legal effect as if they were personally executed by the
agent, when it accepted the down payment of ₱50,000.00. Plaintiff, therefore, cannot say that it was deceived by defendant principal.32 By this legal fiction, the actual or real absence of the principal is converted into his legal or juridical presence – qui
Edwin B. Cuizon, since in the instant case the principal has ratified the act of its agent and plaintiff knew about said rati fication. facit per alium facit per se. 33
Plaintiff could not say that the subject contract was entered into by Edwin B. Cuizon in excess of his powers since [Impact]
Systems Sales made a down payment of ₱50,000.00 two days later.
The elements of the contract of agency are: (1) consent, express or implied, of the parties to establish the relationship; (2) the
object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for himself;
In view of the Foregoing, the Court directs that defendant Edwin B. Cuizon be dropped as party defendant. 23 (4) the agent acts within the scope of his authority. 34

Aggrieved by the adverse ruling of the trial court, petitioner brought the matter to the Court of Appeals which, however, aff irmed In this case, the parties do not dispute the existence of the agency relationship between respo ndents ERWIN as principal and
the 29 January 2002 Order of the court a quo. The dispositive portion of the now assailed Decision of the Court of Appeals EDWIN as agent. The only cause of the present dispute is whether respondent EDWIN exceeded his authority when he signed
states: the Deed of Assignment thereby binding himself personally to pay the obligations to petitioner. Petitioner firmly believes that
respondent EDWIN acted beyond the authority granted by his principal and he should therefore bear the effect of his deed
pursuant to Article 1897 of the New Civil Code.
WHEREFORE, finding no viable legal ground to reverse or modify the conclusions reached by the public respondent in his
Order dated January 29, 2002, it is hereby AFFIRMED.24
We disagree.
Petitioner’s motion for reconsideration was denied by the appellate court in its Resolution promulgated on 17 March 2005.
Hence, the present petition raising, as sole ground for its allowance, the following: Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he
contracts. The same provision, however, presents two instances when an agent becomes personally liable to a third person.
The first is when he expressly binds himself to the obligation and the second is when he exceeds his authority. In the last G.R. No. 120465 September 9, 1999
instance, the agent can be held liable if he does not give the third party sufficient notice of his powers. We hold that respondent WILLIAM UY and RODEL ROXAS, petitioners,
EDWIN does not fall within any of the exceptions contained in this provision. vs.
COURT OF APPEALS, HON. ROBERT BALAO and NATIONAL HOUSING AUTHORITY, respondents.
The Deed of Assignment clearly states that respondent EDWIN signed thereon as the sales manager of Impact Systems. As
discussed elsewhere, the position of manager is unique in that it presupposes the grant of broad powers with which to conduct
the business of the principal, thus: KAPUNAN, J.:

The powers of an agent are particularly broad in the case of one acting as a general agent or manager; such a position Petitioners William Uy and Rodel Roxas are agents authorized to sell eight parcels of land by the owners thereof. By virtue of
presupposes a degree of confidence reposed and investiture with liberal powers for the exercise of judgment and discretion in such authority, petitioners offered to sell the lands, located in Tuba, Tadiangan, Benguet to respondent National Housing
transactions and concerns which are incidental or appurtenant to the business entrusted to his care and management. In the Authority (NHA) to be utilized and developed as a housing project.
absence of an agreement to the contrary, a managing agent may enter into any contracts that he deems reasonably necessary
or requisite for the protection of the interests of his principal entrusted to his management. x x x. 35
On February 14, 1989, the NHA Board passed Resolution No. 1632 approving the acquisition of said lands, with an area of
31.8231 hectares, at the cost of P23.867 million, pursuant to which the parties executed a series of Deeds of Absolute Sale
Applying the foregoing to the present case, we hold that Edwin Cuizon acted well-within his authority when he signed the Deed covering the subject lands. Of the eight parcels of land, however, only five were paid for by the NHA because of the report 1 it
of Assignment. To recall, petitioner refused to deliver the one unit of sludge pump unless it received, in full, the payment for received from the Land Geosciences Bureau of the Department of Environment and Natural Resources (DENR) that the
Impact Systems’ indebtedness.36 We may very well assume that Impact Systems desperately needed the sludge pump for its remaining area is located at an active landslide area and therefore, not suitable for development into a housing project.
business since after it paid the amount of fifty thousand pesos (₱50,000.00) as down payment on 3 March 1995, 37 it still
persisted in negotiating with petitioner which culminated in the execution of the Deed of Assignment of its receivables from
On 22 November 1991, the NHA issued Resolution No. 2352 cancelling the sale over the three parcels of land. The NHA,
Toledo Power Company on 28 June 1995. 38 The significant amount of time spent on the negotiation for the sale of the sludge
through Resolution No. 2394, subsecguently offered the amount of P1.225 million to the landowners as daños perjuicios.
pump underscores Impact Systems’ perseverance to get hold of the said equipment. There is, therefore, no doubt in our mind
that respondent EDWIN’s participation in the Deed of Assignment was "reasonably necessary" or was required in order for him
to protect the business of his principal. Had he not acted in the way he did, the business of his principal would have been On 9 March 1992, petitioners filed before the Regional Trial Court (RTC) of Quezon City a Complaint for Damages against
adversely affected and he would have violated his fiduciary relation with his principal. NHA and its General Manager Robert Balao.

We likewise take note of the fact that in this case, petitioner is seeking to recover both from respondents ERWIN, the principal, After trial, the RTC rendered a decision declaring the cancellation of the contract to be justified. The trial court nevertheless
and EDWIN, the agent. It is well to state here that Article 1897 of the New Civil Code upon which petitioner anchors its clai m awarded damages to plaintiffs in the sum of P1.255 million, the same amount initially offered by NHA to petitioners as
against respondent EDWIN "does not hold that in case of excess of authority, both the agent and the principal are liable to the damages.
other contracting party."39 To reiterate, the first part of Article 1897 declares that the principal is liable in cases when the agent
acted within the bounds of his authority. Under this, the agent is completely absolved of any liability. The second part of the
said provision presents the situations when the agent himself becomes liable to a third party when he expressly binds himself Upon appeal by petitioners, the Court of Appeals reversed the decision of the trial court and entered a new one dismissing th e
or he exceeds the limits of his authority without giving notice of his powers to the third person. However, it must be pointe d out complaint. It held that since there was "sufficient justifiable basis" in cancelling the sale, "it saw no reason" for the award of
that in case of excess of authority by the agent, like what petitioner claims exists here, the law does not say that a third person damages. The Court of Appeals also noted that petitioners were mere attorneys-in-fact and, therefore, not the real parties-in-
can recover from both the principal and the agent. 40 interest in the action before the trial court.

. . . In paragraph 4 of the complaint, plaintiffs alleged themselves to be "sellers' agents" for the
As we declare that respondent EDWIN acted within his authority as an agent, who did not acquire any right nor incur any
liability arising from the Deed of Assignment, it follows that he is not a real party in interest who should be impleaded in this several owners of the 8 lots subject matter of the case. Obsviously, William Uy and Rodel Roxas
case. A real party in interest is one who "stands to be benefited or injured by the judgment in the suit, or the party entitled to the in filing this case acted as attorneys-in-fact of the lot owners who are the real parties in interest
avails of the suit."41 In this respect, we sustain his exclusion as a defendant in the suit before the court a quo. but who were omitted to be pleaded as party-plaintiffs in the case. This omission is fatal. Where
the action is brought by an attorney-in-fact of a land owner in his name, (as in our present
action) and not in the name of his principal, the action was properly dismissed (Ferrer vs.
WHEREFORE, premises considered, the present petition is DENIED and the Decision dated 10 August 2004 and Resolution Villamor, 60 SCRA 406 [1974]; Marcelo vs. de Leon, 105 Phil. 1175) because the rule is that
dated 17 March 2005 of the Court of Appeals in CA-G.R. SP No. 71397, affirming the Order dated 29 January 2002 of the every action must be prosecuted in the name of the real parties-in-interest (Section 2, Rule 3,
Regional Trial Court, Branch 8, Cebu City, is AFFIRMED. Rules of Court).

Let the records of this case be remanded to the Regional Trial Court, Branch 8, Cebu City, for the continuation of the When plaintiffs UY and Roxas sought payment of damages in their favor in view of the partial
proceedings against respondent Erwin Cuizon. rescission of Resolution No. 1632 and the Deed of Absolute Sale covering TCT Nos. 10998,
10999 and 11292 (Prayer complaint, page 5, RTC records), it becomes obviously indispensable
that the lot owners be included, mentioned and named as party-plaintiffs, being the real party-in-
SO ORDERED.
interest. UY and Roxas, as attorneys-in-fact or apoderados, cannot by themselves lawfully
commence this action, more so, when the supposed special power of attorney, in their favor,
MINITA V. CHICO-NAZARIO was never presented as an evidence in this case. Besides, even if herein plaintiffs Uy and Roxas
Associate Justice were authorized by the lot owners to commence this action, the same must still be filed in the
name of the principal, (Filipino Industrial Corporation vs. San Diego, 23 SCRA 706 [1968]). As
such indispensable party, their joinder in the action is mandatory and the complaint may be
dismissed if not so impleaded (NDC vs. CA, 211 SCRA 422 [1992]). 2
Their motion for reconsideration having been denied, petitioners seek relief from this Court contending that: Neither has there been any allegation, much less proof, that petitioners are the heirs of their principals.

10
I. THE RESPONDENT CA ERRED IN DECLARING THAT RESPONDENT NHA HAD ANY Are petitioners assignees to the rights under the contract of sale? In McMicking vs. Banco Español-Filipino, we held that the
LEGAL BASIS FOR RESCINDING THE SALE INVOLVING THE LAST THREE (3) PARCELS rule requiring every action to be prosecuted in the name of the real party-in-interest.
COVERED BY NHA RESOLUTION NO. 1632.
. . . recognizes the assignments of rights of action and also recognizes that when one has a right
II. GRANTING ARGUENDO THAT THE RESPONDENT NHA HAD LEGAL BASIS TO of action assigned to him he is then the real party in interest and may maintain an action upon
RESCIND THE SUBJECT SALE, THE RESPONDENT CA NONETHELESS ERRED IN such claim or right. The purpose of [this rule] is to require the plaintiff to be the real party in
DENYING HEREIN PETITIONERS' CLAIM TO DAMAGES, CONTRARY TO THE PROVISIONS interest, or, in other words, he must be the person to whom the proceeds of the action shall
OF ART. 1191 OF THE CIVIL CODE. belong, and to prevent actions by persons who have no interest in the result of the same. . . .

III. THE RESPONDENT CA ERRED IN DISMISSING THE SUBJECT COMPLAINT FINDING Thus, an agent, in his own behalf, may bring an action founded on a contract made for his principal, as an assignee of such
THAT THE PETITIONERS FAILED TO JOIN AS INDISPENSABLE PARTY PLAINTIFF THE contract. We find the following declaration in Section 372 (1) of the Restatement of the Law on Agency (Second): 11
SELLING LOT-OWNERS. 3
Sec. 372. Agent as Owner of Contract Right
We first resolve the issue raised in the the third assignment of error.
(1) Unless otherwise agreed, an agent who has or who acquires an interest in a contract which
Petitioners claim that they lodged the complaint not in behalf of their principals but in their own name as agents directly he makes on behalf of his principal can, although not a promisee, maintain such action thereon
damaged by the termination of the contract. The damages prayed for were intended not for the benefit of their principals but to maintain such action thereon as might a transferee having a similar interest.
indemnify petitioners for the losses they themselves allegedly incurred as a result of such termination. These damages consist
mainly of "unearned income" and advances. 4 Petitioners, thus, attempt to distinguish the case at bar from those involving
The Comment on subsection (1) states:
agents or apoderedos instituting actions in their own name but in behalf of their principals. 5 Petitioners in this case purportedly
brought the action for damages in their own name and in their own behalf.
a. Agent a transferee. One who has made a contract on behalf of another may become an
assignee of the contract and bring suit against the other party to it, as any other transferee. The
We find this contention unmeritorious.
customs of business or the course of conduct between the principal and the agent may indicate
that an agent who ordinarily has merely a security interest is a transferee of the principals rights
Sec. 2, Rule 3 of the Rules of Court requires that every action must be prosecuted and defended in the name of the real party- under the contract and as such is permitted to bring suit. If the agent has settled with his
in-interest. The real party-in-interest is the party who stands to be benefited or injured by the judgment or the party entitled to principal with the understanding that he is to collect the claim against the obligor by way of
the avails of the suit. "Interest, within the meaning of the rule, means material interest, an interest in the issue and to be reimbursing himself for his advances and commissions, the agent is in the position of an
affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. 6 Cases assignee who is the beneficial owner of the chose in action. He has an irrevocable power to sue
construing the real party-in-interest provision can be more easily understood if it is borne in mind that the true meaning of real in his principal's name. . . . And, under the statutes which permit the real party in interest to sue,
party-in-interest may be summarized as follows: An action shall be prosecuted in the name of the party who, by the substantive he can maintain an action in his own name. This power to sue is not affected by a settlement
law, has the right sought to be enforced. 7 between the principal and the obligor if the latter has notice of the agent's interest. . . . Even
though the agent has not settled with his principal, he may, by agreement with the principal,
have a right to receive payment and out of the proceeds to reimburse himself for advances and
Do petitioners, under substantive law, possess the right they seek to enforce? We rule in the negative.
commissions before turning the balance over to the principal. In such a case, although there is
no formal assignment, the agent is in the position of a transferee of the whole claim for security;
The applicable substantive law in this case is Article 1311 of the Civil Code, which states: he has an irrevocable power to sue in his principal's name and, under statutes which permit the
real party in interest to sue, he can maintain an action in his own name.
Contracts take effect only between the parties, their assigns, and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by Petitioners, however, have not shown that they are assignees of their principals to the subject contracts. While they alleged
stipulation, or by provision of law. . . . that they made advances and that they suffered loss of commissions, they have not established any agreement granting them
"the right to receive payment and out of the proceeds to reimburse [themselves] for advances and commissions before turning
the balance over to the principal[s]."
If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The contracting parties must have Finally, it does not appear that petitioners are beneficiaries of a stipulation pour autrui under the second paragraph of Article
clearly and deliberately conferred a favor upon a third person. (Emphasis supplied.) 1311 of the Civil Code. Indeed, there is no stipulation in any of the Deeds of Absolute Sale "clearly and deliberately" conferring
a favor to any third person.
Petitioners are not parties to the contract of sale between their principals and NHA. They are mere agents of the owners of the
land subject of the sale. As agents, they only render some service or do something in representation or on behalf of their That petitioners did not obtain their commissions or recoup their advances because of the non-performance of the contract did
principals. 8 The rendering of such service did not make them parties to the contracts of sale executed in behalf of the latter. not entitle them to file the action below against respondent NHA. Section 372 (2) of the Restatement of the Law on Agency
Since a contract may be violated only by the parties thereto as against each other, the real parties-in-interest, either as plaintiff (Second) states:
or defendant, in an action upon that contract must, generally, either be parties to said contract. 9
 (2) An agent does not have such an interest in a contract as to entitle him to maintain an action at law In this case, the NHA did not rescind the contract. Indeed, it did not have the right to do so for the other parties to the contract,
upon it in his own name merely because he is entitled to a portion of the proceeds as compensation for the vendors, did not commit any breach, much less a substantial breach, 18 of their obligation. Their obligation was merely to
making it or because he is liable for its breach. deliver the parcels of land to the NHA, an obligation that they fulfilled. The NHA did not suffer any injury by the performance
thereof.
The following Comment on the above subsection is illuminating:
The cancellation, therefore, was not a rescission under Article 1191. Rather, the cancellation was based on the negation of the
cause arising from the realization that the lands, which were the object of the sale, were not suitable for housing.
The fact that an agent who makes a contract for his principal will gain or suffer loss by the performance or
nonperformance of the contract by the principal or by the other party thereto does not entitle him to
maintain an action on his own behalf against the other party for its breach. An agent entitled to receive a Cause is the essential reason which moves the contracting parties to enter into it. 19 In other words, the cause is the immediate,
commission from his principal upon the performance of a contract which he has made on his principal's direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. 20 Cause,
account does not, from this fact alone, have any claim against the other party for breach of the contract, which is the essential reason for the contract, should be distinguished from motive, which is the particular reason of a
either in an action on the contract or otherwise. An agent who is not a promisee cannot maintain an action contracting party which does not affect the other party. 21
at law against a purchaser merely because he is entitled to have his compensation or advances paid out of
the purchase price before payment to the principal. . . .
For example, in a contract of sale of a piece of land, such as in this case, the cause of the vendor (petitioners' principals) in
entering into the contract is to obtain the price. For the vendee, NHA, it is the acquisition of the land. 22 The motive of the NHA,
12
Thus, in Hopkins vs. Ives, the Supreme Court of Arkansas, citing Section 372 (2) above, denied the claim of a real estate on the other hand, is to use said lands for housing. This is apparent from the portion of the Deeds of Absolute Sale 23 stating:
broker to recover his alleged commission against the purchaser in an agreement to purchase property.
WHEREAS, under the Executive Order No. 90 dated December 17, 1986, the VENDEE is mandated to
13
In Goduco vs. Court of appeals, this Court held that: focus and concentrate its efforts and resources in providing housing assistance to the lowest thirty percent
(30%) of urban income earners, thru slum upgrading and development of sites and services projects;
. . . granting that appellant had the authority to sell the property, the same did not make the
buyer liable for the commission she claimed. At most, the owner of the property and the one who WHEREAS, Letters of Instructions Nos. 555 and 557 [as] amended by Letter of Instruction No. 630,
promised to give her a commission should be the one liable to pay the same and to whom the prescribed slum improvement and upgrading, as well as the development of sites and services as the
claim should have been directed. . . . principal housing strategy for dealing with slum, squatter and other blighted communities;

As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour autrui under the contracts of sale, they do xxx xxx xxx
not, under substantive law, possess the right they seek to enforce. Therefore, they are not the real parties-in-interest in this
case.
WHEREAS, the VENDEE, in pursuit of and in compliance with the above-stated purposes offers to buy
and the VENDORS, in a gesture of their willing to cooperate with the above policy and commitments,
Petitioners not being the real parties-in-interest, any decision rendered herein would be pointless since the same would not agree to sell the aforesaid property together with all the existing improvements there or belonging to the
bind the real parties-in- VENDORS;
interest. 14
NOW, THEREFORE, for and in consideration of the foregoing premises and the terms and conditions
15
Nevertheless, to forestall further litigation on the substantive aspects of this case, we shall proceed to rule on me merits. hereinbelow stipulated, the VENDORS hereby, sell, transfer, cede and convey unto the VENDEE, its
assigns, or successors-in-interest, a parcel of land located at Bo. Tadiangan, Tuba, Benguet containing a
total area of FIFTY SIX THOUSAND EIGHT HUNDRED NINETEEN (56,819) SQUARE METERS, more or
Petitioners submit that respondent NHA had no legal basis to "rescind" the sale of the subject three parcels of land. The
less . . . .
existence of such legal basis, notwithstanding, petitioners argue that they are still entitled to an award of damages.

Ordinarily, a party's motives for entering into the contract do not affect the contract. However, when the motive predetermines
Petitioners confuse the cancellation of the contract by the NHA as a rescission of the contract under Article 1191 of the Civil
the cause, the motive may be regarded as the cause. In Liguez vs. Court of Appeals, 24 this Court, speaking through Justice
Code. The right of rescission or, more accurately, resolution, of a party to an obligation under Article 1191 is predicated on a
J.B.L. REYES, HELD:
breach of faith by the other party that violates the reciprocity between them. 16 The power to rescind, therefore, is given to the
injured party. 17 Article 1191 states:
. . . it is well to note, however, that Manresa himself (Vol. 8, pp. 641-642), while maintaining the
distinction and upholding the inoperativeness of the motives of the parties to determine the
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
validity of the contract, expressly excepts from the rule those contracts that are conditioned upon
comply with what is incumbent upon him.
the attainment of the motives of either party.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
December 4, 1946, holding that the motive may be regarded as causa when it predetermines the
should become impossible.
purpose of the contract.
In this case, it is clear, and petitioners do not dispute, that NHA would not have entered into the contract were the lands not Therefore, assuming that petitioners are parties, assignees or beneficiaries to the contract of sale, they would not be entit led to
suitable for housing. In other words, the quality of the land was an implied condition for the NHA to enter into the contract. On any award of damages.
the part of the NHA, therefore, the motive was the cause for its being a party to the sale.
WHEREFORE, the instant petition is hereby DENIED.
Were the lands indeed unsuitable for housing as NHA claimed? SO ORDERED.
Puno, Pardo and Ynares-Santiago, JJ., concur.
Davide, Jr., C.J., on leave.
We deem the findings contained in the report of the Land Geosciences Bureau dated 15 July 1991 suf ficient basis for the
cancellation of the sale, thus:

G.R. No. 149353 June 26, 2006

In Tadiangan, Tuba, the housing site is situated in an area of moderate topography. There [are]
more areas of less sloping ground apparently habitable. The site is underlain by . . . thick slide
deposits (4-45m) consisting of huge conglomerate boulders (see Photo No. 2) mix[ed] with silty JOCELYN B. DOLES, Petitioner,
clay materials. These clay particles when saturated have some swelling characteristics which is vs.
dangerous for any civil structures especially mass housing development. 25 MA. AURA TINA ANGELES, Respondent.

Petitioners contend that the report was merely "preliminary," and not conclusive, as indicated in its title: DECISION
MEMORANDUM
TO: EDWIN G. DOMINGO
AUSTRIA-MARTINEZ, J.:
Chief, Lands Geology Division
FROM: ARISTOTLE A. RILLON
Geologist II This refers to the Petition for Review on Certiorari under Rule 45 of the Rules of Court questioning the Decision 1dated April 30,
SUBJECT: Preliminary Assessment of 2001 of the Court of Appeals (CA) in C.A.-G.R. CV No. 66985, which reversed the Decision dated July 29, 1998 of the
Tadiangan Housing Project in Tuba, Benguet 26 Regional Trial Court (RTC), Branch 21, City of Manila; and the CA Resolution 2 dated August 6, 2001 which denied petitioner’s
Thus, page 2 of the report states in part: Motion for Reconsideration.

xxx xxx xxx The antecedents of the case follow:

Actually there is a need to conduct further geottechnical [sic] studies in the NHA property . On April 1, 1997, Ma. Aura Tina Angeles (respondent) filed with the RTC a complaint for Specific Performance with Damages
Standard Penetration Test (SPT) must be carried out to give an estimate of the degree of against Jocelyn B. Doles (petitioner), docketed as Civil Case No. 97-82716. Respondent alleged that petitioner was indebted to
compaction (the relative density) of the slide deposit and also the bearing capacity of the soil the former in the concept of a personal loan amounting to P405,430.00 representing the principal amount and interest; that on
materials. Another thing to consider is the vulnerability of the area to landslides and other mass October 5, 1996, by virtue of a "Deed of Absolute Sale", 3 petitioner, as seller, ceded to respondent, as buyer, a parcel of land,
movements due to thick soil cover. Preventive physical mitigation methods such as surface and as well as the improvements thereon, with an area of 42 square meters, covered by Transfer Certificate of Title No.
subsurface drainage and regrading of the slope must be done in the area. 27 382532,4 and located at a subdivision project known as Camella Townhomes Sorrente in Bacoor, Cavite, in order to satisfy her
personal loan with respondent; that this property was mortgaged to National Home Mortgage Finance Corporation (NHMFC) to
secure petitioner’s loan in the sum of P337,050.00 with that entity; that as a condition for the foregoing sale, respondent shall
We read the quoted portion, however, to mean only that further tests are required to determine the "degree of compaction,"
assume the undue balance of the mortgage and pay the monthly amortization of P4,748.11 for the remainder of the 25 years
"the bearing capacity of the soil materials," and the "vulnerability of the area to landslides," since the tests already conducted
which began on September 3, 1994; that the property was at that time being occupied by a tenant paying a monthly rent
were inadequate to ascertain such geological attributes. It is only in this sense that the assessment was "preliminary."
of P3,000.00; that upon verification with the NHMFC, respondent learned that petitioner had incurred arrearages amounting
to P26,744.09, inclusive of penalties and interest; that upon informing the petitioner of her arrears, petitioner denied that she
Accordingly, we hold that the NHA was justified in canceling the contract. The realization of the mistake as regards the quality incurred them and refused to pay the same; that despite repeated demand, petitioner refused to cooperate with respondent to
of the land resulted in the negation of the motive/cause thus rendering the contract inexistent. 28 Article 1318 of the Civil Code execute the necessary documents and other formalities required by the NHMFC to effect the transfer of the title over the
states that: property; that petitioner collected rent over the property for the month of January 1997 and refused to remit the proceeds to
respondent; and that respondent suffered damages as a result and was forced to litigate.
Art. 1318. There is no contract unless the following requisites concur:
Petitioner, then defendant, while admitting some allegations in the Complaint, denied that she borrowed money from
respondent, and averred that from June to September 1995, she referred her friends to respondent whom she knew to be
(1) Consent of the contracting parties;
engaged in the business of lending money in exchange for personal checks through her capitalist Arsenio Pua. She alleged
that her friends, namely, Zenaida Romulo, Theresa Moratin, Julia Inocencio, Virginia Jacob, and Elizabeth Tomelden,
(2) Object certain which is the subject matter of the contract; borrowed money from respondent and issued personal checks in payment of the loan; that the checks bounced for
insufficiency of funds; that despite her efforts to assist respondent to collect from the borrowers, she could no longer locate
them; that, because of this, respondent became furious and threatened petitioner that if the accounts were not settled, a
(3) Cause of the obligation which is established. (Emphasis supplied.) criminal case will be filed against her; that she was forced to issue eight checks amounting to P350,000 to answer for the
bounced checks of the borrowers she referred; that prior to the issuance of the checks she informed respondent that they were
not sufficiently funded but the latter nonetheless deposited the checks and for which reason they were subsequently
dishonored; that respondent then threatened to initiate a criminal case against her for violation of Batas Pambansa Blg. 22; that
she was forced by respondent to execute an "Absolute Deed of Sale" over her property in Bacoor, Cavite, to avoid criminal borrowed was deposited with the bank account of the petitioner, while payments made for the loan were deposited by the latter
prosecution; that the said deed had no valid consideration; that she did not appear before a notary public; that the Community to respondent’s bank account;8 that petitioner herself admitted in open court that she was "re-lending" the money loaned from
Tax Certificate number on the deed was not hers and for which respondent may be prosecuted for falsification and perjury; and respondent to other individuals for profit; 9 and that the documentary evidence shows that the actual borrowers, the friends of
that she suffered damages and lost rental as a result. petitioner, consider her as their creditor and not the respondent. 10

The RTC identified the issues as follows: first, whether the Deed of Absolute Sale is valid; second; if valid, whether petiti oner is Furthermore, the CA held that the alleged threat or intimidation by respondent did not vitiate consent, since the same is
obliged to sign and execute the necessary documents to effect the transfer of her rights over the property to the respondent; considered just or legal if made to enforce one’s claim through competent authority under Article 133511 of the Civil Code;12 that
and third, whether petitioner is liable for damages. with respect to the arrearages of petitioner on her monthly amortization with the NHMFC in the sum of P26,744.09, the same
shall be deemed part of the balance of petitioner’s loan with the NHMFC which respondent agreed to assume; and that the
amount of P3,000.00 representing the rental for January 1997 supposedly collected by petitioner, as well as the claim for
On July 29, 1998, the RTC rendered a decision the dispositive portion of which states:
damages and attorney’s fees, is denied for insufficiency of evidence. 13

WHEREFORE, premises considered, the Court hereby orders the dismissal of the complaint for insufficiency of evidence. With
On May 29, 2001, petitioner filed her Motion for Reconsideration with the CA, arguing that respondent categorically admitted in
costs against plaintiff.
open court that she acted only as agent or representative of Arsenio Pua, the principal financier and, hence, she had no legal
capacity to sue petitioner; and that the CA failed to consider the fact that petitioner ’s father, who co-owned the subject property,
SO ORDERED. was not impleaded as a defendant nor was he indebted to the respondent and, hence, she cannot be mad e to sign the
documents to effect the transfer of ownership over the entire property.
The RTC held that the sale was void for lack of cause or consideration: 5
On August 6, 2001, the CA issued its Resolution denying the motion on the ground that the foregoing matters had already
been passed upon.
Plaintiff Angeles’ admission that the borrowers are the friends of defendant Doles and further admission that the checks issued
by these borrowers in payment of the loan obligation negates [sic] the cause or consideration of the contract of sale executed
by and between plaintiff and defendant. Moreover, the property is not solely owned by defendant as appearing in Entry No. On August 13, 2001, petitioner received a copy of the CA Resolution. On August 28, 2001, petitioner filed the present Petition
9055 of Transfer Certificate of Title No. 382532 (Annex A, Complaint), thus: and raised the following issues:

"Entry No. 9055. Special Power of Attorney in favor of Jocelyn Doles covering the share of Teod orico Doles on the parcel of I.
land described in this certificate of title by virtue of the special power of attorney to mortgage, executed before the notar y
public, etc."
WHETHER OR NOT THE PETITIONER CAN BE CONSIDERED AS A DEBTOR OF THE RESPONDENT.

The rule under the Civil Code is that contracts without a cause or consideration produce no effect whatsoever. (Art. 1352, Civil
II.
Code).

WHETHER OR NOT AN AGENT WHO WAS NOT AUTHORIZED BY THE PRINCIPAL TO COLLECT DEBT IN HIS
Respondent appealed to the CA. In her appeal brief, respondent interposed her sole assignment of error:
BEHALF COULD DIRECTLY COLLECT PAYMENT FROM THE DEBTOR.

THE TRIAL COURT ERRED IN DISMISSING THE CASE AT BAR ON THE GROUND OF [sic] THE DEED OF SALE
III.
BETWEEN THE PARTIES HAS NO CONSIDERATION OR INSUFFICIENCY OF EVIDENCE. 6

WHETHER OR NOT THE CONTRACT OF SALE WAS EXECUTED FOR A CAUSE. 14

On April 30, 2001, the CA promulgated its Decision, the dispositive portion of which reads:

Although, as a rule, it is not the business of this Court to review the findings of fact made by the lower courts, jurisprudence has
WHEREFORE, IN VIEW OF THE FOREGOING, this appeal is hereby GRANTED. The Decision of the lower court dated July
recognized several exceptions, at least three of which are present in the instant case, namely: when the judgment is based on
29, 1998 is REVERSED and SET ASIDE. A new one is entered ordering defendant-appellee to execute all necessary
a misapprehension of facts; when the findings of facts of the courts a quo are conflicting; and when the CA manifestly
documents to effect transfer of subject property to plaintiff-appellant with the arrearages of the former’s loan with the NHMFC,
overlooked certain relevant facts not disputed by the parties, which, if properly considered, could justify a different
at the latter’s expense. No costs.
conclusion.15 To arrive at a proper judgment, therefore, the Court finds it necessary to re-examine the evidence presented by
the contending parties during the trial of the case.
SO ORDERED.
The Petition is meritorious.
The CA concluded that petitioner was the borrower and, in turn, would "re-lend" the amount borrowed from the respondent to
her friends. Hence, the Deed of Absolute Sale was supported by a valid consideration, which is the sum of money petitioner
The principal issue is whether the Deed of Absolute Sale is supported by a valid consideration.
owed respondent amounting to P405,430.00, representing both principal and interest.

1. Petitioner argues that since she is merely the agent or representative of the alleged debtors, then she is not a party to the
The CA took into account the following circumstances in their entirety: the supposed friends of petitioner never presented
loan; and that the Deed of Sale executed between her and the respondent in their own names, which was predicated on that
themselves to respondent and that all transactions were made by and between petitioner and respondent; 7 that the money
pre-existing debt, is void for lack of consideration.
Indeed, the Deed of Absolute Sale purports to be supported by a consideration in the form of a price certain in money 16 and witness:
that this sum indisputably pertains to the debt in issue. This Court has consistently held that a contract of sale is null and void a. Yes, sir.
and produces no effect whatsoever where the same is without cause or consideration. 17 The question that has to be resolved Atty. Diza:
for the moment is whether this debt can be considered as a valid cause or consideration for the sale. q. How much?
witness:
a. Two percent to Tomelden, one percent to Jacob and then Inocencio and my friends none, sir.
To restate, the CA cited four instances in the record to support its holding that petitioner "re-lends" the amount borrowed from
Based on the foregoing, the CA concluded that petitioner is the real borrower, while the respondent, the real lender.
respondent to her friends: first, the friends of petitioner never presented themselves to respondent and that all transactions
But as correctly noted by the RTC, respondent, then plaintiff, made the following admission during her cross
were made by and between petitioner and respondent; 18 second; the money passed through the bank accounts of petitioner
examination:23
and respondent;19 third, petitioner herself admitted that she was "re-lending" the money loaned to other individuals for
Atty. Villacorta:
profit;20 and fourth, the documentary evidence shows that the actual borrowers, the friends of petitioner, consider her as their
q. Who is this Arsenio Pua?
creditor and not the respondent. 21
witness:
a. Principal financier, sir.
On the first, third, and fourth points, the CA cites the testimony of the petitioner, then defendant, during her cross- Atty. Villacorta:
examination:22 q. So the money came from Arsenio Pua?
witness:
a. Yes, because I am only representing him, sir.
Atty. Diza:
Other portions of the testimony of respondent must likewise be considered: 24
q. You also mentioned that you were not the one indebted to the plaintiff? Atty. Villacorta:
witness: q. So it is not actually your money but the money of Arsenio Pua?
a. Yes, sir. witness:
Atty. Diza: a. Yes, sir.
q. And you mentioned the persons[,] namely, Elizabeth Tomelden, Teresa Moraquin, Maria Luisa Inocencio, Zenaida
Court:
Romulo, they are your friends?
q. It is not your money?
witness: witness:
a. Inocencio and Moraquin are my friends while [as to] Jacob and Tomelden[,] they were just referred. a. Yes, Your Honor.
Atty. Diza: Atty. Villacorta:
q. And you have transact[ed] with the plaintiff? q. Is it not a fact Ms. Witness that the defendant borrowed from you to accommodate somebody, are you aware of
witness:
that?
a. Yes, sir.
witness:
Atty. Diza: a. I am aware of that.
q. What is that transaction? Atty. Villacorta:
witness: q. More or less she [accommodated] several friends of the defendant?
a. To refer those persons to Aura and to refer again to Arsenio Pua, sir. witness:
Atty. Diza:
a. Yes, sir, I am aware of that.
q. Did the plaintiff personally see the transactions with your friends?
xxxx
witness: Atty. Villacorta:
a. No, sir. q. And these friends of the defendant borrowed money from you with the assurance of the defendant?
Atty. Diza: witness:
q. Your friends and the plaintiff did not meet personally? a. They go direct to Jocelyn because I don’t know them.
witness:
xxxx
a. Yes, sir.
Atty. Villacorta:
Atty. Diza: q. And is it not also a fact Madam witness that everytime that the defendant borrowed money from you her friends
q. You are intermediaries? who [are] in need of money issued check[s] to you? There were checks issued to you?
witness: witness:
a. We are both intermediaries. As evidenced by the checks of the debtors they were deposited to the name of a. Yes, there were checks issued.
Arsenio Pua because the money came from Arsenio Pua.
Atty. Villacorta:
xxxx
q. By the friends of the defendant, am I correct?
Atty. Diza: witness:
q. Did the plaintiff knew [sic] that you will lend the money to your friends specifically the one you mentioned [a] while a. Yes, sir.
ago? Atty. Villacorta:
witness: q. And because of your assistance, the friends of the defendant who are in need of money were able to obtain loan
a. Yes, she knows the money will go to those persons.
to [sic] Arsenio Pua through your assistance?
Atty. Diza:
witness:
q. You are re-lending the money? a. Yes, sir.
witness: Atty. Villacorta:
a. Yes, sir. q. So that occasion lasted for more than a year?
Atty. Diza: witness:
q. What profit do you have, do you have commission?
 a. Yes, sir. suffice it to say that in the normal course of commercial dealings and for reasons of convenience and practical utility it can be
Atty. Villacorta: reasonably expected that the facilities of the agent, such as a bank account, may be employed, and that a sub-agent be
q. And some of the checks that were issued by the friends of the defendant bounced, am I correct? appointed, such as the bank itself, to carry out the task, especially where there is no stipulation to the contrary. 32
witness:
a. Yes, sir.
In view of the two agency relationships, petitioner and respondent are not privy to the contract of loan between their principals.
Atty. Villacorta:
Since the sale is predicated on that loan, then the sale is void for lack of consideration.
q. And because of that Arsenio Pua got mad with you?
witness:
a. Yes, sir. 2. A further scrutiny of the record shows, however, that the sale might have been backed up by another consideration that is
separate and distinct from the debt: respondent averred in her complaint and testified that the parties had agreed that as a
condition for the conveyance of the property the respondent shall assume the balance of the mortgage loan which petitioner
Respondent is estopped to deny that she herself acted as agent of a certain Arsenio Pua, her disclosed principal. She is also
allegedly owed to the NHMFC. 33 This Court in the recent past has declared that an assumption of a mortgage debt may
estopped to deny that petitioner acted as agent for the alleged debtors, the friends whom she (petitioner) referred.
constitute a valid consideration for a sale. 34

This Court has affirmed that, under Article 1868 of the Civil Code, the basis of agency is representation. 25 The question of
Although the record shows that petitioner admitted at the time of trial that she owned the proper ty described in the TCT, 35 the
whether an agency has been created is ordinarily a question which may be established in the same way as any other fact,
Court must stress that the Transfer Certificate of Title No. 382532 36 on its face shows that the owner of the property which
either by direct or circumstantial evidence. The question is ultimately one of intention. 26 Agency may even be implied from the
admittedly forms the subject matter of the Deed of Absolute Sale refers neither to the petitioner nor to her father, Teodorico
words and conduct of the parties and the circumstances of the particular case. 27Though the fact or extent of authority of the
Doles, the alleged co-owner. Rather, it states that the property is registered in the name of "Household Development
agents may not, as a general rule, be established from the declarations of the agents alone, if one professes to act as agent for
Corporation." Although there is an entry to the effect that the petitioner had been granted a special power of attorney "covering
another, she may be estopped to deny her agency both as against the asserted principal and the third persons interested in the
the shares of Teodorico Doles on the parcel of land described in this certificate," 37 it cannot be inferred from this bare notation,
transaction in which he or she is engaged. 28
nor from any other evidence on the record, that the petitioner or her father held any direct interest on the property in question
so as to validly constitute a mortgage thereon38 and, with more reason, to effect the delivery of the object of the sale at the
In this case, petitioner knew that the financier of respondent is Pua; and respondent knew that the borrowers are friends of consummation stage. 39 What is worse, there is a notation that the TCT itself has been "cancelled." 40
petitioner.
In view of these anomalies, the Court cannot entertain the
The CA is incorrect when it considered the fact that the "supposed friends of [petitioner], the actual borrowers, did not present
themselves to [respondent]" as evidence that negates the agency relationship—it is sufficient that petitioner disclosed to
possibility that respondent agreed to assume the balance of the mortgage loan which petitioner allegedly owed to the NHMFC,
respondent that the former was acting in behalf of her principals, her friends whom she referred to respondent. For an agency
especially since the record is bereft of any factual finding that petitioner was, in the first place, endowed with any ownership
to arise, it is not necessary that the principal personally encounter the third person with whom the agent interacts. The law in
rights to validly mortgage and convey the property. As the complainant who initiated the case, respondent bears th e burden of
fact contemplates, and to a great degree, impersonal dealings where the principal need not personally know or meet the third
proving the basis of her complaint. Having failed to discharge such burden, the Court has no choice but to declare the sale void
person with whom her agent transacts: precisely, the purpose of agency is to extend the personality of the principal through the
for lack of cause. And since the sale is void, the Court finds it unnecessary to dwell on the issue of whether duress or
facility of the agent. 29
intimidation had been foisted upon petitioner upon the execution of the sale.

In the case at bar, both petitioner and respondent have undeniably disclosed to each other that they are representing someone
Moreover, even assuming the mortgage validly exists, the Court notes respondent’s allegation that the mortgage with the
else, and so both of them are estopped to deny the same. It is evident from the record that petitioner merely refers actual
NHMFC was for 25 years which began September 3, 1994. Respondent filed her Complaint for Specific Performance in 1997.
borrowers and then collects and disburses the amounts of the loan upon which she received a commission; and that
Since the 25 years had not lapsed, the prayer of respondent to compel petitioner to execute necessary documents to effect the
respondent transacts on behalf of her "principal financier", a certain Arsenio Pua. If their respective principals do not actually
transfer of title is premature.
and personally know each other, such ignorance does not affect their juridical standing as agents, especially since the very
purpose of agency is to extend the personality of the principal through the facility of the agent.
WHEREFORE, the petition is granted. The Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE.
The complaint of respondent in Civil Case No. 97-82716 is DISMISSED.
With respect to the admission of petitioner that she is "re-lending" the money loaned from respondent to other individuals for
profit, it must be stressed that the manner in which the parties designate the relationship is not controlling. If an act done by
one person in behalf of another is in its essential nature one of agency, the former is the agent of the latter notwithstanding he SO ORDERED.
or she is not so called. 30 The question is to be determined by the fact that one represents and is acting for another, and if
relations exist which will constitute an agency, it will be an agency whether the parties understood the exact nature of the
relation or not.31 MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice

That both parties acted as mere agents is shown by the undisputed fact that the friends of petitioner issued checks in paymen t
of the loan in the name of Pua. If it is true that petitioner was "re-lending", then the checks should have been drawn in her
name and not directly paid to Pua.

With respect to the second point, particularly, the finding of the CA that the disbursements and payments for the loan were
made through the bank accounts of petitioner and respondent,
G.R. No. 151319 November 22, 2004 4/18/85
MANILA MEMORIAL PARK CEMETERY, INC., petitioner,
vs.
Dear Atty. Linsangan:
PEDRO L. LINSANGAN, respondent.

This will confirm our agreement that while the offer to purchase under Contract No. 28660 states that the total price
of P132,250.00 your undertaking is to pay only the total sum of P95,000.00 under the old price. Further the total sum
DECISION
of P19,838.00 already paid by you under O.R. # 118912 dated April 6, 1985 has been credited in the total purchase
price thereby leaving a balance of P75,162.00 on a monthly installment of P1,800.00 including interests (sic) charges
TINGA, J.: for a period of five (5) years.

For resolution in this case is a classic and interesting texbook question in the law on agency.
(Signed)

This is a petition for review assailing the Decision1 of the Court of Appeals dated 22 June 2001, and its Resolution2dated 12
FLORENCIA C. BALUYOT
December 2001 in CA G.R. CV No. 49802 entitled "Pedro L. Linsangan v. Manila Memorial Cemetery, Inc. et al.," finding
Manila Memorial Park Cemetery, Inc. (MMPCI) jointly and severally liable with Florencia C. Baluyot to respondent Atty. Pedro
L. Linsangan.
By virtue of this letter, Atty. Linsangan signed Contract No. 28660 and accepted Official Receipt No. 118912. As requested by
The facts of the case are as follows: Baluyot, Atty. Linsangan issued twelve (12) postdated checks of P1,800.00 each in favor of MMPCI. The next year , or on 29
April 1986, Atty. Linsangan again issued twelve (12) postdated checks in favor of MMPCI.
Sometime in 1984, Florencia Baluyot offered Atty. Pedro L. Linsangan a lot called Garden State at the Holy Cross Memorial
Park owned by petitioner (MMPCI). According to Baluyot, a former owner of a memorial lot under Contract No. 25012 was no On 25 May 1987, Baluyot verbally advised Atty. Linsangan that Contract No. 28660 was cancelled for reasons the latter could
longer interested in acquiring the lot and had opted to sell his rights subject to reimbursement of the amounts he already paid. not explain, and presented to hi m another proposal for the purchase of an equivalent property. He refused the new proposal
The contract was for P95,000.00. Baluyot reassured Atty. Linsangan that once reimbursement is made to the former buyer, the and insisted that Baluyot and MMPCI honor their undertaking.
contract would be transferred to him. Atty. Linsangan agreed and gave Baluyot P35,295.00 representing the amount to be
reimbursed to the original buyer and to complete the down payment to MMPCI. 3 Baluyot issued handwritten and typewritten
For the alleged failure of MMPCI and Baluyot to conform to their agreement, Atty. Linsangan filed a Comp laint7 for Breach of
receipts for these payments. 4
Contract and Damages against the former.

Sometime in March 1985, Baluyot informed Atty. Linsangan that he would be issued Contract No. 28660, a new contract
Baluyot did not present any evidence. For its part, MMPCI alleged that Contract No. 28660 was c ancelled conformably with the
covering the subject lot in the name of the latter instead of old Contract No. 25012. Atty. Linsangan protested, but Baluyot
terms of the contract8 because of non-payment of arrearages. 9 MMPCI stated that Baluyot was not an agent but an
assured him that he would still be paying the old price of P95,000.00 with P19,838.00 credited as full down payment leaving a
independent contractor, and as such was not authorized to represent MMPCI or to use its name except as to the extent
balance of about P75,000.00. 5
expressly stated in the Agency Manager Agreement. 10 Moreover, MMPCI was not aware of the arrangements entered into by
Atty. Linsangan and Baluyot, as it in fact received a down payment and monthly installments a s indicated in the
Subsequently, on 8 April 1985, Baluyot brought an Offer to Purchase Lot No. A11 (15), Block 83, Garden Estate I denominated contract.11 Official receipts showing the application of payment were turned over to Baluyot whom Atty. Linsangan had from the
as Contract No. 28660 and the Official Receipt No. 118912 dated 6 April 1985 for the amount of P19,838.00. Contract No. beginning allowed to receive the same in his behalf. Furthermore, whatever misimpression that Atty. Linsangan may have had
28660 has a listed price of P132,250.00. Atty. Linsangan objected to the new contract price, as the same was not the amount must have been rectified by the Account Updating Arrangement signed by Atty. Linsangan which states that he "expressly
previously agreed upon. To convince Atty. Linsangan, Baluyot executed a document 6 confirming that while the contract price is admits that Contract No. 28660 'on account of serious delinquency…is now due for cancellation under its terms and
P132,250.00, Atty. Linsangan would pay only the original price of P95,000.00. conditions.'''12

The document reads in part: The trial court held MMPCI and Baluyot jointly and severally liable. 13 It found that Baluyot was an agent of MMPCI and that the
latter was estopped from denying this agency, having received and enchased the checks issued by Atty. Linsangan and given
to it by Baluyot. While MMPCI insisted that Baluyot was authorized to receive only the down payment, it allowed her to
The monthly installment will start April 6, 1985; the amount of P1,800.00 and the difference will be issued as
continue to receive postdated checks from Atty. Linsangan, which it in turn consistently enc ashed.14
discounted to conform to the previous price as previously agreed upon. --- P95,000.00

The dispositive portion of the decision reads:

Prepared by:

WHEREFORE, judgment by preponderance of evidence is hereby rendered in favor of plaintiff declaring Contract
(Signed)
No. 28660 as valid and subsisting and ordering defendants to perform their undertakings thereof which covers burial
lot No. A11 (15), Block 83, Section Garden I, Holy Cross Memorial Park located at Novaliches, Quezon City. All
(MRS.) FLORENCIA C. BALUYOT payments made by plaintiff to defendants should be credited for his accounts. NO DAMAGES, NO ATTORNEY'S
Agency Manager FEES but with costs against the defendants.
Holy Cross Memorial Park
 The cross claim of defendant Manila Memorial Cemetery Incorporated as against defendant Baluyot is GRANTED up Atty. Linsangan argues that he did not violate the terms and conditions of the contract, and in fact fai thfully performed his
to the extent of the costs. contractual obligations and complied with them in good faith for at least two years. 27 He claims that contrary to MMPCI's
position, his profession as a lawyer is immaterial to the validity of the subject contract and the case at bar. 28 According to him,
MMPCI had practically admitted in its Petition that Baluyot was its agent, and thus, the only issue left to be resolved is wh ether
SO ORDERED.15
MMPCI allowed Baluyot to act as though she had full powers to be held solidarily liable with the latter. 29

MMPCI appealed the trial court's decision to the Court of Appeals. 16 It claimed that Atty. Linsangan is bound by the written
We find for the petitioner MMPCI.
contract with MMPCI, the terms of which were clearly set forth therein and read, understood, and si gned by the former. 17 It also
alleged that Atty. Linsangan, a practicing lawyer for over thirteen (13) years at the time he entered into the contract, is
presumed to know his contractual obligations and is fully aware that he cannot belatedly and unilaterally change the terms of The jurisdiction of the Supreme Court in a petition for review under Rule 45 of the Rules of Court is limited to reviewing only
the contract without the consent, much less the knowledge of the other contracting party, which was MMPCI. And in this case, errors of law, not fact, unless the factual findings complained of are devoid of support by the evidence on record or the assailed
MMPCI did not agree to a change in the contract and in fact implemented the same pursuant to its clear terms. In view thereof, judgment is based on misapprehension of facts. 30 In BPI Investment Corporation v. D.G. Carreon Commercial
because of Atty. Linsangan's delinquency, MMPCI validly cancelled the contract. Corporation,31 this Court ruled:

MMPCI further alleged that it cannot be held jointly and solidarily liable with Baluyot as the latter exceeded the terms of her There are instances when the findings of fact of the trial court and/or Court of Appeals may be reviewed by the
agency, neither did MMPCI ratify Baluyot's acts. It added that it cannot be charged with making any misrepresentation, nor of Supreme Court, such as (1) when the conclusion is a finding grounded entirely on speculation, surmises and
having allowed Baluyot to act as though she had full powers as the written contract expressly stated the terms and conditions conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) where there is a grave
which Atty. Linsangan accepted and understood. In canceling the contract, MMPCI merely enforced the terms and conditions abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are
imposed therein.18 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)
Imputing negligence on the part of Atty. Linsangan, MMPCI claimed that it was the former's obligation, as a party knowingly
when the facts set forth in the petition as well as in the petitioners' main and reply briefs are not disputed by the
dealing with an alleged agent, to determine the limitations of such agent's authority, particularly when such alleged agent's
respondents; and (10) the findings of fact of the Court of Appeals are premised on the supposed absence of
actions were patently questionable. According to MMPCI, Atty. Linsangan did not even bother to verify Baluyot's authority or
evidence and contradicted by the evidence on record. 32
ask copies of official receipts for his payments. 19

In the case at bar, the Court of Appeals committed several errors in the apprehension of the facts of the case, as well as made
The Court of Appeals affirmed the decision of the trial court. It upheld the trial court's finding that Baluyot was an agent of
conclusions devoid of evidentiary support, hence we review its findings of fact.
MMPCI at the time the disputed contract was entered into, having represented MMPCI's interest and acting on its behalf in the
dealings with clients and customers. Hence, MMPCI is considered estopped when it allowed Baluyot to act and represent
MMPCI even beyond her authority. 20 The appellate court likewise found that the acts of Baluyot bound MMPCI when the latter By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of
allowed the former to act for and in its behalf and stead. While Baluyot's authority "may not have been expressly conferred another, with the consent or authority of the latter.33 Thus, the elements of agency are (i) consent, express or implied, of the
upon her, the same may have been derived impliedly by habit or custom, which may have been an accepted practice in the parties to establish the relationship; (ii) the object is the execution of a juridical act in relation to a third person; (iii) the agent
company for a long period of time."21 Thus, the Court of Appeals noted, innocent third persons such as Atty. Linsangan should acts as a representative and not for himself; and (iv) the agent acts within the scope of his authority. 34
not be prejudiced where the principal failed to adopt the needed measures to prevent misrepresentation. Furthermore, if an
agent misrepresents to a purchaser and the principal accepts the benefits of such misrepresentation, he cannot at the same
In an attempt to prove that Baluyot was not its agent, MMPCI pointed out that under its Agency Manager Agreement; an
time deny responsibility for such misrepresentation. 22 Finally, the Court of Appeals declared:
agency manager such as Baluyot is considered an independent contractor and not an agent. 35However, in the same contract,
Baluyot as agency manager was authorized to solicit and remit to MMPCI offers to purchase interment spaces belonging to
There being absolutely nothing on the record that would show that the court a quo overlooked, disregarded, or misinterpreted and sold by the latter. 36 Notwithstanding the claim of MMPCI that Baluyot was an independent contractor, the fact remains that
facts of weight and significance, its factual findings and conclusions must be given great weight and should not be disturbed by she was authorized to solicit solely for and in behalf of MMPCI. As properly found both by the trial court and the Court of
this Court on appeal. Appeals, Baluyot was an agent of MMPCI, having represented the interest of the latter, and having been allowed by MMPCI to
represent it in her dealings with its clients/prospective buyers.
WHEREFORE, in view of the foregoing, the appeal is hereby DENIED and the appealed decision in Civil Case No.
88-1253 of the Regional Trial Court, National Capital Judicial Region, Branch 57 of Makati, is hereby AFFIRMED in Nevertheless, contrary to the findings of the Court of Appeals, MMPCI cannot be bound by the contract procured by Atty.
toto. Linsangan and solicited by Baluyot.

SO ORDERED.23 Baluyot was authorized to solicit and remit to MMPCI offers to purchase interment spaces obtained on forms provided by
MMPCI. The terms of the offer to purchase, therefore, are contained in such forms and, when signed by the buyer and an
authorized officer of MMPCI, becomes binding on both parties.
MMPCI filed its Motion for Reconsideration, 24 but the same was denied for lack of merit. 25

The Offer to Purchase duly signed by Atty. Linsangan, and accepted and validated by MMPCI showed a total list price of
In the instant Petition for Review, MMPCI claims that the Court of Appeals seriously erred in disregarding the plain terms of the
P132,250.00. Likewise, it was clearly stated therein that "Purchaser agrees that he has read or has had read to him this
written contract and Atty. Linsangan's failure to abide by the terms thereof, which justified its cancellation. In addition, even
agreement, that he understands its terms and conditions, and that there are no covenants, conditions, warranties or
assuming that Baluyot was an agent of MMPCI, she clearly exceeded her authority and Atty. Linsangan knew or should have
representations other than those contained herein." 37 By signing the Offer to Purchase, Atty. Linsangan signified that he
known about this considering his status as a long-practicing lawyer. MMPCI likewise claims that the Court of Appeals erred in
understood its contents. That he and Baluyot had an agreement different from that contained in the Offer to Purchase is of no
failing to consider that the facts and the applicable law do not support a judgment against Baluyot only "up to the extent of
moment, and should not affect MMPCI, as it was obviously made outside Baluyot's authority. To repeat, Baluyot's authority was
costs."26
limited only to soliciting purchasers. She had no authority to alter the terms of the written contract provided by MMPCI. The
document/letter "confirming" the agreement that Atty. Linsangan would have to pay the old price was executed by Baluyot Thus, the acts of an agent beyond the scope of his authority do not bind the principal, unless he ratifies them, expressly or
alone. Nowhere is there any indication that the same came from MMPCI or any of its officers. impliedly. Only the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal must have
knowledge of the acts he is to ratify. 44
It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without
upon them to establish it. 38 The basis for agency is representation and a person dealing with an agent is put upon inquiry and authority. The substance of the doctrine is confirmation after conduct, amounting to a substitute for a prior authority. Ordi narily,
must discover upon his peril the authority of the agent. 39 If he does not make such an inquiry, he is chargeable with knowledge the principal must have full knowledge at the time of ratification of all the material facts and circumstances relating to the
of the agent's authority and his ignorance of that authority will not be any excuse. 40 unauthorized act of the person who assumed to act as agent. Thus, if material facts were suppressed or unknown, there can
be no valid ratification and this regardless of the purpose or lack thereof in concealing such facts and regardless of the parties
between whom the question of ratification may arise. 45Nevertheless, this principle does not apply if the principal's ignorance of
As noted by one author, the ignorance of a person dealing with an agent as to the scope of the latter's authority is no excuse to
the material facts and circumstances was willful, or that the principal chooses to act in ignorance of the facts. 46 However, in the
such person and the fault cannot be thrown upon the principal. 41 A person dealing with an agent assumes the risk of lack of
absence of circumstances putting a reasonably prudent man on inquiry, ratification cannot be implied as against the principal
authority in the agent. He cannot charge the principal by relying upon the agent's assumption of authority that proves to be
who is ignorant of the facts. 47
unfounded. The principal, on the other hand, may act on the presumption that third persons dealing with his agent will not be
negligent in failing to ascertain the extent of his authority as well as the existence of his agency. 42
No ratification can be implied in the instant case.
In the instant case, it has not been established that Atty. Linsangan even bothered to inquire whether Baluyot was authorized
to agree to terms contrary to those indicated in the written contract, much less bind MMPCI by her commitment with respect to A perusal of Baluyot's Answer 48 reveals that the real arrangement between her and Atty. Linsangan was for the latter to pay a
such agreements. Even if Baluyot was Atty. Linsangan's friend and known to be an agent of MMPCI, her declarations and monthly installment of P1,800.00 whereas Baluyot was to shoulder the counterpart amount of P1,455.00 to meet the P3,255.00
actions alone are not sufficient to establish the fact or extent of her authority. 43 Atty. Linsangan as a practicing lawyer for a monthly installments as indicated in the contract. Thus, every time an installment falls due, payment was to be made through a
relatively long period of time when he signed the contract should have been put on guard when their agreement was not check from Atty. Linsangan for P1,800.00 and a cash component of P1,455.00 from Baluyot. 49 However, it appears that while
reflected in the contract. More importantly, Atty. Linsangan should have been alerted by the fact that Baluyot failed to effect the Atty. Linsangan issued the post-dated checks, Baluyot failed to come up with her part of the bargain. This was supported by
transfer of rights earlier promised, and was unable to make good her written commitment, nor convince MMPCI to assent Baluyot's statements in her letter 50 to Mr. Clyde Williams, Jr., Sales Manager of MMPCI, two days after she received the copy
thereto, as evidenced by several attempts to induce him to enter into other contracts for a higher consideration. As properly of the Complaint. In the letter, she admitted that she was remiss in her duties when she consented to Atty. Linsangan's
pointed out by MMPCI, as a lawyer, a greater degree of caution should be expected of Atty. Linsangan especially in dealings proposal that he will pay the old price while the difference will be shouldered by her. She likewise admitted that the contract
involving legal documents. He did not even bother to ask for official receipts of his payments, nor inquire from MMPCI directly suffered arrearages because while Atty. Linsangan issued the agreed checks, she was unable to give her share of P1,455.00
to ascertain the real status of the contract, blindly relying on the representations of Baluyot. A lawyer by profession, he knew due to her own financial difficulties. Baluyot even asked for compassion from MMPCI for the error she committed.
what he was doing when he signed the written contract, knew the meaning and value of every word or phrase used in the
contract, and more importantly, knew the legal effects which said document produced. He is bound to accept responsibility for
Atty. Linsangan failed to show that MMPCI had knowledge of the arrangement. As far as MMPCI is concerned, the contract
his negligence.
price was P132,250.00, as stated in the Offer to Purchase signed by Atty. Linsangan and MMPCI's authorized officer. The
down payment of P19,838.00 given by Atty. Linsangan was in accordance with the contract as well. Payments of P3,235.00 for
The trial and appellate courts found MMPCI liable based on ratification and estoppel. For the trial court, MMPCI's acts of at least two installments were likewise in accord with the contract, albeit made through a check and partly in cash. In view of
accepting and encashing the checks issued by Atty. Linsangan as well as allowing Baluyot to receive checks drawn in the Baluyot's failure to give her share in the payment, MMPCI received only P1,800.00 checks, which were clearly insufficient
name of MMPCI confirm and ratify the contract of agency. On the other hand, the Court of Appeals faulted MMPCI in failing to payment. In fact, Atty. Linsangan would have incurred arrearages that could have caused the earlier cancellation of the
adopt measures to prevent misrepresentation, and declared that in view of MMPCI's acceptance of the benefits of Baluyot's contract, if not for MMPCI's application of some of the checks to his account. However, the checks alone were not sufficient to
misrepresentation, it can no longer deny responsibility therefor. cover his obligations.

The Court does not agree. Pertinent to this case are the following provisions of the Civil Code: If MMPCI was aware of the arrangement, it would have refused the latter's check payments for being insufficient. It would not
have applied to his account the P1,800.00 checks. Moreover, the fact that Baluyot had to practically explain to MMPCI's Sales
Manager the details of her "arrangement" with Atty. Linsangan and admit to having made an error in entering such
Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority, and the principal
arrangement confirm that MMCPI had no knowledge of the said agreement. It was only when Baluyot filed her Answer that she
does not ratify the contract, it shall be void if the party with whom the agent contracted is aware of the limits of the
claimed that MMCPI was fully aware of the agreement.
powers granted by the principal. In this case, however, the agent is liable if he undertook to secure the principal's
ratification.
Neither is there estoppel in the instant case. The essential elements of estoppel are (i) conduct of a party amounting to false
representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise
Art. 1910. The principal must comply with all the obligations that the agent may have contracted within the scope of
than, and inconsistent with, those which the party subsequently attempts to assert; (ii) intent, or at least expectation, that this
his authority.
conduct shall be acted upon by, or at least influence, the other party; and (iii) knowledge, actual or constructive, of the r eal
facts.51
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it
expressly or tacitly.
While there is no more question as to the agency relationship between Baluyot and MMPCI, there is no indication that MMPCI
let the public, or specifically, Atty. Linsangan to believe that Baluyot had the authority to alter the standard contracts of the
Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the company. Neither is there any showing that prior to signing Contract No. 28660, MMPCI had any knowledge of Baluyot's
former allowed the latter to act as though he had full powers. commitment to Atty. Linsangan. One who claims the benefit of an estoppel on the ground that he has been misled by the
representations of another must not have been misled through his own want of reasonable care and circumspection. 52 Even
assuming that Atty. Linsangan was misled by MMPCI's actuations, he still cannot invoke the principle of estoppel, as he was
clearly negligent in his dealings with Baluyot, and could have easily determined, had he only been cautious and prudent,
whether said agent was clothed with the authority to change the terms of the principal's written contract. Estoppel must be
intentional and unequivocal, for when misapplied, it can easily become a most convenient and effective means of injustice. 53 In
view of the lack of sufficient proof showing estoppel, we refuse to hold MMPCI liable on this score.

G.R. No. 76931 May 29, 1991

Likewise, this Court does not find favor in the Court of Appeals' findings that "the authority of defendant Baluyot may not have
ORIENT AIR SERVICES & HOTEL REPRESENTATIVES, petitioner,
been expressly conferred upon her; however, the same may have been derived impliedly by habit or custom which may have
vs.
been an accepted practice in their company in a long period of time." A perusal of the records of the case fails to show any
COURT OF APPEALS and AMERICAN AIR-LINES INCORPORATED, respondents.
indication that there was such a habit or custom in MMPCI that allows its agents to enter into agreements for lower prices of its
G.R. No. 76933 May 29, 1991
interment spaces, nor to assume a portion of the purchase price of the interment spaces sold at such lower price. No evidence
AMERICAN AIRLINES, INCORPORATED, petitioner,
was ever presented to this effect.
vs.
COURT OF APPEALS and ORIENT AIR SERVICES & HOTEL REPRESENTATIVES, INCORPORATED,respondents.
As the Court sees it, there are two obligations in the instant case. One is the Contract No. 28660 between MMPCI and by Atty. Francisco A. Lava, Jr. and Andresito X. Fornier for Orient Air Service and Hotel Representatives, Inc.
Linsangan for the purchase of an interment space in the former's cemetery. The other is the agreement between Baluyot and Sycip, Salazar, Hernandez & Gatmaitan for American Airlines, Inc.
Atty. Linsangan for the former to shoulder the amount P1,455.00, or the difference between P95,000.00, the original price, and
P132,250.00, the actual contract price.

To repeat, the acts of the agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same. It PADILLA, J.:
also bears emphasis that when the third person knows that the agent was acting beyond his power or authority, the principal
cannot be held liable for the acts of the agent. If the said third person was aware of such limits of authority, he is to blame and
This case is a consolidation of two (2) petitions for review on certiorari of a decision1 of the Court of Appeals in CA-G.R. No.
is not entitled to recover damages from the agent, unless the latter undertook to secure the principal's ratification. 54
CV-04294, entitled "American Airlines, Inc. vs. Orient Air Services and Hotel Representatives, Inc." which affirmed, with
modification, the decision2 of the Regional Trial Court of Manila, Branch IV, which dismissed the complaint and granted therein
This Court finds that Contract No. 28660 was validly entered into both by MMPCI and Atty. Linsangan. By affixing his signatur e defendant's counterclaim for agent's overriding commission and damages.
in the contract, Atty. Linsangan assented to the terms and conditions thereof. When Atty. Linsangan incurr ed delinquencies in
payment, MMCPI merely enforced its rights under the said contract by canceling the same.
The antecedent facts are as follows:

Being aware of the limits of Baluyot's authority, Atty. Linsangan cannot insist on what he claims to be the terms of Contract No.
On 15 January 1977, American Airlines, Inc. (hereinafter referred to as American Air), an air carrier offering passenger and air
28660. The agreement, insofar as the P95,000.00 contract price is concerned, is void and cannot be enforced as against
cargo transportation in the Philippines, and Orient Air Services and Hotel Representatives (hereinafter referred to as Orient
MMPCI. Neither can he hold Baluyot liable for damages under the same contract, since there is no evidence showing that
Air), entered into a General Sales Agency Agreement (hereinafter referred to as the Agreement), whereby the former
Baluyot undertook to secure MMPCI's ratification. At best, the "agreement" between Baluyot and Atty. Linsangan bound only
authorized the latter to act as its exclusive general sales agent within the Philippines for the sale of air passenger
the two of them. As far as MMPCI is concerned, it bound itself to sell its interment space to Atty. Linsangan for P132,250.00
transportation. Pertinent provisions of the agreement are reproduced, to wit:
under Contract No. 28660, and had in fact received several payments in accordance with the same contract. If the contract
was cancelled due to arrearages, Atty. Linsangan's recourse should only be against Baluyot who personally undertook to pay
the difference between the true contract price of P132,250.00 and the original proposed price of P95,000.00. To surmise that WITNESSETH
Baluyot was acting on behalf of MMPCI when she promised to shoulder the said difference would be to conclude that MMPCI
undertook to pay itself the difference, a conclusion that is very illogical, if not antithetical to its business interests.
In consideration of the mutual convenants herein contained, the parties hereto agree as follows:

However, this does not preclude Atty. Linsangan from instituting a separate action to recover damages from Baluyot, not as an
agent of MMPCI, but in view of the latter's breach of their separate agreement. To review, Baluyot obligated herself to pay 1. Representation of American by Orient Air Services
P1,455.00 in addition to Atty. Linsangan's P1,800.00 to complete the monthly installment payment under the contract, which,
by her own admission, she was unable to do due to personal financial difficulties. It is undisputed that Atty. Linsangan issued Orient Air Services will act on American's behalf as its exclusive General Sales Agent within the Philippines,
the P1,800.00 as agreed upon, and were it not for Baluyot's failure to provide the balance, Contract No. 28660 would not have including any United States military installation therein which are not serviced by an Air Carrier Representation Office
been cancelled. Thus, Atty. Linsangan has a cause of action against Baluyot, whic h he can pursue in another case. (ACRO), for the sale of air passenger transportation. The services to be performed by Orient Air Services shall
include:
WHEREFORE, the instant petition is GRANTED. The Decision of the Court of Appeals dated 22 June 2001 and its Resolution
dated 12 December 2001 in CA- G.R. CV No. 49802, as well as the Decision in Civil Case No. 88-1253 of the Regional Trial (a) soliciting and promoting passenger traffic for the services of American and, if necessary, employing
Court, Makati City Branch 57, are hereby REVERSED and SET ASIDE. The Complaint in Civil Case No. 88-1253 is staff competent and sufficient to do so;
DISMISSED for lack of cause of action. No pronouncement as to costs.
(b) providing and maintaining a suitable area in its place of business to be used exclusively for the
SO ORDERED. transaction of the business of American;

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur. (c) arranging for distribution of American's timetables, tariffs and promotional material to sales agents and
the general public in the assigned territory;
 (d) servicing and supervising of sales agents (including such sub-agents as may be appointed by Orient 10. Default
Air Services with the prior written consent of American) in the assigned territory including if required by
American the control of remittances and commissions retained; and
If Orient Air Services shall at any time default in observing or performing any of the provisions of this Agreement or
shall become bankrupt or make any assignment for the benefit of or enter into any agreement or promise with its
(e) holding out a passenger reservation facility to sales agents and the general public in the assigned creditors or go into liquidation, or suffer any of its goods to be taken in execution, or if it ceases to be in business,
territory. this Agreement may, at the option of American, be terminated forthwith and American may, without prejudice to any
of its rights under this Agreement, take possession of any ticket forms, exchange orders, traffic material or other
property or funds belonging to American.
In connection with scheduled or non-scheduled air passenger transportation within the United States, neither Orient
Air Services nor its sub-agents will perform services for any other air carrier similar to those to be performed
hereunder for American without the prior written consent of American. Subject to periodic instructions and continued 11. IATA and ATC Rules
consent from American, Orient Air Services may sell air passenger transportation to be performed within the United
States by other scheduled air carriers provided American does not provide substantially equivalent schedules
The provisions of this Agreement are subject to any applicable rules or resolutions of the International Air Transport
between the points involved.
Association and the Air Traffic Conference of America, and such rules or resolutions shall control in the event of any
conflict with the provisions hereof.
xxx xxx xxx
xxx xxx xxx
4. Remittances
13. Termination
Orient Air Services shall remit in United States dollars to American the ticket stock or exchange orders, less
commissions to which Orient Air Services is entitled hereunder, not less frequently than semi-monthly, on the 15th
American may terminate the Agreement on two days' notice in the event Orient Air Services is unable to transfer to
and last days of each month for sales made during the preceding half month.
the United States the funds payable by Orient Air Services to American under this Agreement. Either party may
terminate the Agreement without cause by giving the other 30 days' notice by letter, telegram or cable.
All monies collected by Orient Air Services for transportation sold hereunder on American's ticket stock or on
exchange orders, less applicable commissions to which Orient Air Services is entitled hereunder, are the property of
xxx xxx x x x3
American and shall be held in trust by Orient Air Services until satisfactorily accounted for to American.

On 11 May 1981, alleging that Orient Air had reneged on its obligations under the Agreement by failing to promptly remit the
5. Commissions
net proceeds of sales for the months of January to March 1981 in the amount of US $254,400.40, American Air by itself
undertook the collection of the proceeds of tickets sold originally by Orient Air and terminated forthwith the Agreement in
American will pay Orient Air Services commission on transportation sold hereunder by Orient Air Services or its sub- accordance with Paragraph 13 thereof (Termination). Four (4) days later, or on 15 May 1981, American Air instituted suit
agents as follows: against Orient Air with the Court of First Instance of Manila, Branch 24, for Accounting with Preliminary Attachment or
Garnishment, Mandatory Injunction and Restraining Order 4 averring the aforesaid basis for the termination of the Agreement as
well as therein defendant's previous record of failures "to promptly settle past outstanding refunds of which there were avai lable
(a) Sales agency commission
funds in the possession of the defendant, . . . to the damage and prejudice of plaintiff."5

American will pay Orient Air Services a sales agency commission for all sales of transportation by Orient Air Services
In its Answer6 with counterclaim dated 9 July 1981, defendant Orient Air denied the material allegations of the complaint with
or its sub-agents over American's services and any connecting through air transportation, wh en made on American's
respect to plaintiff's entitlement to alleged unremitted amounts, contending that after application thereof to the commission s
ticket stock, equal to the following percentages of the tariff fares and charges:
due it under the Agreement, plaintiff in fact still owed Orient Air a balance in unpaid overriding commissions. Further, the
defendant contended that the actions taken by American Air in the course of terminating the Agreement as well as the
(i) For transportation solely between points within the United States and between such points and Canada: termination itself were untenable, Orient Air claiming that American Air's precipitous conduct had occasioned prejudice to its
7% or such other rate(s) as may be prescribed by the Air Traffic Conference of America. business interests.

(ii) For transportation included in a through ticket covering transportation between points other than those Finding that the record and the evidence substantiated the allegations of the defendant, the trial court ruled in its favor,
described above: 8% or such other rate(s) as may be prescribed by the International Air Transport rendering a decision dated 16 July 1984, the dispositive portion of which reads:
Association.
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered in favor of defendant and
(b) Overriding commission against plaintiff dismissing the complaint and holding the termination made by the latter as affecting the GSA
agreement illegal and improper and order the plaintiff to reinstate defendant as its general sales agent for passenger
tranportation in the Philippines in accordance with said GSA agreement; plaintiff is ordered to pay defendant the
In addition to the above commission American will pay Orient Air Services an overriding commission of 3% of the balance of the overriding commission on total flown revenue covering the period from March 16, 1977 to December
tariff fares and charges for all sales of transportation over American's service by Orient Air Service or its sub-agents. 31, 1980 in the amount of US$84,821.31 plus the additional amount of US$8,000.00 by way of proper 3% overriding
commission per month commencing from January 1, 1981 until such reinstatement or said amounts in its Philippine
xxx xxx xxx peso equivalent legally prevailing at the time of payment plus legal interest to commence from the filing of the
 counterclaim up to the time of payment. Further, plaintiff is directed to pay defendant the amount of One Million Five 5. Commissions
Hundred Thousand (Pl,500,000.00) pesos as and for exemplary damages; and the amount of Three Hundred
Thousand (P300,000.00) pesos as and by way of attorney's fees.
a) . . .

Costs against plaintiff. 7

b) Overriding Commission

On appeal, the Intermediate Appellate Court (now Court of Appeals) in a decision promulgated on 27 January 1986, affirmed
In addition to the above commission, American will pay Orient Air Services an overriding commission of 3% of the
the findings of the court a quo on their material points but with some modifications with respect to the monetary awards
tariff fees and charges for all sales of transportation over American's services by Orient Air Services or itssub-
granted. The dispositive portion of the appellate court's decision is as follows:
agents. (Emphasis supplied)

WHEREFORE, with the following modifications —

Since Orient Air was allowed to carry only the ticket stocks of American Air, and the former not having opted to appoint any
sub-agents, it is American Air's contention that Orient Air can claim entitlement to the disputed overriding commission based
1) American is ordered to pay Orient the sum of US$53,491.11 representing the balance of the latter's overriding only on ticketed sales. This is supposed to be the clear meaning of the underscored portion of the above provision. Thus, to be
commission covering the period March 16, 1977 to December 31, 1980, or its Philippine peso equivalent in entitled to the 3% overriding commission, the sale must be made by Orient Air and the sale must be done with the use of
accordance with the official rate of exchange legally prevailing on July 10, 1981, the date the counterclaim was filed; American Air's ticket stocks.

2) American is ordered to pay Orient the sum of US$7,440.00 as the latter's overriding commission per month On the other hand, Orient Air contends that the contractual stipulation of a 3% overriding commission covers the total revenu e
starting January 1, 1981 until date of termination, May 9, 1981 or its Philippine peso equivalent in accordance with of American Air and not merely that derived from ticketed sales undertaken by Orient Air. The latter, in justific ation of its
the official rate of exchange legally prevailing on July 10, 1981, the date the counterclaim was filed submission, invokes its designation as the exclusive General Sales Agent of American Air, with the corresponding obligations
arising from such agency, such as, the promotion and solicitation for the services of its principal. In effect, by vir tue of such
exclusivity, "all sales of transportation over American Air's services are necessarily by Orient Air." 11
3) American is ordered to pay interest of 12% on said amounts from July 10, 1981 the date the answer with
counterclaim was filed, until full payment;
It is a well settled legal principle that in the interpretation of a contract, the entirety thereof must be taken into consideration to
ascertain the meaning of its provisions. 12 The various stipulations in the contract must be read together to give effect to
4) American is ordered to pay Orient exemplary damages of P200,000.00;
all.13 After a careful examination of the records, the Court finds merit in the contention of Orient Air that the Agreement, when
interpreted in accordance with the foregoing principles, entitles it to the 3% overriding commission based on total revenue, or
5) American is ordered to pay Orient the sum of P25,000.00 as attorney's fees. as referred to by the parties, "total flown revenue."

the rest of the appealed decision is affirmed. As the designated exclusive General Sales Agent of American Air, Orient Air was responsible for the promotion and marketing
of American Air's services for air passenger transportation, and the solicitation of sales therefor. In return for such effor ts and
services, Orient Air was to be paid commissions of two (2) kinds: first, a sales agency commission, ranging from 7-8% of tariff
Costs against American. 8 fares and charges from sales by Orient Air when made on American Air ticket stock; and second, an overriding commission of
3% of tariff fares and charges for all sales of passenger transportation over American Air services. It is immediately observed
American Air moved for reconsideration of the aforementioned decision, assailing the substance thereof and arguing for its that the precondition attached to the first type of commission does not obtain for the second type of commissions. The latter
reversal. The appellate court's decision was also the subject of a Motion for Partial Reconsideration by Orient Air which prayed type of commissions would accrue for sales of American Air services made not on its ticket stock but on the ticket stock of
for the restoration of the trial court's ruling with respect to the monetary awards. The Court of Appeals, by resolution other air carriers sold by such carriers or other authorized ticketing facilities or travel agents. To rule otherwise, i.e., to limit the
promulgated on 17 December 1986, denied American Air's motion and with respect to that of Orient Air, ruled thus: basis of such overriding commissions to sales from American Air ticket stock would erase any distinction between the two (2)
types of commissions and would lead to the absurd conclusion that the parties had entered into a contract with meaningless
provisions. Such an interpretation must at all times be avoided with every effort exerted to harmonize the entire Agreement.
Orient's motion for partial reconsideration is denied insofar as it prays for affirmance of the trial court's award of
exemplary damages and attorney's fees, but granted insofar as the rate of exchange is concerned. The decision of
January 27, 1986 is modified in paragraphs (1) and (2) of the dispositive part so that the payment of the sums An additional point before finally disposing of this issue. It is clear from the records that American Air was the party responsible
mentioned therein shall be at their Philippine peso equivalent in accordance with the official rate of exchange legally for the preparation of the Agreement. Consequently, any ambiguity in this "contract of adhesion" is to be taken "contra
prevailing on the date of actual payment.9 proferentem", i.e., construed against the party who caused the ambiguity and could have avoided it by the exercise of a little
more care. Thus, Article 1377 of the Civil Code provides that the interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity. 14 To put it differently, when several interpretations of a provision are
Both parties appealed the aforesaid resolution and decision of the respondent court, Orient Air as petitioner in G.R. No. 76931 otherwise equally proper, that interpretation or construction is to be adopted which is most favorable to the party in whose favor
and American Air as petitioner in G.R. No. 76933. By resolution10 of this Court dated 25 March 1987 both petitions were the provision was made and who did not cause the ambiguity. 15 We therefore agree with the respondent appellate court's
consolidated, hence, the case at bar. declaration that:

The principal issue for resolution by the Court is the extent of Orient Air's right to the 3% overriding commission. It is the stand Any ambiguity in a contract, whose terms are susceptible of different interpretations, must be read against the party
of American Air that such commission is based only on sales of its services actually negotiated or transacted by Orient Air, who drafted it.16
otherwise referred to as "ticketed sales." As basis thereof, primary reliance is placed upon paragraph 5(b) of the Agreement
which, in reiteration, is quoted as follows:
We now turn to the propriety of American Air's termination of the Agreement. The respondent appellate court, on this issue,
ruled thus:

It is not denied that Orient withheld remittances but such action finds justification from paragraph 4 of the Agreement,
Exh. F, which provides for remittances to American less commissions to which Orient is entitled, and from paragraph
5(d) which specifically allows Orient to retain the full amount of its commissions. Since, as stated ante, Orient is
entitled to the 3% override. American's premise, therefore, for the cancellation of the Agreement did not exist. . . ."

We agree with the findings of the respondent appellate court. As earlier established, Orient Air was entitled to an overriding
commission based on total flown revenue. American Air's perception that Orient Air was remiss or in default of its obligations
under the Agreement was, in fact, a situation where the latter acted in accordance with the Agreement—that of retaining from
the sales proceeds its accrued commissions before remitting the balance to American Air. Since the latter was still obligated to
Orient Air by way of such commissions. Orient Air was clearly justified in retaining and refusing to remit the sums claimed by
American Air. The latter's termination of the Agreement was, therefore, without cause and basis, for which it should be held
liable to Orient Air.

On the matter of damages, the respondent appellate court modified by reduction the trial court's award of exemplary damages
and attorney's fees. This Court sees no error in such modification and, thus, affirms the same.

It is believed, however, that respondent appellate court erred in affirming the rest of the decision of the trial court.1âwphi1We
refer particularly to the lower court's decision ordering American Air to "reinstate defendant as its general sales agent for
passenger transportation in the Philippines in accordance with said GSA Agreement."

By affirming this ruling of the trial court, respondent appellate court, in effect, compels American Air to extend its person ality to
Orient Air. Such would be violative of the principles and essence of agency, defined by law as a contract whereby "a person
binds himself to render some service or to do something in representation or on behalf of another, WITH THE CONSENT OR
AUTHORITY OF THE LATTER . 17 (emphasis supplied) In an agent-principal relationship, the personality of the principal is
extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform
all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which
must not, in any way, be compelled by law or by any court. The Agreement itself between the parties states that "either party
may terminate the Agreementwithout cause by giving the other 30 days' notice by letter, telegram or cable." (emphasis
supplied) We, therefore, set aside the portion of the ruling of the respondent appellate court reinstating Orient Air as general
sales agent of American Air.

WHEREFORE, with the foregoing modification, the Court AFFIRMS the decision and resolution of the respondent Court of
Appeals, dated 27 January 1986 and 17 December 1986, respectively. Costs against petitioner American Air.

SO ORDERED.
G.R. No. 110782 September 25, 1998
IRMA IDOS, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
QUISUMBING, J.:
Before this Court is the petition for review of the Decision of respondent Court of Appeals 1 dismissing petitioner's appeal in CA-G.R. CR No. 11960;
and affirming her conviction as well as the sentence imposed on her by the Regional Trial Court of Malolos, Bulacan, in Criminal Case No. 1395-M-
88 2 as follows:
WHEREFORE . . . the (c)ourt finds the accused Irma Idos guilty beyond reasonable doubt and is hereby sentenced to suffer the
penalty of imprisonment of six (6) months and to pay a fine of P135,000.00 and to pay private complainant Eddie Alarilla the
amount of the check in question of P135,000.00 at 12% interest from the time of the filing of the (i)nformation (August 10, 1988)
until said amount has been fully paid.
Elevated from the Third Division3 of this Court, the case was accepted for resolution en banc on the initial impression that here, a constitutional
question might be involved. 4 It was opined that petitioner's sentence, particularly six months' imprisonment, might be in violation of the
constitutional guarantee against imprisonment for non-payment of a debt.5
A careful consideration of the issues presented in the petition as well as the comments thereon and the findings of fact by the courts below in the
light of applicable laws and precedents convinces us, however, that the constitutional dimension need not be reached in order to resolve those
issues adequately. For, as herein discussed, the merits of the petition could be determined without delving into aspects of the cited constitutional
guarantee vis-a-vis provisions of the Bouncing Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay aside discussions of
the constitutional challenge to said law in deciding this petition.
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her accuser for violation of B.P. 22 is her erstwhile supplier and
business partner, the complainant below, Eddie Alarilla.
As narrated by the Court of Appeals, the background of this case is as follows:
The complainant Eddie Alarilla supplied chemicals and rawhide to the accused-appellant Irma L. Idos for use in the latter's
business of manufacturing leather. In 1985, he joined the accused-appellant's business and formed with her a partnership under
the style "Tagumpay Manufacturing," with offices in Bulacan and Cebu City.
However, the partnership was short lived. In January, 1986 the parties agreed to terminate their partnership. Upon liquidation of
the business the partnership had as of May 1986 receivables and stocks worth P1,800,000.00. The complainant's share of the
assets was P900,000.00 to pay for which the accused-appellant issued the following postdated checks, all drawn against
Metrobank Branch in Mandaue, Cebu:
CHECK NO. DATE AMOUNT
1) 103110295 8-15-86 P135,828.87
2) 103110294 P135,828.87
3) 103115490 9-30-86 P135,828.87
4) 103115491 10-30-86 P126,656.01
The complainant was able to encash the first, second, and fourth checks, but the third check (Exh. A) which is the subject of this
case, was dishonored on October 14, 1986 for insufficiency of funds. The complainant demanded payment from the accused-
appellant but the latter failed to pay. Accordingly, on December 18, 1986, through counsel, he made a formal demand for
payment. (Exh. B) In a letter dated January 2, 1987, the accused-appellant denied liability. She claimed that the check had been
given upon demand of complainant in May 1986 only as "assurance" of his share in the assets of the partnership and that it was
not supposed to be deposited until the stocks had been sold.
Complainant then filed his complaint in the Office of the Provincial Fiscal of Bulacan which on August 22, 1988 filed an
information for violation of BP Blg. 22 against accused-appellant.
Complainant danied that the checks issued to him by accused-appellant were subject to the disposition of the stocks and the
collection of receivables of the business. But the accused-appellant insisted that the complainant had known that the checks
were to be funded from the proceeds of the sale of the stocks and the collection of receivables. She claimed that the
complainant himself asked for the checks because he did not want to continue in the tannery business and had no use for a share
of the stocks. (TSN, p. 7, April 14, 1991; id., pp. 8-9, Nov. 13, 1989; id., pp. 12, 16, 20, Feb. 14, 1990; id, p. 14, June 4, 1990).
On February 15, 1992, the trial court rendered judgment finding the accused-appellant guilty of the crime charged. The accused-
appellant's motion for annulment of the decision and for reconsideration was denied by the trial court in its order dated Apr il 12,
1991.6
Herein respondent court thereafter affirmed on appeal the decision of the trial court. Petitioner timely moved for a reconsideration, but this was
subsequently denied by respondent court in its Resolution 7 dated June 11, 1993. Petitioner has now appealed to us by way of a petition
for certiorari under Rule 45 of the Rules of Court.
During the pendency of this petition, this Court by a resolutions8 dated August 30, 1993, took note of the compromise agreement executed between
the parties, regarding the civil aspect of the case, as manifested by petitioner in a Motion to Render Judgment based on Compromise
Agreement9 filed on August 5, 1993. After submission of the Comment10 by the Solicitor General, and the Reply11 by petitioner, this case was deemed
submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial court's decision, petitioner cites the following reasons to justify the review of
her case:
1. The Honorable Court of Appeals has decided against the innocence of the accused based on mere
probabilities which, on the contrary, should have warranted her acquittal on reasonable doubt. Even then,
the conclusion of the trial court is contrary to the evidence on record, including private complainant's judicial
admission that there was no consideration for the check.
2 The Honorable Court of Appeals has confused and merged into one the legal concepts of dissolution,
liquidation and termination of a partnership and on the basis of such misconception of the law, disregarded
the fact of absence of consideration of the check and convicted the accused.
3 While this appeal was pending, the parties submitted for the approval of the Honorable Court a
compromise agreement on the civil liability. The accused humbly submits that this supervening event, which
by its terms puts to rest any doubt the Court of Appeals had entertained against the defense of lack of
consideration, should have a legal effect favorable to the accused, considering that the dishonored check
constitutes a private transaction between partners which does not involve the public interest, and
considering further that the offense is not one involving moral turpitude.
4 The Honorable Court of Appeals failed to appreciate the fact that the accused had warned private
complainant that the check was not sufficiently funded, which should have exonerated the accused pursuant
to the ruling in the recent case of Magno vs. Court of Appeals, 210 SCRA 471, which calls for a more flexible
and less rigid application of the Bouncing Checks law.12
For a thorough consideration of the merits of petitioner's appeal, we find pertinent and decisive the following issues:
1. Whether respondent court erred in holding that the subject check was issued by petitioner to apply on account or for value, that is, as part of the
consideration of a "buy-out" of said complainant's interest in the partnership, and not merely as a commitment on petitioner's part to return the
investment share of complainant, along with any profit pertaining to said share, in the partnership.
2. Whether the respondent court erred in concluding that petitioner issued the subject check knowing at the time of issue that she did not have
sufficient funds in or credit with the drawee bank and without communicating this fact of insufficiency of funds to the complainant.
Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming the trial court's judgment that she violated Batas
Pambansa Blg. 22?
Considering that penal statutes are strictly construed against the state and liberally in favor of the accused, it bears stressing that for an act to be
punishable under the B.P. 22, it "must come clearly within both the spirit and the letter of the statue. 13 Otherwise, the act has to be declared outside
the law's ambit and a plea of innocence by the accused must be sustained.
The relevant provisions of B.P. 22 state that:
Sec. 1. Checks without sufficient funds. — Any person who makes or draws and issues any check to apply on account or for
value, knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank for the payment of
such check in full upon its presentment, which check is subsequently dishonored by the drawee bank for insufficiency of funds or
credit or would have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment, shall be punished by imprisonment of not less than thirty days but not more than one (1) year or by a fine of not
less than but not more than double the amount of the check which fine shall in no case exceed Two hundred thousand pesos, or
both such fine and imprisonment at the discretion of the court.
The same penalty shall be imposed upon any person who having sufficient funds in or credit with the drawee bank when he
makes or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit or to cover the full amount of the
check if presented within a period of ninety (90) days from the date appearing thereon, for which reason it is dishonored by the
drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of
such drawer shall be liable under this Act.
Sec. 2. Evidence of knowledge of insufficient funds. — The making, drawing and issuance of a check payment of which is refused
by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of
the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays
the holder thereof the amount due thereon or makes arrangements for payment in full by the drawee of such check within five (5)
banking days after receiving notice that such check has not been paid by the drawee. (Emphasis supplied)
As decided by this Court, the elements of the offense penalized under B.P. 22, are as follows: "(1) the making, drawing and issuance of any check to
apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient funds in or credit
with the drawee bank for the payment of such check in full upon its presentment; and (3) subsequent dishonor of the check by the drawee bank for
insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. 14
In the present case, with regard to the first issue, evidence on record would show that the subject check was to be funded from receivables to be
collected and goods to be sold by the partnership, and only when such collection and sale were realized. 15 Thus, there is sufficient basis for the
assertion that the petitioner issued the subject check (Metrobank Check No. 103115490 dated October 30, 1986, in the amount of P135,828.87) to
evidence only complainant's share or interest in the partnership, or at best, to show her commitment that when receivables are collected and goods
are sold, she would give to private complainant the net amount due him representing his interest in the partnership. It did not involve a debt of or
any account due and payable by the petitioner.
Two facts stand out. Firstly, three of four checks were properly encashed by complainant; only one (the third) was not. But eventually even this one
was redeemed by petitioner. Secondly, even private complainant admitted that there was no consideration whatsoever for the issuance of the check,
whose funding was dependent on future sales of goods and receipts of payment of account receivables.
Now, it could not be denied that though the parties — petitioner and complainant — had agreed to dissolve the partnership, such ageement did not
automatically put an end to the partnership, since they still had to sell the goods on hand and collect the receivables from debtors. In short, they
were still in the process of "winding up" the affairs of the partnership, when the check in question was issued.
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and (3) termination. These stages are distinguished, to
wit:
(1) Dissolution Defined
Dissolution is the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on of the business (Art. 1828). It is that point of time the
time the partners cease to carry on the business tonether. (Citation omitted).
(2) Winding Up Defined
Winding up is the process of settling business affairs of dissolution.
(NOTE: Examples of winding up: the paying of previous obligations; the collecting of
assets previously demandable; even new business if needed to wind up, as the
contracting with a demolition company for the demolition of the garage used in a "used
car" partnership.)
(3) Termination Defined
Termination is the point in time after all the partnership affairs have been wound up. 16 [Citation omitted] (Emphasis supplied).
These final stages in the life of a partnership are recognized under the Civil Code that explicitly declares that upon dissolution, the partnership is not
terminated, to wit:
Art 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business.
Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is
completed. (Emphasis supplied.)
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. The check was thus issued by the petitioner to complainant, as would a partner to another, and not as
payment from a debtor to a creditor.
The more tenable view, one in favor of the accused, is that the check was issued merely to evidence the complainant's share in the partnership
property, or to assure the latter that he would receive in time his due share therein. The alternative view that the check was in consider ation of a
"buy out" is but a theory, favorable to the complainant, but lacking support in the record; and must necessarily be discarded.
For there is nothing on record which even slightly suggest that petitioner ever became interested in acquiring, much less keeping, the shares of the
complainant. What is very clear therefrom is that the petitioner exerted her best efforts to sell the remaining goods and to collect the receivables of
the partnership, in order to come up with the amount necessary to satisfy the value of complainant's interest in the partnership at the dissolution
thereof. To go by accepted custom of the trade, we are more inclined to the view that the subject check was issued merely to evidence
complainant's interest in the partnership. Thus, we are persuaded that the check was not intended to apply on account or for value; rather it should
be deemed as having been drawn without consideration at the time of issue.
Absent the first element of the offense penalized under B.P. 22, which is "the making, drawing and issuance of any check to apply on account or for
value", petitioner's issuance of the subject check was not an act contemplated in nor made punishable by said statute.
As to the second issue, the Solicitor General contends that under the Bouncing Checks Law, the elements of deceit and damage are not essential or
required to constitute a violation thereof. In his view, the only essential element is the knowledge on the part of the maker or drawer of the check of
the insufficiency of his/her funds at the time of the issuance of said check.
The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special offense punishable by law. "Malice or intent in issuing the
worthless check is immaterial, the offense being malum
prohibitum," 17 so goes the argument for the public respondents.
But of course this could not be an absolute proposition without descending to absurdity. For if a check were issued by a kidnap victim to a kidnapper
for ransom, it would be absurd to hold the drawer liable under B.P. 22, if the check is dishonored and unpaid. That would go against public policy and
common sense.
Public respondents further contend that "since petitioner issued the check in favor of complainant. Alarilla and when notified that it was returned for
insufficiency of funds, failed to make good the check, then petitioner is liable for violation of B.P. 22.18 Again, this matter could not be all that simple.
For while "the maker's knowledge of the insufficiency of funds is legally presumed from the dishonor of his checks for insufficiency of funds,19 this
presumption is rebuttable.
In the instant case, there is only a prima facie presumption which did not preclude the presentation of contrary evidence.20 In fact, such contrary
evidence on two points could be gleaned from the record concerning (1) lack of actual knowledge of insufficiency of funds; and (2) lack of adequate
notice of dishonor.
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee bank for the payment of a check upon its presentment is an
essential element of the offense. 21 It must be proved, particularly where the prima facie presumption of the existence of this element has been
rebutted. The prima facie presumption arising from the fact of drawing, issuing or making a check, the payment of which was subsequently refused
for insufficiency of funds is, moreover, not sufficient proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals,22 it was held that the subsequent dishonor of the subject check issued by accused merely engendered
the prima facie presumption that she knew of the insufficiency of funds, but did not render the accused automatically guilty under B.P. 22. 23
The prosecution has a duty to prove all the elements of the crime, including the acts that give rise to the prima
facie presumption; petitioner, on the other hand, has a right to rebut the prima facie presumption. Therefore, if such knowledge
of insufficiency of funds is proven to be actually absent or non-existent, the accused should not be held liable for the offense
defined under the first paragraph of Section 1 of B.P. 22. Although the offense charged is a malum prohibitum, the prosecution is
not thereby excused from its responsibility of proving beyond reasonable doubt all the elements of the offense, one of which is
knowledge of the insufficiency of funds.
Sec. 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the check, be shown that he knows at the time of issue, that he
does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment.
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the proportionate share of complainant in the partnership
assets upon its dissolution. Payment of that share in the partnership was conditioned on the subsequent realization of profits from the unsold goods
and collection of the receivables of the firm. This condition must be satisfied or complied with before the complainant can actually "encash" the
check. The reason for the condition is that petitioner has no independent means to satisfy or discharge the complainant's share, other than by the
future sale and collection of the partnership assets. Thus, prior to the selling of the goods and collecting of the receivables, the complainant could
not, as of yet, demand his proportionate share in the business. This situation would hold true until after the winding up, and subsequent termination
of the partnership. For only then, when the goods were already sold and receivables paid that cash money could be availed of by the erstwhile
partners.
Complainant did not present any evidence that petitioner signed and issued four checks actually knowing that funds therefor would be insufficient at
the time complainant would present them to the drawee bank. For it was uncertain at the time of issuance of the checks whether the unsold goods
would have been sold, or whether the receivables would have been collected by the time the checks would be encashed. As it turned out, three were
fully funded when presented to the bank; the remaining one was settled only later on.
Since petitioner issued these four checks without actual knowledge of the insufficiency of funds, she could not be held liable under B.P. 22 when one
was not honored right away. For it is basic doctrine that penal statutes such as B.P. 22 "must be construed with such strictness as to carefully
safeguard the rights of the defendant . . ."24 The element of knowledge of insufficiency of funds has to be proved by the prosecution; absent said
proof, petitioner could not be held criminally liable under that law. Moreover, the presumption of prima facie knowledge of such insufficiency in this
case was actually rebutted by petitioner's evidence.
Further, we find that the prosecution also failed to prove adequate notice of dishonor of the subject check on petitioner's part, thus precluding any
finding of prima facie evidence of knowledge of insufficiency of funds. There is no proof that notice of dishonor was actually sent by the complainant
or by the drawee bank to the petitioner. On this point, the record is bereft of evidence to the contrary.
But in fact, while the subject check initially bounced, it was later made good by petitioner. In addition, the terms of the parties' compromise
agreement, entered into during the pendency of this case, effectively invalidates the allegation of failure to pay or to make arrangement for the
payment of the check in full. Verily, said compromise agreement constitutes an arrangement for the payment in full of the subject check.
The absence of notice of dishonor is crucial in the present case. As held by this Court in prior cases:
Because no notice of dishonor was actually sent to and received by the petitioner, the prima facie presumption that she knew
about the insufficiency of funds cannot apply. Section 2 of B.P. 22 clearly provides that this presumption arises not from the mere
fact of drawing, making and issuing a bum check; there must also be a showing that, within five banking days from receipt of the
notice of dishonor, such maker or drawer failed to pay the holder of the check the amount due thereon or to make arrangement
for its payment in full by the drawee of such check. 25 [Emphasis supplied.]
The absence of a notice of dishonor necessarily deprives an accused an opportunity to preclude a criminal prosecution.
Accordingly, procedural due process clearly enjoins that a notice of dishonor be actually served on petitioner. Petitioner has a
right to demand — and the basic postulates of fairness require — that the notice of dishonor be actually sent to and received by
her to afford her the opportunity to avert prosecution under
B.P. 26
Further, what militates strongly against public respondents' stand is the fact that petitioner repeatedly notified the complainant of the insufficiency
of funds. Instructive is the following pronouncement of this Court in Magno v. Court of Appeals:
Furthermore, the element of "knowing at the time of issue that he does not have sufficient funds in or credit with the drawee
bank for the payment of such check in full upon its presentment, which check is subsequently dishonored by the drawee bank for
 insufficiency of funds or credit or would have been dishonored for the same reason . . ." is inversely applied in this case. From the
very beginning. petitioner never hid the fact that he did not have the funds with which to put up the warranty deposit and as a
matter of fact, he openly intimated this to the vital conduit of the transaction, Joey Gomez, to whom petitioner was introduced
by Mrs. Teng. It would have been different if this predicament was not communicated to all the parties he dealt with regarding
the lease agreement the financing or which was covered by L.S. Finance Management. " 27
In the instant case, petitioner intimated to private complainant the possibility that funds might be insufficient to cover the subject check, due to the
fact that the partnership's goods were yet to be sold and receivables yet to be collected.
As Magno had well observed:
For all intents and purposes, the law was devised to safeguard the interest of the banking system and the legitimate public
checking account user. It did not intend to shelter or favor nor encourage users of the system to enrich themselves through
manipulations and circumvention of the noble purpose and objective of the law. Least should it be used also as a means of
jeopardizing honest-to-goodness transactions with some color of "get-rich" scheme to the prejudice of well-meaning
businessmen who are the pillars of society.
xxx xxx xxx
Thus, it behooves upon a court of law that in applying the punishment imposed upon the accused, the objective of retribution of
a wronged society, should be directed against the "actual and potential wrongdoers". In the instant case, there is no doubt that
petitioner's four (4) checks were used to collateralize an accommodation, and not to cover the receipt of an actual "account or
credit for value" as this was absent, and therefore petitioner should not be punished for mere issuance of the checks in question.
Following the aforecited theory, in petitioner's stead the "potential wrongdoer," whose operation could be a menace to society,
should not be glorified by convicting the petitioner. 28
Under the circumstances obtaining in this case, we find the petitioner to have issued the check in good faith, with every intention of abiding by her
commitment to return, as soon as able, the investments of complainant in the partnership. Evidently, petitioner issued the check with benign
considerations in mind, and not for the purpose of committing fraud, deceit, or violating public policy.
To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable for violation of B.P. 22 for the following reasons: (1) the
subject check was not made, drawn and issued by petitioner in exchange for value received as to qualify it as a check on account or for value; (2)
there is no sufficient basis to conclude that petitioner, at the time of issue of the check, had actual knowledge of the insufficiency of funds; and (3)
there was no notice of dishonor of said check actually served on petitioner, thereby depriving her of the opportunity to pay or make arrangements
for the payment of the check, to avoid criminal prosecution.
Having resolved the foregoing principal issues, and finding the petition meritorious, we no longer need to pass upon the validity and legality or
necessity of the purported compromise agreement on civil liability between the petitioner and the complainant.
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER ACQUITTED. The Decision of the respondent Court of Appeals in CA-G.R.
CR No. 11960 is hereby REVERSED and the Decision of Regional Trial Court in Criminal Case No. 1395-M-88 is hereby SET ASIDE.
NO COSTS.
SO ORDERED.

G.R. No. L-27343 February 28, 1979

MANUEL G. SINGSONG, JOSE BELZUNCE, AGUSTIN E. TONSAY, JOSE L. ESPINOS, BACOLOD SOUTHERN LUMBER YARD, and OPPEN, ESTEBAN,
INC., plaintiffs-appellees,
vs.
ISABELA SAWMILL, MARGARITA G. SALDAJENO and her husband CECILIO SALDAJENO LEON GARIBAY, TIMOTEO TUBUNGBANUA, and THE PROVINCIAL
SHERIFF OF NEGROS OCCIDENTAL, defendants, MARGARITA G. SALDAJENO and her husband CECILIO SALDAJENO, defendants-appellants.

FERNANDEZ, J.:
This is an appeal to the Court of Appeals from the judgment of the Court of First Instance of Negros Occidental in Civil Cage No. 5343, entitled
"Manuel G. Singson, et all vs. Isabela Sawmill, et al.,", the dispositive portion of which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, it is hereby held. (1) that the contract, Appendix "F", of the Partial Stipulation of
Facts, Exh. "A", has not created a chattel mortgage lien on the machineries and other chattels mentioned therein, all of which are
property of the defendant partnership "Isabela Sawmill", (2) that the plaintiffs, as creditors of the defendant partnership, have a
preferred right over the assets of the said partnership and over the proceeds of their sale at public auction, superior to the right
of the defendant Margarita G. Saldajeno, as creditor of the partners Leon Garibay and Timoteo Tubungbanua; (3) that the
defendant Isabela Sawmill' is indebted to the plaintiff Oppen, Esteban, Inc. in the amount of P1,288.89, with legal interest
thereon from the filing of the complaint on June 5, 1959; (4) that the same defendant is indebted to the plaintiff Manuel G.
Singsong in the total amount of P5,723.50, with interest thereon at the rate of 1 % per month from May 6, 1959, (the date of the
statements of account, Exhs. "L" and "M"), and 25% of the total indebtedness at the time of payment, for attorneys' fees, both
interest and attorneys fees being stipulated in Exhs. "I" to "17", inclusive; (5) that the same defendant is indebted to the plaintiff
Agustin E. Tonsay in the amount of P933.73, with legal interest thereon from the filing of the complaint on June 5, 1959; (6) that
the same defendant is indebted to the plaintiff Jose L. Espinos in the amount of P1,579.44, with legal interest thereon from the
 filing of the complaint on June 5, 1959; (7) that the same defendant is indebted to the plaintiff Bacolod Southern Lumber Yar d in
the amount of Pl,048.78, with legal interest thereon from the filing of the complaint on June 5, 1959; (8) that the same
defendant is indebted to the plaintiff Jose Belzunce in the amount of P2,052.10, with legal interest thereon from the filing of the
complaint on June 5. 1959; (9) that the defendant Margarita G. Saldajeno, having purchased at public auction the assets of the
defendant partnership over which the plaintiffs have a preferred right, and having sold said assets for P 45,000.00, is bound to
pay to each of the plaintiffs the respective amounts for which the defendant partnership is held indebted to, them, as above
indicated and she is hereby ordered to pay the said amounts, plus attorneys fees equivalent to 25% of the judgment in favor of
the plaintiff Manuel G. Singson, as stipulated in Exhs. "I" "to I-17", inclusive, and 20% of the respective judgments in favor of the
other plaintiffs, pursuant to. Art. 2208, pars. (5) and (11), of the Civil Code of the Philippines; (10) The defendants Leon Garibay
and Timoteo Tibungbanua are hereby ordered to pay to the plaintiffs the respective amounts adjudged in their favor in the event
that said plaintiffs cannot recover them from the defendant Margarita G. Saldajeno and the surety on the bond that she has filed
for the lifting of the injunction ordered by this court upon the commencement of this case.
The cross-claim cf the defendant Margarita G. Saldajeno against the defendants Leon Garibay arid Timoteo Tubungbanua is
hereby discussed Margarita G. Saldajeno shall pay the costs.
SO ORDERED.1
In a resolution promulgated on February 3, 1967, the Court of Appeals certified the records of this case to the Supreme Court "considering that the
resolution of this appeal involves purely questions or question of law over which this Court has no jurisdiction ...2
On June 5. 1959, Manuel G. Singsong, Jose Belzunce, Agustin E. Tonsay, Jose L. Espinos, Bacolod Southern Lumber Yard, and Oppen, Esteban, Inc.
filed in the Court of first Instance of Negros Occidental, Branch I, against "Isabela Sawmill", Margarita G. Saldajeno and her husband Cecilio Saldajeno,
Leon Garibay, Timoteo Tubungbanua and the Provincial Sheriff of Negros Occidental a complaint the prayer of which reads:
WHEREFORE, the plaintiffs respectfully pray:
(1) That a writ of preliminary injunction be issued restraining the defendant Provincial Sheriff of Negros Occidental from
proceeding with the sales at public auction that he advertised in two notices issued by him on May 18, 1959 in connection with
Civil Case No. 5223 of this Honorable Court, until further orders of this Court; and to make said injunction permanent after
hearing on the merits:
(2) That after hearing, the defendant partnership be ordered; to pay to the plaintiff Manuel G. Singson the sum of P3,723.50 plus
1% monthly interest thereon and 25% attorney's fees, and costs; to pay to the plaintiff JoseBelzunce the sum of P2,052.10, plus
6% annual interest thereon and 25% for attorney's fees, and costs;to pay to the plaintiff Agustin E. Tonsay the sum of P993.73
plus 6% annual interest thereon and 25% attorney's fees, and costs; to pay to the plaintiff Bacolod Southern Lumber Yard the
sum of P1,048.78, plus 6% annual interest thereon and 25% attorney's fees, and costs; and to pay to the plaintiff Oppen, Esteban,
Inc. the sum of P1,350.89, plus 6% annual interest thereon and 25% attorney's fees and costs:
(3) That the so-called Chattel Mortgage executed by the defendant Leon Garibay and Timoteo Tubungbanua in favor of the
defendant Margarita G. Saldajeno on May 26, 1958 be declared null and void being in fraud of creditors of the defendant
partnership and without valuable consideration insofar as the said defendant is concerned:
(4) That the Honorable Court order the sale of public auction of the assets of the defendnat partnership in case the latter fails to
pay the judgment that the plaintiffs may recover in the action, with instructions that the proceeds of the sale b e applied in
payment of said judgment before any part of saod proceeds is paid to the defendant Margarita G. Saldajeno;
(5) That the defendant Leon Garibay, Timoteo Tubungbanua, and Margarita G. Saldajeno be declared jointly liable to the plaintifs
for whatever deficiency may remain unpaid after the proceeds of the sale of the assets of the defendnt partnership are supplied
in payment of the judgment that said plaintiffs may recover in this action;
(6) The plaintiffs further pray for all other remedies to which the Honorable Court will find them entitled to, with costs to the
defendants.
Bacolod City, June 4, 1959.3
The action was docketed as Civil Case No. 5343 of said court.
In their amended answer, the defendants Margarita G. Saldajeno and her husband, Cecilio Saldajeno, alleged the following special and affirmative
defenses:
xxx xxx xxx
2. That the defendant Isabela Sawmill has been dissolved by virtue of an action entitled "In the matter of: Dissolution of Isabela
Sawmill as partnership, etc. Margarita G. Saldajeno et al. vs. Isabela Sawmill, et al., Civil Case No. 4787, Court of First Instance of
Negros Occidental;
3. That as a result of the said dissolution and the decision of the Court of First Instance of Negros Occidental in the aforesaid
case, the other defendants herein Messrs. Leon Garibay and Timoteo Tubungbanua became the successors-in-interest to the said
defunct partnership and have bound themselves to answere for any and all obligations of the defunct partnership to its creditors
and third persons;
4. That to secure the performance of the obligations of the other defendants Leon Garibay and Timoteo Tubungbanua to the
answering defendant herein, the former have constituted a chattel mortgage over the properties mentioned in the annexes to
 that instrument entitled "Assignment of Rights with Chattel Mortgage" entered into on May 26, 1968 and duly registered in the
Register of Deeds of Negros Occidental on the same date:
5. That all the plaintiffs herein, with the exceptionof the plaintiff Oppen, Esteban, Inc. are creditors of Messrs. Leon Garibay and
Timoteo Tubungbanua and not of the defunct Isabela Sawmill and as such they have no cause of action against answering
defendant herein and the defendant Isabela Sawmill;
6. That all the plaintiffs herein, except for the plaintiff Oppen, Esteban, Inc. granted cash advances, gasoline, crude oil, motor oil,
grease, rice and nipa to the defendants Leon Garibay and Timoteo Tubungbanua with the knowledge and notice that the Isabela
Sawmill as a former partnership of defendants Margarita G. Isabela Sawmill as a former partnership of defendants Margarita G.
Saldajeno, Leon Garibay and Timoteo Tubungbanua, has already been dissolved;
7. That this Honorable Court has no jurisdictionover the claims of the plaintiffs Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L.
Espinos, and the Bacolod Southern Lumber Yard, it appearing that the amounts sought to be recovered by them in this action is
less than P2,000.00 each, exclusive of interests;
8. That in so far as the claims of these alleged creditors plaintiffs are concerned, there is a misjoinder of parties because this is
not a class suit, and therefore this Honorable Court cannot take jurisdictionof the claims for payment;
9. That the claims of plaintiffs-creditors, except Oppen, Esteban, Inc. go beyond the limit mentioned inthe statute of frauds, Art.
1403 of the Civil Code, and are therefor unenforceable, even assuming that there were such credits and claims;
10. That this Honorable Court has no jurisdiction in this case for it is well settled in law and in jurisprudence that a court of first
instance has no power or jurisdiction to annul judgments or decrees of a coordinate court because other function devolves upon
the proper appellate court; (Lacuna, et al. vs. Ofilada, et al., G.R. No. L-13548, September 30, 1959; Cabigao vs. del Rosario, 44
Phil. 182; PNB vs. Javellana, 49 O.G. No. 1, p.124), as it appears from the complaint in this case to annul the decision of this same
court, but of another branch (Branch II, Judge Querubin presiding).4
Said defendants interposed a cross-claim against the defendsants Leon Garibay and Timoteo Tubungbanua praying "that in the event that judgment
be rendered ordering defendant cross claimant to pay to the plaintiffs the amount claimed in the latter's complaint, that the cross claimant whatever
amount is paid by the latter to the plaintiff in accordance to the said judgment. ...5
After trial, judgment was rendered in favor of the plaintiffs and against the defendants.
The defendants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, appealed to the Court of Appeals assigning the following errors:
I
THE COURT A QUO ERRED IN ASSUMING JURISDICTION OVER THE CASE.
II
THE COURT A QUO ERRED IN HOLDING THAT THE ISSUE WITH REFERENCE TO THE WITHDRAWAL OF DEFENDANT-APPELLANT
MARGARITA G. SALDAJENO FROM THE PARTNERSHIP "SABELA SAWMILL" WAS WHETHER OR NOT SUCH WITHDRAWAL CAUSED
THE "COMPLETE DISAPPEARANCE" OR "EXTINCTION" OF SAID PARTNERSHIP.
III
THE COURT A QUO ERRED IN OT HOLDING THAT THE WITHDRAWAL OF DEFENDANT-APPELLANT MARGARITA G. SALDAJENO AS A
PARTNER THEREIN DISSOLVED THE PARTNERSHIP "ISABELA SAWMILL" (FORMED ON JAN. 30, 1951 AMONG LEON GARIBAY,
TIMOTEO TUBUNGBANUA AND SAID MARGARITA G. SALDAJENO).
IV
THE COURT A QUO ERRED IN ISSUING THE WRIT OF PRELIMINARY INJUNCTION.
V
THE COURT A QUO ERRED IN HOLDING THAT THE CHATTEL MORTGAGE DATED MAY 26, 1958, WHICH CONSTITUTED THE
JUDGMENT IN CIVIL CASE NO. 4797 AND WHICH WAS FORECLOSED IN CIVIL CASE NO. 5223 (BOTH OF THE COURT OF FIRST
INSTANCE OF NEGROS OCCIDENTAL) WAS NULL AND VOID.
VI
THE COURT A QUO ERRED IN HOLDING THAT THE CHATTLES ACQUIRED BY DEFENDANT-APPELLANT MARGARITA G. SALDAJENO
IN THE FORECLOSURE SALE IN CIVIL CASE NO. 5223 CONSTITUTED 'ALL THE ASSETS OF THE DEFENDNAT PARTNERSHIP.
VII
THE COURT A QUO ERRED IN HOLDING THAT DEFENDANT-APPELLANT MARGARITA G. SALDAJENO BECAME PRIMARILY LIABLE TO
THE PLAINTFFS-APPELLEES FOR HAVING ACQUIRED THE MORTGAGED CHATTLES IN THE FORECLOSURE SALE CONDUCTED IN
CONNECTION WITH CIVIL CASE NO. 5223.
VIII
THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G. SALDAJENO LIABLE FOR THE OBLIGATIONS OF
MESSRS. LEON GARIBAY AND TIMOTEO TUBUNGBANUA, INCURRED BY THE LATTER AS PARTNERS IN THE NEW 'ISABELA
SAWMILL', AFTER THE DISSOLUTION OF THE OLD PARTNERSHIP IN WHICH SAID MARGARITA G. SALDAJENO WAS A PARTNER.
IX
THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G. SALDAJENO LIABLE TO THE PLAINTIFFS-
APPELLEES FOR ATTORNEY'S FEES.
X
 THE COURT A QUO ERRED IN NOT DISMISSING THE COMPLAINT OF THE PLAINTIFFS-APPELLEES.
XI
THE COURT A QUO ERRED IN DISMISSING THE CROSS-CLAIM OF DEFENDANT-APPELLANT MARGARITA G. SALDAJENO AGAINST
CROSS-DEFENDANTS LEON GARIBAY AND TIMOTEO TUBUNGBANUA.6
The facts, as found by the trial court, are:
At the commencement of the hearing of the case on the merits the plaintiffs and the defendant Cecilio and Margarita g.
Saldajeno submittee a Partial Stipulation of Facts that was marked as Exh. "A". Said stipulation reads as folows:
1. That on January 30, 1951 the defendants Leon Garibay, Margarita G. Saldejeno, and Timoteo Tubungbanua
entered into a Contract of Partnership under the firm name "Isabela Sawmill", a copy of which is hereto
attached Appendix "A".
2. That on February 3, 1956 the plaintiff Oppen, Esteban, Inc. sold a Motor Truck and two Tractors to the
partnership Isabela Sawmill for the sum of P20,500.00. In order to pay the said purcahse price, the said
partnership agreed to make arrangements with the International Harvester Company at Bacolod City so that
the latter would sell farm machinery to Oppen, Esteban, Inc. with the understanding that the price was to be
paid by the partnership. A copy of the corresponding contract of sle is attached hereto as Appendix "B".
3. That through the method of payment stipulated in the contract marked as Appendix "B" herein, the
International Harvester Company has been paid a total of P19,211.11, leaving an unpaid balance of P1,288.89
as shown in the statements hereto attached as Appendices "C", "C-1", and "C-2".
4. That on April 25, 1958 Civil Case No. 4797 was filed by the spouses Cecilio Saldajeno and Margarita G.
Saldajeno against the Isabela Sawmill, Leon Garibay, and Timoteo Tubungbanua, a copy of which Complaint is
attached as Appendix 'D'.
5. That on April 27, 1958 the defendants LeonGaribay, Timoteo Tubungbanua and Margarita G. Saldajeno
entered into a "Memorandum Agreement", a copy of which is hereto attached as Appendix 'E' in Civil Case
4797 of the Court of First Instance of Negros Occidental.
6. That on May 26, 1958 the defendants Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno
executed a document entitled "Assignment of Rights with Chattel Mortgage", a copy of which documents and
its Annexes "A" to "A-5" forming a part of the record of the above mentioned Civil Case No. 4797, which deed
was referred to in the Decision of the Court ofFirst Instance of Negros Occidental in Civil Case No. 4797 dated
May 29, 1958, a copy of which is hereto attached as Appendix "F" and "F-1" respectively.
7. That thereafter the defendants Leon Garibay and Timoteo Tubungbanua did not divide the assets and
properties of the "Isabela Sawmill" between them, but they continued the business of said partnership under
the same firm name "Isabela Sawmill".
8. That on May 18, 1959 the Provincial Sheriff of Negros Occidental published two (2) notices that he would
sell at public auction on June 5, 1959 at Isabela, Negros Occidental certain trucks, tractors, machinery,
officeequipment and other things that were involved in Civil Case No. 5223 of the Court of First Instance of
Negros Occidental, entitled "Margarita G. Saldajeno vs. Leon Garibay, et al." See Appendices "G" and "G-1".
9. That on October 15, 1969 the Provincial Sheriff of Negros Occidental executed a Certificate ofSale in favor
of the defendant Margarita G. Saldajeno, as a result of the sale conducted by him on October 14 and 15,
1959 for the enforcement of the judgment rendered in Civil Case No. 5223 of the Court of First Instance of
Negros Occidental, a certified copy of which certificte of sale is hereto attached as Appendix "H".
10. That on October 20, 1959 the defendant Margarita G. Saldajeno executed a deed of sale in favor of the
Pan Oriental Lumber Company transfering to the latter for the sum of P45,000.00 the trucks, tractors,
machinery, and other things that she had purchashed at a public auction referred to in the foregoing
paragraph, a certified true copy of which Deed of Sale is hereto attached as Appendix "I".
11. The plaintiffs and the defendants Cecilio Saldajeno and Margarita G. Saldajeno reserve the right to
present additional evidence at the hearing of this case.
Forming parts of the above copied stipulation are documents that were marked as Appendices "A", "B", "C", "C-1", "C-2", "D",
"E", "F", "F-1", "G", "G-1", "H", and "I".
The plaintiffs and the defendants Cecilio and Margarita G. Saldajeno presented additional evidence, mostly documentary, while
the cross-defendants did not present any evidence. The case hardly involves quetions of fact at all, but only questions of law.
The fact that the defendnat 'Isabela Sawmill' is indebted to theplaintiff Oppen, Esteban, Inc. in the amount of P1,288.89 as the
unpaid balance of an obligation of P20,500.00 contracted on February 3, 10956 is expressly admitted in paragraph 2 and 3 of the
Stipulation, Exh. "A" and its Appendices "B", "C", "C-1", and "C-2".
The plaintiff Agustin E. Tonssay proved by his own testimony and his Exhs. "B" to"G" that from October 6, 1958 to November 8,
1958 he advanced a total of P4,200.00 to the defendant 'Isabela Sawmill'. Agaist the said advances said defendant delivered to
Tonsay P3,266.27 worth of lumber, leavng an unpaid balance of P933.73, which balance was confirmed on May 15, 1959 by the
defendant Leon Garibay, as Manager of the defendant partnership.
 The plaintiff Manuel G. Singsong proved by his own testimony and by his Exhs. "J" to "L" that from May 25, 1988 to January 13,
1959 he sold on credit to the defendnat "Isabela Sawmill" rice and bran, on account of which business transaction there remains
an unpaid balance of P3,580.50. The same plaintiff also proved that the partnership ownes him the sum of P143.00 for nipa
shingles bought from him on credit and unpaid for.
The plaintiff Jose L. Espinos proved through the testimony of his witness Cayetano Palmares and his Exhs. "N" to "O-3" that he
owns the "Guia Lumber Yard", that on October 11, 1958 said lumber yard advanced the sum of P2,500.00 to the defendant
"Isabela Sawmill", that against the said cash advance, the defendant partnership delivered to Guia Lumber Yard P920.56 worth of
lumber, leaving an outstanding balance of P1,579.44.
The plaintiff Bacolod Southern Lumber Yard proved through the testimony of the witness Cayetano Palmares an its Exhs. "P" to
"Q-1" that on October 11, 1958 said plaintiff advanced the sum of P1,500.00 to the defendsant 'Isabela Sawmill', that against the
said cash advance, the defendant partnership delivered to the said plaintiff on November 19, 1958 P377.72 worth of lumber, and
P73.54 worth of lumber on January 27, 1959, leaving an outstanding balance of P1,048.78.
The plaintiff Jose Balzunce proved through the testimony of Leon Garibay whom he called as his witness, and through the Exhs.
"R" to "E" that from September 14, 1958 to November 27, 1958 he sold to the defedant "Isabela Sawmill" gasoline, motor fuel,
and lubricating oils, and that on account of said transactions, the defendant partnersip ownes him an unpaid balance of
P2,052.10.
Appendix "H" of the stipulation Exh. "A" shows that on October 13 and 14, 1959 the Provincial Sheriff sold to the defendant
Margrita G. Saldajeno for P38,040.00 the assets of the defendsant "Isabela Sawmill" which the defendants Leon G. Garibay and
Timoteo Tubungbanua had mortgaged to her, and said purchase price was applied to the judgment that she has obtained against
he said mortgagors in Civil Case No. 5223 of this Court.
Appendix "I" of the same stipulation Exh. "A" shows that on October 20, 1959 the defendant Margarita G. Saldajeno sold to the
PAN ORIENTAL LUMBER COMPANY for P45,000.00 part of the said properties that she had bought at public aucton one week
before.
xxx xxx xxx7
It is contended by the appellants that the Court of First Instance of Negros Occidental had no jurisdiction over Civil Case No. 5343 because the
plaintiffs Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos and the Bacolod Southern Lumber Yard sought to collect sums of moeny, the
biggest amount of which was less than P2,000.00 and, therefore, within the jurisdiction of the municipal court.
This contention is devoid of merit because all the plaintiffs also asked for the nullity of the assignment of right with chattel mortgage entered into by
and between Margarita G. Saldajeno and her former partners Leon Garibay and Timoteo Tubungbanua. This cause of action is not capable of
pecuniary estimation and falls under the jurisdiction of the Court of First Instnace. Where the basic issue is something more than the right to recover
a sum of money and where the money claim is purely incidental to or a consequence of the principal relief sought, the action is as a case where the
subject of the litigation is not capable of pecuniary estimation and is cognizable exclusively by the Court of First Instance.
The jurisdiction of all courts in the Philippines, in so far as the authority thereof depends upon the nature of litigation, is defined in the amended
Judiciary Act, pursuant to which courts of first instance shall have exclusive original jurisdiction over any case the subject matter of which is not
capable of pecuniary estimation. An action for the annulment of a judgment and an order of a court of justice belongs to th category.8
In determining whether an action is one the subject matter of which is not capable of pecuniary estimation this Court has adopted the criterion of
first ascertaining the nature of the principal action or remedy sought. If it is primarily for the recovery of a sum of money, the cliam is considered
capable of pecuniary estimation, and whether jurisdiciton is in the municipal courts or in the courts of first instance would depend on the amount of
the claim. However, where the basic issue is something other than the right to recover a sum of money, where the money claim is purely incidental
to, or a consequence of, the principal relief sought, this Court has considered such actions as cases where the subject ogf the litigation may not be
estimated in terms of money, and are cognizable exclusively by courts of first instance.
In Andres Lapitan vs. SCANDIA, Inc., et al.,9 this Court held:
Actions for specific performance of contracts have been expressly prounounced to be exclusively cognizable by courts of first
instance: De Jesus vs. Judge Garcia, L-26816, February 28, 1967; Manufacturers' Distributors, Inc. vs. Yu Siu Liong, L-21285, April
29, 1966. And no cogent reason appears, and none is here advanced by the parties, why an actin for rescission (or resolution)
should be differently treated, a "rescission" being a counterpart, so to speak, of "specific performance'. In both cases, the court
would certainly have to undertake an investigation into facts that would justify one act of the other. No award for damages may
be had in an action for resicssion without first conducting an inquiry into matters which would justify the setting aside of a
contract, in the same manner that courts of first instance would have to make findings of fact and law in actions not capable of
pecuniary estimnation espressly held to be so by this Court, arising from issues like those arised in Arroz v. Alojado, et al., L-
22153, March 31, 1967 (the legality or illegality of the conveyance sought for and the determination of the validity of the money
deposit made); De Ursua v. Pelayo, L-13285, April 18, 1950 (validity of a judgment); Bunayog v. Tunas, L-12707, December 23,
1959 (validity of a mortgage); Baito v. Sarmiento, L-13105, August 25, 1960 (the relations of the parties, the right to support
created by the relation, etc., in actions for support); De Rivera, et al. v. Halili, L-15159, September 30, 1963 (the validity or nullity
of documents upon which claims are predicated). Issues of the same nature may be raised by a party against whom an action for
rescission has been brought, or by the plaintiff himself. It is, therefore, difficult to see why a prayer for damages in an action for
rescission should be taken as the basis for concluding such action for resiccison should be taken as the basis for concluding such
 action as one cpable of pecuniary estimation - a prayer which must be included in the main action if plaintiff is to be
compensated for what he may have suffered as a result of the breach committed by defendant, and not later on precluded from
recovering damages by the rule against splitting a cause of action and discouraging multiplicitly of suits.
The foregoing doctrine was reiterated in The Good Development Corporation vs. Tutaan, 10 where this Court held:
On the issue of which court has jurisdiction, the case of SENO vs. Pastolante, et al., is in point. It was ruled therein that although
the purposes of an action is to recover an amount plus interest which comes within the original jurisidction of the Justice of the
Peace Court, yet when said action involves the foreclosure of a chattel mortgage covering personal properties valued at more
than P2,000, (now P10,000.00) the action should be instituted before the Court of First Instance.
In the instanct, case, the action is to recover the amount of P1,520.00 plus interest and costs, and involves the foreclosure of a
chattel mortgage of personal properties valued at P15,340.00, so that it is clearly within the competence of the respondent court
to try and resolve.
In the light of the foregoing recent rulings, the Court of First Instance of Negros Occidental did no err in exercising jurisidction over Civil Case No.
5343.
The appellants also contend that the chattel mortgage may no longer be annulled because it had been judicially approved in Civil Case No. 4797 of
the Court of First Instance of Negros Occidental and said chattel mortgage had been ordered foreclosed in Civil Case No. 5223 of the same court.
On the question of whether a court may nullify a final judgment of another court of co-equal, concurrent and coordinate jusridiction, this Court
originally ruled that:
A court has no power to interfere with the judgments or decrees of a court of concurrent or coordinate jurisdiction having equal
power to grant the relief sought by the injunction.
The various branches of the Court of First Instance of Manila are in a sense coordinate courts and cannot be allowed to interfere
with each others' judgments or decrees. 11
The foregoing doctrine was reiterated in a 1953 case 12 where this Court said:
The rule which prohibits a Judge from intertering with the actuations of the Judge of another branch of the same court is not
infringed when the Judge who modifies or annuls the order isued by the other Judge acts in the same case and belongs to the
same court (Eleazar vs. Zandueta, 48 Phil. 193. But the rule is infringed when the Judge of a branch of the court issues a writ of
preliminary injunction in a case to enjoint the sheriff from carrying out an order by execution issued in another case by the Judge
of another branch of the same court. (Cabigao and Izquierdo vs. Del Rosario et al., 44 Phil. 182).
This ruling was maintained in 1967. In Mas vs. Dumaraog, 13 the judgment sought to be annulled was rendered by the Court of First Instance of Iloilo
and the action for annullment was filed with the Court of First Instance of Antique, both courts belonging to the same Judicial District. This Court held
that:
The power to open, modify or vacant a judgment is not only possessed by but restricted to the court in which the judgment was
rendered.
The reason of this Court was:
Pursuant to the policy of judicial stability, the judgment of a court of competent jurisdiction may not be interfered with by any
court concurrrent jurisdiction.
Again, in 1967 this Court ruled that the jurisdiction to annul a judgement of a branch of the court of First Instance belongs solely to the very same
branch which rendered the judgement. 14
Two years later, the same doctrine was laid down in the Sterling Investment case. 15
In December 1971, however, this court re-examined and reversed its earlier doctrine on the matter. In Dupla v. Court of Appeals, 16 this Tribunal,
speaking through Mr. Justice Villamor declared:
... the underlying philosophy expressed in the Dumara-og case, the policy of judicial stability, to the end that the judgment of a
court of competent jurisdiction may not be interfered with by any court of concurrent jurisdiction may not be interfered with by
any court of concurrent jurisdiciton, this Court feels that this is as good an occasion as any to re-examine the doctrine laid down
...
In an action to annul the judgment of a court, the plaintiff's cause of action springs from the alleged nullity of the judgment
based on one ground or another, particularly fraud, which fact affords the plaintiff a right to judicial interference in his behalf. In
such a suit the cause of action is entirely different from that in the actgion which grave rise to the judgment sought to be
annulled, for a direct attack against a final and executory judgment is not a incidental to, but is the main object of the
proceeding. The cause of action in the two cases being distinct and separate from each other, there is no plausible reason why
the venue of the action to annul the judgment should necessarily follow the venue of the previous action ...
The present doctrine which postulate that one court or one branch of a court may not annul the judgment of another court or
branch, not only opens the door to a violation of Section 2 of Rule 4, (of the Rules of Court) but also limit the opportunity for the
application of said rule.
Our conclusion must therefore be that a court of first instance or a branch thereof has the authority and jurisdiction to take
cognizance of, and to act in, suit to annul final and executory judgment or order rendered by another court of first instance or by
another branch of the same court...
In February 1974 this Court reiterated the ruling in the Dulap case.17
In the light of the latest ruling of the Supreme Court, there is no doubt that one branch of the Court of First Instance of Negros Occidental can take
cognizance of an action to nullify a final judgment of the other two branches of the same court.
It is true that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business. 18 However, on
dissolution, the partnershop is not terminated but continuous until the winding up to the business. 19
The remaining partners did not terminate the business of the partnership "Isabela Sawmill". Instead of winding up the business of the partnership,
they continued the business still in the name of said partnership. It is expressly stipulated in the memorandum-agreement that the remaining
partners had constituted themselves as the partnership entity, the "Isabela Sawmill". 20
There was no liquidation of the assets of the partnership. The remaining partners, Leon Garibay and Timoteo Tubungbanua, continued doing the
business of the partnership in the name of "Isabela Sawmill". They used the properties of said partnership.
The properties mortgaged to Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua, belonged to the
partnership "Isabela Sawmill." The appellant, Margarita G. Saldajeno, was correctly held liable by the trial court because she purchased at public
auction the properties of the partnership which were mortgaged to her.
It does not appear that the withdrawal of Margarita G. Saldajeno from the partnership was published in the newspapers. The appellees and the
public in general had a right to expect that whatever, credit they extended to Leon Garibay and Timoteo Tubungbanua doing the business in the
name of the partnership "Isabela Sawmill" could be enforced against the proeprties of said partnership. The judicial foreclosure of the chattel
mortgage executed in favor of Margarita G. Saldajeno did not relieve her from liability to the creditors of the partnership.
The appellant, margrita G. Saldajeno, cannot complain. She is partly to blame for not insisting on the liquidaiton of the assets of the partnership. She
even agreed to let Leon Garibay and Timoteo Tubungbanua continue doing the business of the partnership "Isabela Sawmill" by entering into the
memorandum-agreement with them.
Although it may be presumed that Margarita G. Saldajeno had action in good faith, the appellees aslo acted in good faith in extending credit to the
partnership. Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the
consequences. Had Margarita G. Saldajeno not entered into the memorandum-agreement allowing Leon Garibay and Timoteo Tubungbanua to
continue doing the business of the aprtnership, the applees would not have been misled into thinking that they were still dealing with the
partnership "Isabela Sawmill". Under the facts, it is of no moment that technically speaking the partnership "Isabela Sawmill" was dissolved by the
withdrawal therefrom of Margarita G. Saldajeno. The partnership was not terminated and it continued doping business through the two remaining
partners.
The contention of the appellant that the appleees cannot bring an action to annul the chattel mortgage of the propertiesof the partnership executed
by Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit.
As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may
file an action to annul the contract.
This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercised an action for nullity of the
contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him
from the contract in which he has no intervention. 21
The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership "Isabela
Sawmill" in favopr of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua. Hence, said appelees have a right
to file the action to nullify the chattel mortgage in question.
The portion of the decision appealed from ordering the appellants to pay attorney's fees to the plaintiffs-appellees cannot be sustained. There is no
showing that the appellants displayed a wanton disregard of the rights of the plaintiffs. Indeed, the appellants believed in good faith, albeit
erroneously, that they are not liable to pay the claims.
The defendants-appellants have a right to be reimbursed whatever amounts they shall pay the appellees by their co-defendants Leon Garibay and
Timoteo Tubungbanua. In the memorandum-agreement, Leon Garibay and Timoteo Tubungbaun undertook to release Margarita G. Saldajeno from
any obligation of "Isabela Sawmill" to third persons. 22
WHEREFORE, the decision appealed from is hereby affirmed with the elimination of the portion ordering appellants to pay attorney's fees and with
the modification that the defendsants, Leon Garibay and Timoteo Tubungbanua, should reimburse the defendants-appellants, Margarita G.
Saldajeno and her husband Cecilio Saldajeno, whatever they shall pay to the plaintiffs-appellees, without pronouncement as to costs.
SO ORDERED.

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU
SHIAN JENG and CHEN HO-FU, respondents.
Jose C. Guico for petitioner.
Wilfredo Cortez for private respondents.

FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and export business operated by a registered
partnership with the firm name of "Jade Mountain Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28
June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of
China (Taiwan), as limited partners. The partnership business consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and
Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the Cruz spouses. 1 The partnership had its
main office in Makati, Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant General Manager with a monthly salary of P4,000.00.
According to petitioner Yu, however, he actually received only half of his stipulated monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm shall have secured additional operating funds from abroad. Benjamin Yu actually managed
the operations and finances of the business; he had overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and Rhodora Bendal sold and transferred their interests
in the partnership to private respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private respondent Willy Co acquired the great bulk of the
partnership interest. The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan Manila. A Supplement to the Memorandum
Agreement relating to the operation of the marble quarry was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the
business enterprise continued as before. All the employees of the partnership continued working in the business, all, save petitioner Benjamin Yu as
it turned out.
On 16 November 1987, having learned of the transfer of the firm's main office from Makati to Mandaluyong, petitioner Benjamin Yu reported to the
Mandaluyong office for work and there met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
bought the business from the original partners and that it was for him to decide whether or not he was responsible for the obligations of the old
partnership, including petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
unpaid salaries remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October
1988, moral and exemplary damages and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The partnership
and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was never hired as an employee by the present or new
partnership.4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had been illegally dismissed. The Labor Arbiter decreed
his reinstatement and awarded him his claim for unpaid salaries, backwages and attorney's fees. 5
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor Arbiter and dismissed petitioner's complaint in a
Resolution dated 29 November 1990. The NLRC held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
Jade Mountain business, that the new partnership had not retained petitioner Yu in his original position as Assistant General Manager, and that there
was no law requiring the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally dismissed
by the new partnership which had simply declined to retain him in his former managerial position or any other position. Finally, the NLRC held that
Benjamin Yu's claim for unpaid wages should be asserted against the original members of the preceding partnership, but these though impleaded
had, apparently, not been served with summons in the proceedings before the Labor Arbiter.6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and annul the Resolution of the NLRC as a product
of grave abuse of discretion amounting to lack or excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership has a juridical personality separate and distinct
from that of each of its members. Such independent legal personality subsists, petitioner claims, notwithstanding changes in the identities of the
partners. Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain could not have been aff ected by
changes in the latter's membership. 7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had hired petitioner Yu as Assistant
General Manager had been extinguished and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new
partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new
partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the membership of the
partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co
and Emmanuel Zapanta in 1987.
The applicable law in this connection — of which the NLRC seemed quite unaware — is found in the Civil Code provisions relating to partnerships.
Article 1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
 xxx xxx xxx
(b) by the express will of any partner, who must act in good faith, when no definite term
or particular undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of this article, by the express will of
any partner at any time;
xxx xxx xxx
(Emphasis supplied)
In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of the total partnership interest) to Mr. Willy
Co and Emmanuel Zapanta. The record does not show what happened to the remaining 18% of the original partnership interest. The acquisition of
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82%
interest, was enough to constitute a new partnership.
The occurrence of events which precipitate the legal consequence of dissolution of a partnership do not, however, automatically result in the
termination of the legal personality of the old partnership. Article 1829 of the Civil Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the
affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old partnership was simply continued by
the new partners, without the old partnership undergoing the procedures relating to dissolution and winding up of its business affairs. In other
words, the new partnership simply took over the business enterprise owned by the preceeding partnership, and continued using the old name of
Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and
distributing its net assets, and then re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt,
powerful tax considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is not,
however, necessary to inquire into such matters.
What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora Bendal, et al.)
but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the debts of the preceding partnership.
In Singson, et al. v. Isabela Saw Mill, et al,8 the Court held that under facts very similar to those in the case at bar, a withdrawing partner remains
liable to a third party creditor of the old partnership. 9 The liability of the new partnership, upon the other hand, in the set of circumstances obtaining
in the case at bar, is established in Article 1840 of the Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing
the business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative
of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the
partners and one or more third persons, if the business is continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership
property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with
others;
(3) When any Partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this
Article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his
right in partnership property;
(4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who
promise to pay the debts and who continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners continue the business under the provisions of article
1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of
the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of
the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditor s of the
retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner
or the representative of the deceased partner against the person or partnership continuing the business on account of the
retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest
or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment on the ground of fraud.
xxx xxx xxx
(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which continued the business of the old
one without liquidation of the partnership affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for
unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as such retired partner's interest in the dissolved
partnership is concerned. It is not necessary for the Court to determine under which one or mare of the above six (6) paragraphs, the case at bar
would fall, if only because the facts on record are not detailed with sufficient precision to permit such determination. It is, however, clear to the
Court that under Article 1840 above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his
employment with the previous partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or assistant general manager
to run the affairs of the business enterprise take over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager
did not therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new
owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous
or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of service that he had
rendered to the old partnership, a fraction of at least six (6) months being considered as a whole year.
While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, we consider that Benjamin Yu was very shabbily
treated by the new partnership. The old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole
marble quarrying, processing and exporting enterprise. His work constituted value-added to the business itself and therefore, the new partnership
similarly benefitted from the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that there was any cause
consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to terminate his ser vices. Nonetheless,
the new Jade Mountain did not notify him of the change in ownership of the business, the relocation of the main office of Jade Mountain from
Makati to Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including the refusal to honor his claim for
unpaid wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for
which the new Jade Mountain may legitimately be required to respond by paying moral damages. This Court, exercising its discretion and in view of
all the circumstances of this case, believes that an indemnity for moral damages in the amount of P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six percent (6%) per annum on the amount of unpaid
wages, and of his separation pay, computed from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade
Mountain compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to attorney's fe es in the amount of ten
percent (10%) of the total amount due from private respondent Jade Mountain.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the Comment filed by private respondents is treated as their
Answer to the Petition for Certiorari, and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new Decision is
hereby ENTERED requiring private respondent Jade Mountain Products Company Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of P2,000.00 per
month multiplied by thirty-six (36) months (November 1984 to December 1987) in the total amount of
P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years of service or
a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a) and (b) above, commencing on 26
December 1989 and until fully paid; and
(e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.

G.R. No. 167379 June 27, 2006

PRIMELINK PROPERTIES AND DEVELOPMENT CORPORATION and RAFAELITO W. LOPEZ, Petitioners,
vs.
MA. CLARITA T. LAZATIN-MAGAT, JOSE SERAFIN T. LAZATIN, JAIME TEODORO T. LAZATIN and JOSE MARCOS T. LAZATIN, Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the Decision 1 of the Court of Appeals (CA) in CA-
G.R. CV No. 69200 and its Resolution2 denying petitioners’ motion for reconsideration thereof.
The factual and procedural antecedents are as follows:
Primelink Properties and Development Corporation (Primelink for brevity) is a domestic corporation engaged in real estate development. Rafaelito
W. Lopez is its President and Chief Executive Officer. 3
Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose Marcos T. Lazatin (the Lazatins for brevity), are co-
owners of two (2) adjoining parcels of land, with a combined area of 30,000 square meters, located in Tagaytay City and covered by Transfer
Certificate of Title (TCT) No. T-108484 of the Register of Deeds of Tagaytay City.
On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as President, entered into a Joint Venture Agreement 5 (JVA) for
the development of the aforementioned property into a residential subdivision to be known as "Tagaytay Garden Villas." Under the JVA, the Lazatin
siblings obliged themselves to contribute the two parcels of land as their share in the joint venture. For its part, Primelink undertook to contribute
money, labor, personnel, machineries, equipment, contractor’s pool, marketing activities, managerial expertise and other needed resources to
develop the property and construct therein the units for sale to the public. Specifically, Primelink bound itself to accomplish the following, upon the
execution of the deed:
a.) Survey the land, and prepare the projects master plans, engineering designs, structural and architectural plans, site development plans,
and such other need plans in accordance with existing laws and the rules and regulations of appropriate government institutions, firms or
agencies;
b.) Secure and pay for all the licenses, permits and clearances needed for the projects;
c.) Furnish all materials, equipment, labor and services for the development of the land in preparation for the construction and sale of the
different types of units (single-detached, duplex/twin, cluster and row house);
d.) Guarantee completion of the land development work if not prevented by force majeure or fortuitous event or by competent authority,
or other unavoidable circumstances beyond the DEVELOPER’S control, not to exceed three years from the date of the signing of this Joint
Venture Agreement, except the installation of the electrical facilities which is solely MERALCO’S responsibility;
e.) Provide necessary manpower resources, like executive and managerial officers, support personnel and marketing staff, to handle all
services related to land and housing development (administrative and construction) and marketing (sales, advertising and promotions).6
The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as follows:
1. During the first two years of the Project, the DEVELOPER and the LANDOWNER can draw allowances or make advances not exceeding a
total of twenty percent (20%) of the net revenue for that period, on the basis of sixty percent (60%) for the DEVELOPER and forty percent
(40%) for the LANDOWNERS.
The drawing allowances/advances are limited to twenty percent (20%) of the net revenue for the first two years, in order to have sufficient
reserves or funds to protect and/or guarantee the construction and completion of the different types of units mentioned above.
2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to drawing allowances and/or advances equivalent to sixty
percent (60%) and forty percent (40%), respectively, of the total net revenue or income of the sale of the units.7
They also agreed to share in the profits from the joint venture, thus:
1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or income of the Joint Venture project, after deducting all
expenses incurred in connection with the land development (such as administrative management and construction expenses), and
marketing (such as sales, advertising and promotions), and
2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or income of the Joint Venture project, after deducting all
the above-mentioned expenses. 8
Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:
SALES-INCOME-COST PROJECTION
lawphil.net
SELLING PRICE COST PRICE DIFFERENCE INCOME

CLUSTER:

A1 3,200,000 - A2 1,260,000 = 1,940,000 x 24 = P 46,560,000.00

TWIN:

B1 2,500,000 - B2 960,000 = 1,540,000 x 24 = 36,960,000.00

SINGLE:

C1 3,500,000 - C2 1,400,000 = 2,100,000 x 16 = 33,600,000.00

ROW-TYPE TOWNHOMES:

D1 1,600,000 - D2 700,000 = 900,000 x 24 = 21,600,000.00

₱138,720,000.00

(GROSS) Total Cash Price (A1+B1+C1+D1) = ₱231,200,000.00

 Total Building Expense (A2+B2+C2+D2) = 92,480,000.00

COMPUTATION OF ADD’L. INCOME ON INTEREST

TCP x 30% D/P = P 69,360,000 P 69,360,000.00

Balance = 70% = 161,840,000

x .03069 x 48 = P238,409,740 238,409,740.00

Total Amount (TCP + int. earn.) P307,769,740.00

EXPENSES:

less: A Building expenses P 92,480,000.00

B Commission (8% of TCP) 18,496,000.00

C Admin. & Mgmt. expenses (2% of TCP) 4,624,000.00

D Advertising & Promo exp. (2% of TCP) 4,624,000.00

E Building expenses for the open

spaces and Amenities (Development
cost not incl. Housing) 400 x 30,000 sqms. 12,000,000.00

TOTAL EXPENSES (A+B+C+D+E) P132,224,000.00

RECONCILIATION OF INCOME VS. EXPENSES

Total Projected Income (incl. income from interest earn.) P307,769,740.00

less: 132,224,000.00

Total Expenses P175,545,740.009

The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions between the parties relative to the interpretation,
scope and reach, and the enforcement/implementation of any provision of the agreement shall be referred to Voluntary Arbitration in accordance
with the Arbitration Law.10
The Lazatins agreed to subject the title over the subject property to an escrow agreement. Conformably with the escrow agreement, the owner’s
duplicate of the title was deposited with the China Banking Corporation.11 However, Primelink failed to immediately secure a Development Permit
from Tagaytay City, and applied the permit only on August 30, 1995. On October 12, 1995, the City issued a Development Permit to Primelink. 12
In a Letter13 dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply with its obligations under the JVA, other wise the
appropriate action would be filed against it to protect their rights and interests. This impelled the officers of Primelink to meet with the Lazatins and
enabled the latter to review its business records/papers. In another Letter 14 dated October 22, 1997, the Lazatins informed Primelink that they had
decided to rescind the JVA effective upon its receipt of the said letter. The Lazatins demanded that Primelink cease and desist from further
developing the property.
Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC) of Tagaytay City, Branch 18, a complaint for rescission
accounting and damages, with prayer for temporary restraining order and/or preliminary injunction against Primelink and Lopez. The case was
docketed as Civil Case No. TG-1776. Plaintiffs alleged, among others, that, despite the lapse of almost four (4) years from the execution of the JVA
and the delivery of the title and possession of the land to defendants, the land development aspect of the project had not yet been completed, and
the construction of the housing units had not yet made any headway, based on the following facts, namely: (a) of the 50 housing units programmed
for Phase I, only the following types of houses appear on the site in these condition: (aa) single detached, one completed and two units
uncompleted; (bb) cluster houses, one unit nearing completion; (cc) duplex, two units completed and two units unfinished; and (dd) row houses, two
units, completed; (b) in Phase II thereof, all that was done by the defendants was to grade the area; the units so far constructed had been the object
of numerous complaints by their owners/purchasers for poor workmanship and the use of sub-standard materials in their construction, thus,
undermining the project’s marketability. Plaintiffs also alleged that defendants had, without justifiable reason, completely disregarded previously
agreed accounting and auditing procedures, checks and balances system installed for the mutual protection of both parties, and the scheduled
regular meetings were seldom held to the detriment and disadvantage of plaintiffs. They averred that they sent a letter through counsel, demanding
compliance of what was agreed upon under the agreement but defendants refused to heed said demand. After a succession of letters with still no
action from defendants, plaintiffs sent a letter on October 22, 1997, a letter formally rescinding the JVA.
Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by defendants, they (plaintiffs) stood to receive the amount
of P70,218,296.00 as their net share in the joint venture project; to date, however, after almost four (4) years and despite the undertaking in the JVA
that plaintiffs shall initially get 20% of the agreed net revenue during the first two (2) years (on the basis of the 60%-40% sharing) and their full 40%
share thereafter, defendants had yet to deliver these shares to plaintiffs which by conservative estimates would amount to no less
than P40,000,000.00.15
Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:
WHEREFORE, it is respectfully prayed of this Honorable Court that a temporary restraining order be forthwith issued enjoining the defendants to
immediately stop their land development, construction and marketing of the housing units in the aforesaid project; after due proceedings, to issue a
writ of preliminary injunction enjoining and prohibiting said land development, construction and marketing of housing units, pending the disposition
of the instant case.
After trial, a decision be rendered:
1. Rescinding the Joint Venture Agreement executed between the plaintiffs and the defendants;
2. Immediately restoring to the plaintiffs possession of the subject parcels of land;
3. Ordering the defendants to render an accounting of all income generated as well as expenses incurred and disbursement made in
connection with the project;
4. Making the Writ of Preliminary Injunction permanent;
5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount Forty Million Pesos (P40,000,000.00) in actual and/or
compensatory damages;
6. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of Two Million Pesos (P2,000,000.00) in exemplary
damages;
7. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount equivalent to ten percent (10%) of the total amount due
as and for attorney’s fees; and
8. To pay the costs of this suit.
Other reliefs and remedies as are just and equitable are likewise being prayed for.16
Defendants opposed plaintiffs’ plea for a writ of preliminary injunction on the ground that plaintiffs’ complaint was premature, due to their failure to
refer their complaint to a Voluntary Arbitrator pursuant to the JVA in relation to Section 2 of Republic Act No. 876 before filing their complaint in the
RTC. They prayed for the dismissal of the complaint under Section 1(j), Rule 16 of the Rules of Court:
WHEREFORE, it is respectfully prayed that an Order be issued:
a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited Rules of Court, or, in the alternative,
b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to arbitrate, and then asking the parties to resolve
their controversies, pursuant to the Arbitration Law, or in the alternative;
c) staying or suspending the proceedings in captioned case until the completion of the arbitration, and
d) denying the plaintiffs’ prayer for the issuance of a temporary restraining order or writ of preliminary injunction.
Other reliefs and remedies just and equitable in the premises are prayed for.17
In the meantime, before the expiration of the reglementary period to answer the complaint, defendants, invoking their counsel’s heavy workload,
prayed for a 15-day extension18 within which to file their answer. The additional time prayed for was granted by the RTC. 19 However, instead of filing
their answer, defendants prayed for a series of 15-day extensions in eight (8) successive motions for extensions on the same justification. 20 The RTC
again granted the additional time prayed for, but in granting the last extension, it warned against further extension.21 Despite the admonition,
defendants again moved for another 15-day extension,22 which, this time, the RTC denied. No answer having been filed, plaintiffs moved to declare
the defendants in default, 23 which the RTC granted in its Order 24 dated June 24, 1998.
On June 25, 1998, defendants filed, via registered mail, their "Answer with Counterclaim and Opposition to the Prayer for the Issuance of a Writ of
Preliminary Injunction."25 On July 8, 1998, defendants filed a Motion to Set Aside the Order of Default.26 This was opposed by plaintiffs.27 In an
Order28 dated July 14, 1998, the RTC denied defendants’ motion to set aside the order of default and ordered the reception of plaintiffs’ evidence ex
parte. Defendants filed a motion for reconsideration 29 of the July 14, 1998 Order, which the RTC denied in its Order 30 dated October 21, 1998.
Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in default, as well as the Order denying their motion to set
aside the order of default, alleging that these were contrary to facts of the case, the law and jurisprudence. 31 On September 16, 1999, the appellate
court issued a Resolution32 dismissing the appeal on the ground that the Orders appealed from were interlocutory in character and, therefore, not
appealable. No motion for reconsideration of the Order of the dismissal was filed by defendants.
In the meantime, plaintiffs adduced ex parte their testimonial and documentary evidence. On April 17, 2000, the RTC rendered a Decision, the
dispositive part of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as follows:
1. Ordering the rescission of the Joint Venture Agreement as of the date of filing of this complaint;
2. Ordering the defendants to return possession, including all improvements therein, of the real estate property belonging to the plaintiffs
which is described in, and covered by Transfer Certificate of Title No. T-10848 of the Register of Deeds of Tagaytay City, and located in
Barangay Anulin, City of Tagaytay;
3. Ordering the defendants to turn over all documents, records or papers that have been executed, prepared and retained in connection
with any contract to sell or deed of sale of all lots/units sold during the effectivity of the joint venture agreement;
 4. Ordering the defendants to pay the plaintiffs the sum of P1,041,524.26 representing their share of the net income of the P2,603,810.64
as of September 30, 1995, as stipulated in the joint venture agreement;
5. Ordering the defendants to pay the plaintiffs’ attorney’s fees in the amount of P104,152.40;
6. Ordering the defendants to pay the costs.
SO ORDERED.33
The trial court anchored its decision on the following findings:
x x x Evidence on record have shown patent violations by the defendants of the stipulations particularly paragraph II covering Developer’s
(defendant) undertakings, as well as paragraph III and paragraph V of the JVA. These violations are not limited to those made against the plaintiffs
alone as it appears that some of the unit buyers themselves have their own separate gripes against the defendants as typified by the letters (Exhibits
"G" and "H") of Mr. Emmanuel Enciso.
xxxx
Rummaging through the evidence presented in the course of the testimony of Mrs. Maminta on August 6, 1998 (Exhibits "N," "O," "P," "Q" and "R" as
well as submarkings, pp. 60 to 62, TSN August 6, 1998) this court has observed, and is thus convinced, that a pattern of what appears to be a scheme
or plot to reduce and eventually blot out the net income generated from sales of housing units by defendants, has been established. Exhibit "P-2" is
explicit in declaring that, as of September 30, 1995, the joint venture project earned a net income of about P2,603,810.64. This amount, however,
was drastically reduced in a subsequent financial report submitted by the defendants to P1,954,216.39. Shortly thereafter, and to the dismay of the
plaintiffs, the defendants submitted an income statement and a balance sheet (Exhibits "R" and "R-1") indicating a net loss of P5,122,906.39 as of
June 30, 1997.
Of the reported net income of P2,603,810.64 (Exhibit "P-2") the plaintiffs should have received the sum of P1,041,524.26 representing their 40%
share under paragraph II and V of the JVA. But this was not to be so. Even before the plaintiffs could get hold of their share as indicated above, the
defendants closed the chance altogether by declaring a net loss. The court perceives this to be one calculated coup-de-grace that would put to thin
air plaintiffs’ hope of getting their share in the profit under the JVA.
That this matter had reached the court is no longer a cause for speculation. The way the defendants treated the JVA and the manner by which they
handled the project itself vis-à-vis their partners, the plaintiffs herein, there is bound to be certain conflict as the latter repeatedly would received
the losing end of the bargain.
Under the intolerable circumstances, the plaintiffs could not have opted for some other recourse but to file the present action to enforce their rights.
x x x34
On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal 35 alleging defendants’ dilatory tactics for its allowance. This was opposed by
defendants.36
On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of plaintiffs.37 Upon posting a bond of P1,000,000.00 by
plaintiffs, a writ of execution pending appeal was issued on June 20, 2000.38
Defendants appealed the decision to the CA on the following assignment of errors:
I
THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST REFERRING THE COMPLAINT FOR VOLUNTARY ARBITRATION (RA NO. 876),
CONTRARY TO THE MANDATED VOLUNTARY ARBITRATION CLAUSE UNDER THE JOINT VENTURE AGREEMENT, AND THE DOCTRINE IN "MINDANAO
PORTLAND CEMENT CORPORATION V. MCDONOUGH CONSTRUCTION COMPANY OF FLORIDA" (19 SCRA 814-815).
II
THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING APPEAL EVEN IN THE ABSENCE OF GOOD AND COMPELLING REASONS TO
JUSTIFY SAID ISSUANCE, AND DESPITE PRIMELINK’S STRONG OPPOSITION THERETO.
III
THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINK’S MOTION TO QUASH THE WRIT OF EXECUTION PENDING APPEAL AND THE MOTION
FOR RECONSIDERATION, ALTHOUGH THE COURT HAS RETAINED ITS JURISDICTION TO RULE ON ALL QUESTIONS RELATED TO EXECUTION.
IV
THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT ALTHOUGH PRIMELINK HAS SUBSTANTIALLY DEVELOPED THE PROJECT
AND HAS SPENT MORE OR LESS FORTY MILLION PESOS, AND DESPITE APPELLEES’ FAILURE TO PRESENT SUFFICIENT EVIDENCE JUSTIFYING THE SAID
RESCISSION.
V
THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE RIGHT TO TAKE OVER THE SUBDIVISION AND TO APPROPRIATE FOR
THEMSELVES ALL THE EXISTING IMPROVEMENTS INTRODUCED THEREIN BY PRIMELINK, ALTHOUGH SAID RIGHT WAS NEITHER ALLEGED NOR PRAYED
FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING THE EX PARTE HEARING, AND EVEN WITHOUT ORDERING APPELLEES TO FIRST REIMBURSE
PRIMELINK OF THE SUBSTANTIAL DIFFERENCE BETWEEN THE MARKET VALUE OF APPELLEES’ RAW, UNDEVELOPED AND UNPRODUCTIVE LAND
(CONTRIBUTED TO THE PROJECT) AND THE SUM OF MORE OR LESS FORTY MILLION PESOS WHICH PRIMELINK HAD SPENT FOR THE HORIZONTAL
AND VERTICAL DEVELOPMENT OF THE PROJECT, THEREBY ALLOWING APPELLEES TO UNJUSTLY ENRICH THEMSELVES AT THE EXPENSE OF
PRIMELINK.39
The appeal was docketed in the CA as CA-G.R. CV No. 69200.
On August 9, 2004, the appellate court rendered a decision affirming, with modification, the appealed decision. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the assailed decision of the Regional Trial Court of Tagaytay City, Branch 18, promulgated on April 17, 2000 in
Civil Case No. TG-1776, is hereby AFFIRMED. Accordingly, Transfer Certificate of Title No. T-10848 held for safekeeping by Chinabank pursuant to the
Escrow Agreement is ordered released for return to the plaintiffs-appellees and conformably with the affirmed decision, the cancellation by the
Register of Deeds of Tagaytay City of whatever annotation in TCT No. 10848 by virtue of the Joint Venture Agreement, is now proper.
SO ORDERED.40
Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation, 41 the appellate court ruled that, under Philippine law, a joint
venture is a form of partnership and is to be governed by the laws of partnership. The aggrieved parties filed a motion for reconsideration, 42 which
the CA denied in its Resolution43 dated March 7, 2005.
Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:
1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND REVERSIBLE LEGAL ERROR AND/OR GRAVE ABUSE OF DISCRETION IN
ORDERING THE RETURN TO THE RESPONDENTS OF THE PROPERTY WITH ALL IMPROVEMENTS THEREON, EVEN WITHOUT
ORDERING/REQUIRING THE RESPONDENTS TO FIRST PAY OR REIMBURSE PRIMELINK OF ALL EXPENSES INCURRED IN DEVELOPING AND
MARKETING THE PROJECT, LESS THE ORIGINAL VALUE OF THE PROPERTY, AND THE SHARE DUE RESPONDENTS FROM THE PROFITS (IF ANY)
OF THE JOINT VENTURE PROJECT?
2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE AND UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD
HUMAN RELATIONS AND VIOLATIVE OF EXISTING LAWS AND JURISPRUDENCE ON JUDICIAL NOTICE, DEFAULT, UNJUST ENRICHMENT AND
RESCISSION OF CONTRACT WHICH REQUIRES MUTUAL RESTITUTION, NOT UNILATERAL APPROPRIATION, OF PROPERTY BELONGING TO
ANOTHER?44
Petitioners maintain that the aforesaid portion of the decision which unconditionally awards to respondents "all improvements" on the project
without requiring them to pay the value thereof or to reimburse Primelink for all expenses incurred therefore is inherently and essentially illegal and
confiscatory, oppressive and unconscionable, contrary to the tenets of good human relations, and will allow respondents to unjustly enrich
themselves at Primelink’s expense. At the time respondents contributed the two parcels of land, consisting of 30,000 square meters to the joint
venture project when the JVA was signed on March 10, 1994, the said properties were worth not more than P500.00 per square meter, the "price
tag" agreed upon the parties for the purpose of the JVA. Moreover, before respondents rescinded the JVA sometime in October/November 1997, the
property had already been substantially developed as improvements had already been introduced thereon; petitioners had likewise incurred
administrative and marketing expenses, among others, amounting to more or less P40,000,000.00.45
Petitioners point out that respondents did not pray in their complaint that they be declared the owners and entitled to the possession of the
improvements made by petitioner Primelink on the property; neither did they adduce evidence to prove their entitlement to said improvements. It
follows, petitioners argue, that respondents were not entitled to the improvements although petitioner Primelink was declared in default.
They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to the extent necessary to cover the damages caused and that,
under Article 1385 of the same Code, rescission creates the obligation to return the things which were not object of the contract, together with their
fruits, and the price with its interest; consequently, it can be effected only when respondents can return whatever they may be obliged to return.
Respondents who sought the rescission of the JVA must place petitioner Primelink in the status quo. They insist that respondents cannot rescind and,
at the same time, retain the consideration, or part of the consideration received under the JVA. They cannot have the benefits of rescission without
assuming its burden. All parties must be restored to their original positions as nearly as possible upon the rescission of a contract. In the event that
restoration to the status quo is impossible, rescission may be granted if the Court can balance the equities and fashion an appropriate remedy that
would be equitable to both parties and afford complete relief.
Petitioners insist that being defaulted in the court a quo would in no way defeat their claim for reimbursement because "[w]hat matters is that the
improvements exist and they cannot be denied."46 Moreover, they point out, the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing
Corporation47 cited by the CA is not in point.
On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not specifically pray for their takeover of the property and
for the possession of the improvements on the parcels of land, nevertheless, respondents were entitled to said relief as a necessary consequence of
the ruling of the trial court ordering the rescission of the JVA. The appellate court cited the ruling of this Court in the Aurbach case and Article 1838
of the New Civil Code, to wit:
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is silent on any particular issue,
the general principles of partnership may be resorted to.48
Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with rescissible contracts. What applies is Article 1191 of the
New Civil Code, which reads:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and
the Mortgage Law.
They insist that petitioners are not entitled to rescission for the improvements because, as found by the RTC and the CA, it was petitioner Primelink
that enriched itself at the expense of respondents. Respondents reiterate the ruling of the CA, and argue as follows:
PRIMELINK argued that the LAZATINs in their complaint did not allege, did not prove and did not pray that they are and should be entitled to take
over the development of the project, and that the improvements and existing structures which were introduced by PRIMELINK after spending more
or less Forty Million Pesos – be awarded to them. They merely asked in the complaint that the joint venture agreement be rescinded, and that the
parcels of land they contributed to the project be returned to them.
PRIMELINK’s argument lacks merit. The order of the court for PRIMELINK to return possession of the real estate property belonging to the LAZATINs
including all improvements thereon was not a judgment that was different in kind than what was prayed for by the LAZATINs. The order to return the
property with all the improvements thereon is just a necessary consequence to the order of rescission.
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is silent on any particular issue,
the general principles of partnership may be resorted to. In Aurbach v. Sanitary Wares Manufacturing Corporation, the Supreme Court discussed the
following points regarding joint ventures and 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. (Gates v. Megargel, 266 Fed. 811 [1920]) It is, in fact, hardly distinguishable from the partnership,
since 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 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. (Tuffs v. Mann,
116 Cal.App. 170, 2 P.2d 500 [1931]; Harmon v. Martin, 395 III. 595, 71 N.E.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 laws of partnership. 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 Lopez – Campos Comments, Notes and Selected Cases, Corporation Code 1981)
(Emphasis Supplied)
The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the words of the court a quo, was a pattern of what appears to be a
scheme or plot to reduce and eventually blot out the net incomes generated from sales of housing units by the defendants. Under Article 1838 of the
Civil Code, where the partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party
entitled to rescind is, without prejudice to any other right is entitled to a lien on, or right of retention of, the surplus of the partnership property after
satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any
capital or advance contributed by him. In the instant case, the joint venture still has outstanding liabilities to third parties or the buyers of the
property.
It is not amiss to state that title to the land or TCT No. T-10848 which is now held by Chinabank for safekeeping pursuant to the Escrow Agreement
executed between Primelink Properties and Development Corporation and Ma. Clara T. Lazatin-Magat should also be returned to the LAZATINs as a
necessary consequence of the order of rescission of contract. The reason for the existence of the Escrow Agreement has ceased to exist when the
joint venture agreement was rescinded. 49
Respondents stress that petitioners must bear any damages or losses they may have suffered. They likewise stress that they did not enrich
themselves at the expense of petitioners.
In reply, petitioners assert that it is unjust and inequitable for respondents to retain the improvements even if their share in the P1,041,524.26 of the
net income of the property and the sale of the land were to be deducted from the value of the improvements, plus administrative and marketing
expenses in the total amount of P40,000,000.00. Petitioners will still be entitled to an accounting from respondents. Respondents cannot deny the
existence and nature of said improvements as they are visible to the naked eye.
The threshold issues are the following: (1) whether respondents are entitled to the possession of the parcels of land covered by the JVA and the
improvements thereon introduced by petitioners as their contribution to the JVA; (2) whether petitioners are entitled to reimbursement for the
value of the improvements on the parcels of land.
The petition has no merit.
On the first issue, we agree with petitioners that respondents did not specifically pray in their complaint below that possession of the improvements
on the parcels of land which they contributed to the JVA be transferred to them. Respondents made a specific prayer in their complaint that, upon
the rescission of the JVA, they be placed in possession of the parcels of land subject of the agreement, and for other "reliefs and such other remedies
as are just and equitable in the premises." However, the trial court was not precluded from awarding possession of the improvements on the parcels
of land to respondents in its decision. Section 2(c), Rule 7 of the Rules of Court provides that a pleading shall specify the relief sought but it may add
as general prayer for such further or other relief as may be deemed just and equitable. Even without the prayer for a specific remedy, proper relief
may be granted by the court if the facts alleged in the complaint and the evidence introduced so warrant.50 The court shall grant relief warranted by
the allegations and the proof even if no such relief is prayed for.51 The prayer in the complaint for other reliefs equitable and just in the premises
justifies the grant of a relief not otherwise specifically prayed for.52
The trial court was not proscribed from placing respondents in possession of the parcels of land and the improvements on the said parcels of land. It
bears stressing that the parcels of land, as well as the improvements made thereon, were contributed by the parties to the joint venture under the
JVA, hence, formed part of the assets of the joint venture. 53 The trial court declared that respondents were entitled to the possession not only of the
parcels of land but also of the improvements thereon as a consequence of its finding that petitioners breached their agreement and defrauded
respondents of the net income under the JVA.
On the second issue, we agree with the CA ruling that petitioner Primelink and respondents entered into a joint venture as ev idenced by their JVA
which, under the Court’s ruling in Aurbach, is a form of partnership, and as such is to be governed by the laws on partnership.
When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that petitioners willfully and per sistently committed
a breach of the JVA, the court thereby dissolved/cancelled the partnership. 54 With the rescission of the JVA on account of petitioners’ fraudulent
acts, all authority of any partner to act for the partnership is terminated except so far as may be necessary to wind up the partnership affairs or to
complete transactions begun but not yet finished. 55 On dissolution, the partnership is not terminated but continues until the winding up of
partnership affairs is completed. 56 Winding up means the administration of the assets of the partnership for the purpose of terminating the business
and discharging the obligations of the partnership.
The transfer of the possession of the parcels of land and the improvements thereon to respondents was only for a specific purpose: the winding up
of partnership affairs, and the partition and distribution of the net partnership assets as provided by law. 57 After all, Article 1836 of the New Civil
Code provides that unless otherwise agreed by the parties in their JVA, respondents have the right to wind up the partnership affairs:
Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving
partner, not insolvent, has the right to wind up the partnership affairs, provided, however, that any partner, his legal repr esentative or his assignee,
upon cause shown, may obtain winding up by the court.
It must be stressed, too, that although respondents acquired possession of the lands and the improvements thereon, the said lands and
improvements remained partnership property, subject to the rights and obligations of the parties, inter se, of the creditors and of third parties under
Articles 1837 and 1838 of the New Civil Code, and subject to the outcome of the settlement of the accounts between the parties as provided in
Article 1839 of the New Civil Code, absent any agreement of the parties in their JVA to the contrary.58 Until the partnership accounts are determined,
it cannot be ascertained how much any of the parties is entitled to, if at all.
It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of the improvements on the parcels of land
owned by the joint venture/partnership. Notably, the JVA of the parties does not contain any provision designating any party to wind up the affairs of
the partnership.
Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is caused in contravention of the partnership agreement
are as follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by
themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership
property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under the second paragraph, No.
1(b) of this article, and in like manner indemnify him against all present or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragraph, No. 2, all the rights of a partner under the first
paragraph, subject to liability for damages in the second paragraph, No. 1(b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the right as against his co-partners and all
claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any
damage caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by a bond
approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the
partner’s interest the value of the good-will of the business shall not be considered.
And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to any other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons
for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made
by him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.
The accounts between the parties after dissolution have to be settled as provided in Article 1839 of the New Civil Code:
Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the
contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
 (c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of the liabilities.
(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified
in the preceding number.
(6) Any partner or his legal representative shall have the right to enforce the contributions specified in No. 4, to the extent of the amount
which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured
creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following
order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 69200 are
AFFIRMED insofar as they conform to this Decision of the Court.
Costs against petitioners.
SO ORDERED.

[G.R. No. 30616 : December 10, 1990.]

192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B. MAGLANA, Defendant-Appellee.

D ECISION

PARAS, J.:

This is a direct appeal to this Court from a decision ** of the then Court of First Instance of Davao, Seventh Judicial District, Branch III, in Civil Case
No. 3518, dismissing appellant's complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit "A") called Eastcoast Development Enterprises (EDE) with
only the two of them as partners. The partnership EDE with an indefinite term of existence was duly registered on January 21, 1955 with the
Securities and Exchange Commission.
One of the purposes of the duly-registered partnership was to "apply or secure timber and/or minor forests products licenses and concessions over
public and/or private forest lands and to operate, develop and promote such forests rights and concessions." (Rollo, p. 114).
A duly registered Articles of Co-Partnership was filed together with an application for a timber concession covering the area located at Cateel and
Baganga, Davao with the Bureau of Forestry which was approved and Timber License No. 35-56 was duly issued and became the basis of subsequent
renewals made for and in behalf of the duly registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage the business affairs of the partnership, including marketing and handling of
cash and is authorized to sign all papers and instruments relating to the partnership, while appellant Rojas shall be the logging superintendent and
shall manage the logging operations of the partnership. It is also provided in the said articles of co-partnership that all profits and losses of the
partnership shall be divided share and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no operation of said partnership (Record on Appeal [R.A. ] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of Pahamotang as industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-Partnership (Exhibit "B" and Exhibit "C") under the firm
name EASTCOAST DEVELOPMENT ENTERPRISES (EDE). Aside from the slight difference in the purpose of the second partnership which is to hold and
secure renewal of timber license instead of to secure the license as in the first partnership and the term of the second partnership is fixed to thirty
(30) years, everything else is the same.
The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956, and was able to ship logs and realize profits. An
income was derived from the proceeds of the logs in the sum of P643,633.07 (Decision, R.A. 919).
On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled "CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP,
EASTCOAST DEVELOPMENT ENTERPRISE" (Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas shall purchase the interest,
share and participation in the Partnership of Pahamotang assessed in the amount of P31,501.12. It was also agreed in the said instrument that after
payment of the sum of P31,501.12 to Pahamotang including the amount of loan secured by Pahamotang in favor of the partnership, the two
(Maglana and Rojas) shall become the owners of all equipment contributed by Pahamotang and the EASTCOAST DEVELOPMENT ENTERPRISES, the
name also given to the second partnership, be dissolved. Pahamotang was paid in fun on August 31, 1957. No other rights and obligations accrued in
the name of the second partnership (R.A. 921).
After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas without the benefit of any written agreement or
reconstitution of their written Articles of Partnership (Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract with another logging enterprise, the CMS Estate, Inc. He left and abandoned the
partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly acquired area (Decision, R.A. 948 ).
The equipment withdrawn were his supposed contributions to the first partnership and was transferred to CMS Estate, Inc. by way of chattel
mortgage (Decision, R.A. p. 948).
On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute, either in cash or in equipment, to the capital
investments of the partnership as well as his obligation to perform his duties as logging superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with the promised contributions and he will not work as
logging superintendent. Maglana then told Rojas that the latter's share will just be 20% of the net profits. Such was the sharing from 1957 to 1959
without complaint or dispute (Decision, R.A. 949).: nad
Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter dated February 21, 1961 (Exhibit "10") Maglana
notified Rojas that he dissolved the partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against Maglana for the recovery of properties, accounting,
receivership and damages, docketed as Civil Case No. 3518 (Record on Appeal, pp. 1-26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine the long and voluminous accounts of the Eastcoast
Development Enterprises (Ibid., pp. 894-895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114) was denied by Judge Romero for want of merit (Ibid., p.
125). Judge Romero also required the inclusion of the entire year 1961 in the report to be submitted by the commissioners (Ibid., pp. 138-143).
Accordingly, the commissioners started examining the records and supporting papers of the partnership as well as the information furnished them by
the parties, which were compiled in three (3) volumes.
On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with counterclaim, attaching thereto the amended answer (Ibid.,
pp. 26-336), which was granted on May 22, 1964 (Ibid., p. 336).
On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid., p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964 approving the report of the commissioners which was
opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues were agreed upon to be submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after the dissolution of the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the partnership (Decision, R.A. pp. 895-896).- nad
After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of which reads as follows:
"WHEREFORE, the above facts and issues duly considered, judgment is hereby rendered by the Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after Pahamotang retired from the second partnership, that
is, after August 31, 1957, when Pahamotang was finally paid his share — the partnership of the defendant and the plaintiff is one of a de
facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation, that is the ratio and proportion of their respective
contributions, or on the basis of share and share alike — this covered by actual contributions of the plaintiff and the defendant and by their
verbal agreement; that the sharing of profits and losses is on the basis of actual contributions; that from 1957 to 1959, the sharing is on the
basis of 80% for the defendant and 20% for the plaintiff of the profits, but from 1960 to the date of dissolution, February 23, 1961, the
plaintiff's share will be on the basis of his actual contribution and, considering his indebtedness to the partnership, the plaintiff is not
entitled to any share in the profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and placed in his or in his wife's name were acquired with
partnership funds or with funds of the defendant and — the Court declares that there is no evidence that these properties were acquired
by the partnership funds, and therefore the same should not belong to the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused them and who should be liable for them — the Court
declares that neither parties is entitled to damages, for as already stated above it is not a wise policy to place a price on the right of a
person to litigate and/or to come to Court for the assertion of the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February 23, 1961; did it dissolve the partnership or not —
the Court declares that the letter of the defendant to the plaintiff dated February 23, 1961, in effect dissolved the partnership;
 "6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and other merchandise to the laborers and employees of the
Eastcoast Development Enterprises, — the COURT DECLARES THE SAME AS NOT BELONGING TO THE PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles David — is VALID AND BINDING UPON THE PARTIES
AND SHOULD BE CONSIDERED AS PART OF MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the partnership the amount of P69,000.00 the profits he
received from the CMS Estate, Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of P85,000.00 which according to him he is still entitled to
receive from the CMS Estate, Inc. is hereby denied considering that it has not yet been actually received, and further the receipt is merely
based upon an expectancy and/or still speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his personal account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he should have received as logging superintendent, and
which was not paid to him, and this should be considered as part of Maglana's contribution likewise to the partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.: rd
"SO ORDERED." Decision, Record on Appeal, pp. 985-989).
Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal relationship of the Maglana-Rojas after Pahamotang retired from the second
partnership.
The lower court is of the view that the second partnership superseded the first, so that when the second partnership was dissolved there was no
written contract of co-partnership; there was no reconstitution as provided for in the Maglana, Rojas and Pahamotang partnership contract. Hence,
the partnership which was carried on by Rojas and Maglana after the dissolution of the second partnership was a de facto partnership and at will. It
was considered as a partnership at will because there was no term, express or implied; no period was fixed, expressly or impliedly (Decision, R.A. pp.
962-963).
On the other hand, Rojas insists that the registered partnership under the firm name of Eastcoast Development Enterprises (EDE) evidenced by the
Articles of Co-Partnership dated January 14, 1955 (Exhibit "A") has not been novated, superseded and/or dissolved by the unregistered articles of co-
partnership among appellant Rojas, appellee Maglana and Agustin Pahamotang, dated March 4, 1956 (Exhibit "C") and accordingly, the terms and
stipulations of said registered Articles of Co-Partnership (Exhibit "A") should govern the relations between him and Maglana. Upon withdrawal of
Agustin Pahamotang from the unregistered partnership (Exhibit "C"), the legally constituted partnership EDE (Exhibit "A") continues to govern the
relations between them and it was legal error to consider a de facto partnership between said two partners or a partnership at will. Hence, the letter
of appellee Maglana dated February 23, 1961, did not legally dissolve the registered partnership between them, being in contr avention of the
partnership agreement agreed upon and stipulated in their Articles of Co-Partnership (Exhibit "A"). Rather, appellant is entitled to the rights
enumerated in Article 1837 of the Civil Code and to the sharing profits between them of "share and share alike" as stipulated in the registered
Articles of Co-Partnership (Exhibit "A").
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears evident that it was not the intention of the
partners to dissolve the first partnership, upon the constitution of the second one, which they unmistakably called an "Additional Agreement"
(Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except for the fact that they took in one industrial partner; gave him an equal share in the
profits and fixed the term of the second partnership to thirty (30) years, everything else was the same. Thus, they adopted the same name,
EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes and the capital contributions of Rojas and Maglana as stipulated in both
partnerships call for the same amounts. Just as important is the fact that all subsequent renewals of Timber License No. 35-36 were secured in favor
of the First Partnership, the original licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form
of Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered (Brief for Plaintiff-Appellant, p. 5). Otherwise stated, even
during the existence of the second partnership, all business transactions were carried out under the duly registered articles. As found by the trial
court, it is an admitted fact that even up to now, there are still subsisting obligations and contracts of the latter (Decision, R.A. pp. 950-957). No
rights and obligations accrued in the name of the second partnership except in favor of Pahamotang which was fully paid by the duly registered
partnership (Decision, R.A., pp. 919-921).
On the other hand, there is no dispute that the second partnership was dissolved by common consent. Said dissolution did not affect the first
partnership which continued to exist. Significantly, Maglana and Rojas agreed to purchase the interest, share and participation in the second
partnership of Pahamotang and that thereafter, the two (Maglana and Rojas) became the owners of equipment contributed by Pahamotang. Even
more convincing, is the fact that Maglana on March 17, 1957, wrote Rojas, reminding the latter of his obligation to contribute either in cash or in
equipment, to the capital investment of the partnership as well as his obligation to perform his duties as logging superintendent. This reminder
cannot refer to any other but to the provisions of the duly registered Articles of Co-Partnership. As earlier stated, Rojas replied that he will not be
able to comply with the promised contributions and he will not work as logging superintendent. By such statements, it is obvious that Roxas
understood what Maglana was referring to and left no room for doubt that both considered themselves governed by the articles of the duly
registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of Pahamotang can neither be considered as a De Facto
Partnership, nor a Partnership at Will, for as stressed, there is an existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the case at bar, the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the partnership, it is in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even
before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing
partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased,
hence, the dissolution. And in whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana shall be guided in the
liquidation of the partnership by the provisions of its duly registered Articles of Co-Partnership; that is, all profits and losses of the partnership shall
be divided "share and share alike" between the partners.
But an accounting must first be made and which in fact was ordered by the trial court and accomplished by the commissioners appointed for the
purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners from 1956-1961 are as follows: Eufracio Rojas who should
have contributed P158,158.00, contributed only P18,750.00 while Maglana who should have contributed P160,984.00, contributed P267,541.44
(Decision, R.A. p. 976). It is a settled rule that 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 (Article 1786, Civil Code) and for interests and damages from the time he
should have complied with his obligation (Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a contract of
partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their voluminous reports which was approved by the trial
court, they showed that on 50-50% basis, Rojas will be liable in the amount of P131,166.00; on 80-20%, he will be liable for P40,092.96 and finally on
the basis of actual capital contribution, he will be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamotang which is unquestionably a continuation of the
duly registered partnership and the sharing of profits and losses which should be on the basis of share and share alike as pr ovided for in the duly
registered Articles of Co-Partnership, no plausible reason could be found to disturb the findings and conclusions of the trial court.: nad
As to whether Maglana is liable for damages because of such withdrawal, it will be recalled that after the withdrawal of Pahamotang, Rojas entered
into a management contract with another logging enterprise, the CMS Estate, Inc., a company engaged in the same business as the partnership. He
withdrew his equipment, refused to contribute either in cash or in equipment to the capital investment and to perform his duties as logging
superintendent, as stipulated in their partnership agreement. The records also show that Rojas not only abandoned the partner ship but also took
funds in an amount more than his contribution (Decision, R.A., p. 949).
In the given situation Maglana cannot be said to be in bad faith nor can he be liable for damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao, Branch III, is hereby MODIFIED in the sense that the duly
registered partnership of Eastcoast Development Enterprises continued to exist until liquidated and that the sharing basis of the partners should be
on share and share alike as provided for in its Articles of Partnership, in accordance with the computation of the commissioners. We also hereby
AFFIRM the decision of the trial court in all other respects.: nad
SO ORDERED.

G.R. No. 17024 March 24, 1922

DOMINGO BEARNEZA, plaintiff-appelle,
vs.
BALBINO DEQUILLA, defendant-appellant.
C. Lozano and Cecilio I. Lim for appellant.
Montinola, Montinola & Hontiveros for appellee.
ROMUALDEZ, J.:
In the year 1903, Balbino Dequilla, the herein defendant, and Perpetua Bearneza formed a partnership for the purpose of exploiting a fish pond
situated in the barrio of Talisay, municipality of Barotac Nuevo, Province of Iloilo, Perpetua obligating herself to contribute to the payment of the
expenses of the business, which obligation she made good, and both agreeing to divide the profits between themselves, which they had been doing
until the death of the said Perpetua in the year 1912.
The deceased left a will in one of the clauses of which she appointed Domingo Bearnez, the herein plaintiff, as her heir to succeed to all her rights
and interests in the fish pond in question.
Demand having been made upon Balbino Dequilla by Domingo Bearneza for the delivery of the part of the fish pond belonging to his decedent,
Perpetua, and delivery having been refused, Domingo Bearneza brought this action to recover said part of the fish pond belonging to his decedent,
Perpetua, and delivery having been refused, Domingo Bearneza brought this action recover said part of the fish pond and one-half of the profits
received by the defendant from the fish pond from the year 1913 to 1919, as damages (the amended complaint was filed on April 12, 1920),
amounting, according to plaintiff, to the sum of thirteen thousand one hundred pesos (13,100).
In his answer, the defendant denies generally and specifically the allegations of the complaint, and alleges, as special defense, that "the formation of
the supposed partnership between the plaintiff and the defendant for the exploitation of the aforesaid fish pond was not carr ied into effect, on
account of the plaintiff having refused to defray the expenses of reconstruction and exploitation of said fish pond." As another special defense, the
defendant alleges "that in the event that the court should hold the plaintiff to be entitled to the undivided one-half of the fish pond, claimed in the
complaint, the plaintiff's action has prescribed, the time for bringing the same having elapsed."
Proceedings having been held as usual, the court below rendered judgment, declaring the plaintiff owner of one-half of the fish pond, which was
composed of the portions known as "Alimango" and "Dalusan," but without awarding him any of the damages claimed by him, the same not having
been proven, in the opinion of the court, and ordering the defendant to pay the costs.
From this judgment the defendant appeals, making various assignments of error. The plaintiff did not appeal from that part of the judgment denying
his claim for damages; hence the only question we are called upon to decide is whether or not the plaintiff has any right to maintain an action for the
recovery of one-half of the said fish pond.
The partnership formed by Perpetua Bearneza and Balbino Dequilla, as to the existence of which the proof contained in the record is conclusive and
there is no dispute, was of a civil nature. It was a particular partnership, as defined in article 1678 of the Civil Code, it having had for its subject-
matter a specified thing, to with, the exploitation of the aforementioned fish pond. Although, as the trial court says in its decision, the defendant, in
his letters to Perpetua or her husband, makes reference to the fish pond, calling it "our," or "your fish pond," this reference cannot be held to include
the land on which the said fish pond was built. It has not been proven that Perpetua Bearneza participated in the ownership of said land, and Exhibits
2 and 3 of the defendant show that he has been paying, as exclusive owner of the fish pond, the land tax thereon, although in Exhibit X he says that
the said land belongs to the State. The conclusion, therefore, from the evidence is that the land on which the fish pond was constructed did not
constitute a part of the subject- matter of the aforesaid partnership.
Now, this partnership not having been organized in the form of a mercantile partnership, and, therefore, the provisions of the Code of Commerce
not being applicable thereto (article 1670 of the Civil Code), it was dissolved by the death of Perpetua Bearneza, and falls under the provisions of
article 1700, subsection 3, of the same Code, and not under the exception established in the last paragraph of said article 1700 of the Civil Code.
Neither can it be maintained that the partnership continued to exist after the death of Perpetua, inasmuch as it does not appear that any stipulation
to that effect has ever been made by her and the defendant, pursuant to the provisions of article 1704 of the Code last cited.
The partnership having been dissolved by the death of Perpetua Bearneza, its subsequent legal status was that of a partnership in liquidation, and
the only rights inherited by her testamentary heir, the herein plaintiff, were those resulting from the said liquidation in favor of the deceased
partner, and nothing more. Before this liquidation is made, which up to the present has not been effected, it is impossible to determine what rights
or interests, if any, the deceased had, the partnership bond having been dissolved.
There is no sufficient ground for holding that a community of property existed between the plaintiff and the defendant, it not being known whether
the deceased still had any interest in the partnership property which could have been transmitted by will to the plaintiff. There being no community
of property, article 395 of the Civil Code cited by the plaintiff in support of his contention can have no application to the case at bar.
Neither can it be said that the partnership continued between the plaintiff and the defendant. It is true that the latter's act in requiring the heirs of
Perpetua to contribute to the payment of the expenses of exploitation of the aforesaid fishing industry was an attempt to continue the partnership,
but it is also true that neither the said heirs collectively, nor the plaintiff individually, took any action in response to that requirement, nor made any
promise to that effect, and therefore no new contract of partnership existed.
We find that the plaintiff has not sufficiently shown his right of action.
The judgment appealed from is modified, the same being affirmed insofar as it denies the plaintiff's claim for damages, and reversed insofar as it
declares the said plaintiff owner of one-half of the fish pond, "Alimango" and "Dalusan," here in dispute.
No special finding as to costs is made. So ordered.

G.R. No. L-10040 January 31, 1916

EUGENIA LICHAUCO, ET AL., Plaintiffs-Appellants, vs. FAUSTINO LICHAUCO, Defendant-Appellant.
Haussermann, Cohn and Fisher for plaintiffs.
Gibbs, McDonough and Blanco for defendant.
CARSON, J.:
This action was brought by two of the partners of an enterprise of which the defendant was manager ( gestor), to secure an accounting of its affairs,
and the payment to the plaintiffs of their respective shares of capital and profits.chanroblesvirtualawlibrary chanrobles virtual law library
The defendant admitted the allegations of the complaint as to the organization of the enterprise and the participation of the plaintiffs therein, but he
contended that the plaintiffs could not maintain this action under the terms of the written contract by virtue of which the enterprise was organized.
This contention having been overruled, an account of the affairs of the enterprise was submitted, and the parties having been given an opportunity
to offer evidence for and against certain dispute items of the account, judgment was rendered for the balance shown to be due the plaintiffs, after
allowing some of these disputed items and disallowing the rest. To this judgment, both plaintiffs and defendant excepted, and the record is now
before us on their respective bills of exceptions.chanroblesvirtualawlibrary chanrobles virtual law library
In October, 1901, a notarial instrument was executed in Manila, by the terms of which a partnership was duly organized for the purpose of carrying
on a rice-cleaning business at Dagupan, and for the purchase and sale of "palay" and rice. The articles of association, which were not recorded in the
mercantile registry, contain, among others, the following provisions:
2. The association will be named F. Lichauco Hermanos and will be domiciled in the center of its operations, that is, in the pueblo of Dagupan,
Province of Pangasinan.chanroblesvirtualawlibrary chanrobles virtual law library
3. The association cannot be dissolved except by the consent and agreement of two-thirds of its partners and in the event of the death of any of the
latter, the heirs of the deceased, if they be minors or otherwise incapacitated, shall be represented in the association by their legal representatives or
if two-thirds of the surviving partners agree thereto, the participation of the deceased partner may be
liquidated.chanroblesvirtualawlibrary chanrobles virtual law library
4. The management and direction of the association shall be in charged of Don Faustino Lichauco y Santos, who shall be domiciled in this city of
Manila, with ample powers to direct and manage the business; to carry out all manner of purchases and sales of "palay," rice, chattels, machinery
and whatsoever may be necessary and proper for the business of the association; to make all contracts of every kind related to said business, either
orally, in private documents or in public instruments, as he deems fit; to appoint subordinates and other employees such as may be necessary; and
finally to perform whatever acts and things he may deem suitable to the interest of the association; and to appear before the courts of justice and
other authorities and public offices in such matters as may concern the association and to appoint agents for those matters to which he cannot
attend personally.
The articles disclose that the capital invested in the enterprise was fixed at P100,000, of which amount P60,000 was contributed by the defendant
and his brothers in the form of machinery in a mill at Dagupan and the good will of the milling business formerly conducted at the place, the balance
of the capital being contributed by the plaintiffs and others in cash, in the following proportions: Eugenia Lichauco, P13,000; Catalino Arevalo,
P8,000; Mariano Nable Jose, P5,000; Tomas Roux, P4,000; Julita Lichauco, P10,000.chanroblesvirtualawlibrary chanrobles virtual law library
The business thus organized was carried on until May, 1904, when it was found to be unprofitable and discontinued by the defendant manager
( gestor); and thereafter, the machinery of the rice mil was dismantled by his orders, and offered for sale. No accounting ever was made to his
associates by the defendant until this action was instituted in October, 1912, although it appears that in the year 1905, Mariano Limjap, one of the
participants in the venture, demanded a rendition of accounts; and that Eugenia Lichauco, one of the plaintiffs in this action, made repeated
unsuccessful demands for the return of her share of the capital invested in the enterprise. And yet it further appears that during all that time the
defendant manager of the defunct enterprise had in his possession not less than P20,000, the cash balance on hand, over and above all claims of
indebtedness after suspending operations in 1904; and that since that time he received or should have received substantial sums of money from the
sale of the machinery of the dismantled mill.chanroblesvirtualawlibrary chanrobles virtual law library
There is evidence in the record tending to show that the defendant informed some of his associates, about the year 1906 or 1907, that the whole
enterprise was bankrupt; and it appears that some months prior to the institution of this action, he rendered upon demand of counsel, a so-called
account showing a balance to the credit of the enterprise of only P643.64; although at the trial, some six months afterwards, he expressly admitted
the existence of a cash balance of some P23,131.53, and the amount by the trial judge as due by him on account of the venture was P29,549.99. The
defendant explained that the account rendered to counsel for the plaintiffs showing a balance of P634.64 was mailed by one of his employees
without his knowledge, and that it was a stupid blunder which he greatly regretted; and it would seem that his statement as to the bankruptcy of the
enterprise were not intended to be understood as an assertion that there was no balance due the partners, but merely that the enterprise had not
paid, and that the losses of operation had exceeded the profits.chanroblesvirtualawlibrary chanrobles virtual law library
Giving the defendant the benefit of the doubt, we are inclined to accept these explanations of these incidents, as it is hardly possible that he could
have hoped to escape indefinitely the necessity of accounting for his management of the enterprise, and thus permanently retain in his own
possession the substantial balance due to his associates. But it is to be observed that, viewed for many standpoint, these statements, made and
rendered by the defendant as to the affairs of the association, taken together with the other evidence in the record, leave no room for doubt that
from the time he concluded the operations of the business in 1904 until the date of the institution of this action in 1912 he made no attempt to
account to his associates or to turn over to them the amount due them on a proper accounting.chanroblesvirtualawlibrary chanrobles virtual law
library
The assignments of error made by counsel for the defendant, as appellant, are as follows:
Error No. 1. - The trial court erred in rendering judgment in favor of the plaintiffs and against the defendant for any sum, without first decreeing a
dissolution of the association and final liquidation of its assets in accordance with paragraph 10 of the articles of association, and because such
judgment is not within the issues joined.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 2. - The trial court erred in charging the defendant with P5,500, the price of certain boilers and machinery sold to one Marciano Rivera by
Crisanto Lichauco, which amount never came into the possession of defendant.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 3. - The trial court erred in disallowing the credit of P60.36, taken by defendant for that amount expended in an attempt to make good the
sale and delivery to Marciano Rivera of the boilers and machinery mentioned in the second assignment of
error.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 4. - The court erred in charging the defendant with the P1,820, covered by stipulation of December 10, 1913, for the reason that the
defendant's liability under that stipulation can only accrue on the final dissolution and liquidation of the
association.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 5. - The court erred in rendering judgment against the defendant for the costs of the action.
The assignments of error made by refusing to condemn the defendant to the payment of interest at the legal rate from May 30, 1904, to date of
payment.
Error No. 1 - The court erred in refusing to condemn the defendant to the payment of interest at the legal rate of 6 per cent upon the credit balance
of the joint venture from May 30, 1904, to date of payment.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 2. - The court erred in refusing to allow interest at the legal rate of 6 per cent upon the sum of P1,147.44 from May 30, 1904, to date of
payment, said credit balance of the joint venture was unduly diminished by error in the conversion of gold
currency.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 3. - The court erred in refusing to allow the joint venture account the sum of P17, 746, being the value of 3,736 cavanes of rice at P4.75 per
cavan, for which the defendant has wholly failed to account.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 4. - The court erred in declining to allow the joint venture account the sum of P8,943.98 as interest upon said last-mentioned sum at the
legal rate.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 5. - The court erred in declining to allow the joint venture account the sum of P564.34, as interest at the legal rate upon the sum of P5,500,
for which the defendant has failed and refused to account.chanroblesvirtualawlibrary chanrobles virtual law library
Error No. 6. - The court erred in declining to credit the joint venture account with the sum of P2,498.46 as the amount due said account from
Mariano Nable Jose, together with interest thereon at the legal rate, amounting to P1,259.22.
We shall first examine the contentions of counsel for the defendant in support of his principal assignment of error, as a ruling in this regard is
necessary to the proper disposition of all the other assignments of error by both plaintiffs and defendant.chanroblesvirtualawlibrary chanrobles
virtual law library
Counsel for defendant says in his brief:
It is our contention, and we believe it to be unanswerable, that the dissolution and liquidation, either in whole or in part, of the association is
absolutely prohibited by paragraph 10 of the articles of association, except by and with the conformity and agreement of two-thirds of the partners,
and that as a consequence thereof the court, without allegations or proof of compliance with that paragraph and without making the other partners
parties to the action, had no power to decree a distribution either in whole or in part of the capital or assets of the
association.chanroblesvirtualawlibrary chanrobles virtual law library
It certainly cannot be seriously contended that part of the capital and assets of this association can be lawfully returned to and distributed between
the plaintiffs who constitute one-fifth of the total number of partners, as required by paragraph 10 of the articles of
association.chanroblesvirtualawlibrary chanrobles virtual law library
It is elementary that no lawful liquidation and distribution of capital and assets of any company or association can ever take place except upon
dissolution thereof.
These contentions of counsels for the defendant take no account of the provisions of both the Civil and Commercial Codes for the dissolution and
liquidation of the different classes of partnerships and mercantile associations upon the occurrence of certain contingencies not within the control of
the partners. The provisions of paragraph 10 of the articles of partnership prohibiting the dissolution of the association under review, except by the
consent and agreement of two-thirds of its partners, denied the right to a less number of the partners to effect a dissolution of the partnership
through judicial intervention or otherwise; but in no wise limited or restricted the rights of the individual partners in the event the dissolution of the
association was effected, not by any act of theirs, but by the express mandate of statutory law. It would be absurd and unreasonable to hold that
such an association could never be dissolved and liquidated without the consent and agreement of two-thirds of its partners notwithstanding that it
had lost all its capital, or had become bankrupt, or that the enterprise for which it had been organized had been concluded or utterly
abandoned.chanroblesvirtualawlibrary chanrobles virtual law library
Chapter 3 of Title VIII [Book IV,] of the Civil Code prescribes the means by which partnership ( sociedades) as defined in that code, may be
terminated. The first article of that chapter is as follows:
1700. Partnership is extinguished:chanrobles virtual law library
(1) When the term for which it was constituted expires.chanroblesvirtualawlibrary chanrobles virtual law library
(2) When the thing is lost, or the business for which it was constituted ends.chanroblesvirtualawlibrary chanrobles virtual law library
(3) By the natural death, civil interdiction, or insolvency of any of the partners, and in the case provided for in article
1699.chanroblesvirtualawlibrary chanrobles virtual law library
(4) By the will of any of the partners, subject to the provisions of articles 1705 and 1707.chanroblesvirtualawlibrary chanrobles virtual law library
Partnerships, to which article 1670 refers, are excepted from the provisions of Nos. 3 and 4 of this article, in the cases in which they should exist,
according to the Code of Commerce.chanroblesvirtualawlibrary chanrobles virtual law library
1670. Civil partnerships, on account of the objects for which they are destined, may adopt all the forms accepted by the Code of Commerce. In this
case, the provisions of the same shall be applicable, in so far as they are not in conflict with those of the present Code.
Articles 221 and 222 of the Code of Commerce are as follows:
221. Associations of any kind whatsoever shall be completely dissolved for the following reasons:chanrobles virtual law library
(1) The termination of the period fixed in the articles of association of the conclusion of the enterprise which constitutes its
purpose.chanroblesvirtualawlibrary chanrobles virtual law library
(2) The entire loss of the capital.chanroblesvirtualawlibrary chanrobles virtual law library
(3) The failure of the association.chanroblesvirtualawlibrary chanrobles virtual law library
222. General and limited copartnerships shall furthermore be totally dissolved for the following reasons:chanrobles virtual law library
(1) The death of one of the general partners if the articles of copartnership do not contain an express agreement that the heirs of deceased partner
are to continue in the copartnership, or an agreement to the effect that said copartnership will continue between the surviving
partners.chanroblesvirtualawlibrary chanrobles virtual law library
(2) The insanity of a managing partner or any other cause which renders him incapable of administering his
property.chanroblesvirtualawlibrary chanrobles virtual law library
(3) The failure of any of the general partners.
It cannot be doubted that under these provisions of law the association of which the defendant was nominated manager ( gestor) was totally
dissolved in the year 1904, when the rice mill for the operation of which it was organized was dismantled, the machinery offered for sale and the
whole enterprise concluded and abandoned.chanroblesvirtualawlibrary chanrobles virtual law library
Upon the dissolution of the association in 1904 it became the duty of the defendant to liquidate its affairs and account to his associates for their
respective shares in the capital invested - this not merely from the very nature of his relation to the enterprise and of his duties to those associated
with him as partners, but also by the express mandate of the law. The association having been dissolved by the termination and abandonment of the
enterprise for which it was organized, he owed this duty to liquidate and account to all and to each of his associates, and upon his failure to perform
that duty, all or any of them had a clear legal right to compel him to fulfill it. Each of his associates had a perfect right to demand for himself a full,
complete and satisfactory accounting, and in the event that he conceived himself aggrieved in this regard, to institute the appropriate judicial
proceedings to secure relief. Doubtless, in order to avoid a multiplicity of actions, the defendant in such an action could require all the associates to
be made parties, but the right of an individual member of the association to recover his share in the enterprise and to assert his individual claim for
redress, wholly independent of the action or attitudes of his associates, could be in no wise affected thereby. The other associates would be proper,
but not necessary, parties to an action of this kind; and when, as in the case at bar, the defendant proceeds to trial without objection on the express
ground that all the associates in the enterprise have not been made parties to the action, he cannot thereafter be heard to raise such an objection
for the purpose of challenging any judgment which may be rendered therein.chanroblesvirtualawlibrary chanrobles virtual law library
Although the enterprise was organized in the year 1901 for the purpose of conducting mercantile operations, including the buying and selling of
"palay" and rice, the articles of partnership or association were not registered in the mercantile registry in accordance with the provisions of articles
17 and 119 of the Commercial Code. It was therefore a mere unregistered commercial partnership, and the association never became in the legal
sense a juridical person, nor did it attain the dignity, rights or privileges accorded the different classes of compañias mercantiles (mercantile
partnerships), discussed in Title 1 of Book 2 of the Commercial Code. Still, under the provisions of the above-cited article 1670 of the Civil Code, if it
be found that the association is clothed with the forms of any of the commercial association or partnerships recognized in the Commercial Code, the
provisions of that code, in so far as they are not in conflict with those of the Civil Code, may be relied upon in an attempt to define the legal relations
of the association and its members. Though the unregistered articles of partnership gave the association a form of organization closely assimilated to
that of a regular "compañia en comandita," as prescribed in the Commercial Code, except that the name designated in the articles did not include
the words "y compañia" (and company) and the additional words "sociedad en comandita," it appears to have been organized and conducted in
substantially the manner and form prescribed for "cuentas en participacion" (joint accounts) in articles 239-243 of that
Code.chanroblesvirtualawlibrary chanrobles virtual law library
The plaintiffs alleged in their complaint and the defendant admitted in his answer that the contract was one of a "sociedad de cuentas en
participacion" (joint account partnership) of which the defendant was gestor (manager). In his brief on appeal, however, counsel for defendant
intimates that under article 241 of the Commercial Code, the adoption in the articles of partnership of a firm name deprived the parties of the rights
and privileges secured to those interested in cuentas en participacion under the provisions of the Commercial
Code.chanroblesvirtualawlibrary chanrobles virtual law library
But whatever effect the inclusion or omission of a firm name in the articles of partnership may have had as to third persons dealing with the
partnership, we are of opinion that as between the associates themselves, their mutual rights, duties and obligations may properly be determined
upon the authority of article 1670 of the Civil Code by the provisions of the Commercial Code touching partnerships, the form of which in all other
respects, the partners have adopted in their articles of partnership.chanroblesvirtualawlibrary chanrobles virtual law library
The duty of the defendant to liquidate the affairs of the enterprise and to account to his associates promptly upon the dissolution of the association
in the year 1904 is expressly prescribed in the Commercial Code, whether we regard the association, so far as it affects the mutual rights and
obligations of the partners, as clothed with the forms of a "sociedad de cuentas en participacion" (joint account partnership) or a "sociedad en
comindata."chanrobles virtual law library
Article 243 of the Code of Commerce prescribes with reference to "cuentas en participacion" (joint accounts) that:
243. The liquidation shall be effected by the manager, and after the transactions have been concluded he shall render a proper account of its results.
Articles 229 and 230 of the same Code are as follows:
229. In general or limited copartnerships, should there be no opposition on the part of any of the partners, the persons who managed the common
funds shall continue in charge of the liquidation; but should all the partners not agree thereto a general meeting shall be called without delay, and
the decision adopted at the same shall be enforced with regard to the appointment of liquidators from among the members of the association or
not, as well as in all that refers to the form and proceedings of the liquidation and the management of the common
funds.chanroblesvirtualawlibrary chanrobles virtual law library
230. Under the penalty of removal the liquidators shall -chanrobles virtual law library
(1) Draw up and communicate to the members, within the period of twenty days, an inventory of the common property, with a balance of the
association in liquidation according to its books.chanroblesvirtualawlibrary chanrobles virtual law library
(2) Communicate in the same manner to the members every month the condition of the liquidation.
We conclude that an express statutory obligation imposed upon the defendant an imperative obligation to proceed without delay to the liquidation
of the association in the year 1904 and the further duty to account to his associates for the result of that liquidation. While he appears to have gone
forward with the liquidation far enough to collect all the cash resources of the association into his own hands, how utterly failed neglected to
account therefor to his associates or to make any attempt so to do, and we are of opinion that the plaintiffs were clearly entitled to bring this action
to compel an accounting, and the payment of their respective shares of the capital invested, together with damages resulting from the failure of the
defendant to perform the duty expressly imposed upon him by statute. The damages arising from the failure to account consisted of the loss of the
use of the money to which they would have been entitled upon a proper accounting, from the date at which it should have been turned over by the
defendant until it is actually paid by him, that is to say, interest on that amount at the rate of six per centum per annum until
paid.chanroblesvirtualawlibrary chanrobles virtual law library
What has been said disposes adversely of the contentions of the defendant in support of his assignments of errors Nos. 1 and 5; and sustains the
contentions of the plaintiffs in their assignments of errors Nos. 1 and 2, to the extent that interest at the rate of six per centum per annum should
have been allowed upon the credit balance of the enterprise from May 30, 1904, the date when it should have been distributed among his associates
by the defendant had he performed his statutory duty in that regard. This balance (including the item mentioned in plaintiff's assignment of error
No . 2) we fix at P23, 131.53, adopting as a basis for our finding in this regard, the findings and conclusions of the trial judge, and disregarding the
possibility that had defendant accounted promptly to his associates, interest might not have been chargeable on some of the smaller items in
included in the account until some little time after the date just mentioned.chanroblesvirtualawlibrary chanrobles virtual law library
As to the other assignments of error it must suffice to say that we have carefully examined the record and have arrived at the following
conclusions:chanrobles virtual law library
With relation to the item of account referred to in defendant's assignment of error No . 2 and plaintiff's assignment No. 5, we hold that the
defendant's account was properly charged by the trial judge with the sum of P5,500, the purchase price of certain machinery sold by him and for
which, under all the circumstances, he must account, together with interest at the rate of six per centum per annum from January 8, 1912, the date
of sale to Marciano Rivera.chanroblesvirtualawlibrary chanrobles virtual law library
With relation to the items mentioned in plaintiff's assignments of errors Nos. 3 and 4, we hold that the trial judge properly declines to charge the
defendant's account with the amounts mentioned therein, the evidence of record not being sufficient to establish his liability therefor as manager
or gestor of the enterprise.chanroblesvirtualawlibrary chanrobles virtual law library
With relation to the matter referred to in plaintiff's assignment of error number 6 and defendant's assignment No. 4, we are of opinion that the trial
judge properly disposed of the issues between the parties in this regard, as they were submitted to him and as they are disclosed by the record
brought here on appeal.chanroblesvirtualawlibrary chanrobles virtual law library
We find no merit in defendant's assignment of error numbered 3.chanroblesvirtualawlibrary chanrobles virtual law library
Twenty days hereafter let judgment be entered reversing the judgment of the lower court, without special condemnation of the costs in this
instance, and directing the return of the record to the trial court, wherein judgment will be entered in accordance herewith, and ten days thereafter
let the record be remanded in confirmity therewith. So ordered.chanroblesvirtualawlibrary chanrobles virtual la

G.R. No. L-22825 February 14, 1925

TESTATE ESTATE OF LAZARO MOTA, deceased, ET AL., plaintiffs-appellants,
vs.
SALVADOR SERRA, defendant-appellee.
Eduardo Gutierrez Repide for appellants.
Hilado and Hilado, Fisher, DeWitt, Perkins and Brady, Araneta and Zaragosa, Antonio Sanz and Jose Galan y Blanco for appellee.
VILLAMOR, J.:
On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, marked Exhibit A, for the construction and exploitation of a
railroad line from the "San Isidro" and "Palma" centrals to the place known as "Nandong." The original capital stipulated was P150,000. It was
covenanted that the parties should pay this amount in equal parts and the plaintiffs were entrusted with the administration of the partnership. The
agreed capital of P150,000, however, did not prove sufficient, as the expenses up to May 15, 1920, had reached the amount of P226,092.92, as per
statement Exhibit B, presented by the administrator and O.K.'d by the defendant.
January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga, whereby
he sold to the latter the estate and central known as "Palma" with its running business, as well as all the improvements, machineries and buildings,
real and personal properties, rights, choses in action and interests, including the sugar plantation of the harvest year of 1920 to 1921, covering all the
property of the vendor. This contract was executed before a notary public of Iloilo and is evidenced by Exhibit 1 of the defendant, paragraph 5 of
which reads as follows:
5. The party of the first part hereby states that he has entered into a contract with the owners of the "San Isidro" Central for the
construction, operation, and exploitation of a railroad line of about 10 kilometers extending from the "Palma" Central and "S an Isidro"
Central to a point known as "Nandong," the expenses until the termination of which shall be for the account of the "San Isidro" Central, and
of which expenses, one-half shall be borne by the "Palma" Central with the obligation to reimburse same within five (5) years with interest
at the rate of 10 per cent per annum to the said "San Isidro" Central. The vendee hereby obligates himself to respect the aforesaid contract
and all obligations arising therefrom.
Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga renounced all his rights under the contract of January 29,
1920, in favor of Messrs. Venancio Concepcion and Phil. C. Whitaker. This gave rise to the fact that on July 17, 1920, Venancio Concepcion and Phil.
C. Whitaker and the herein defendant executed before Mr. Antonio Sanz, a notary public in and for the City of Manila, another deed of absolute sale
of the said "Palma" Estate for the amount of P1,695,961.90, of which the vendor received at the time of executing the deed the amount of
P945,861.90, and the balance was payable by installments in the form and manner stipulated in the contract. The purchasers guaranteed the unpaid
balance of the purchase price by a first and special mortgage in favor of the vendor upon the hacienda and the central with all the improvements,
buildings, machineries, and appurtenances then existing on the said hacienda.
Clause 6 of the deed of July 17, 1920, contains the following stipulations:
 6. Messrs. Phil. C. Whitaker and Venancio Concepcion hereby state that they are aware of the contract that Mr. Salvador Serra has with the
proprietors of the "San Isidro" Central for the operation and exploitation of a railroad line about 10 kilometers long from the "Palma" and
"San Isidro" centrals to the place known as "Nandong;" and hereby obligate themselves to respect the said contract and subrogate
themselves into the rights and obligations thereunder. They also bind themselves to comply with all the contracts heretofore entered by
the vendor with the customers, coparceners on shares and employees.
Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the plaintiffs the one-half of the railroad line pertaining to
the latter, executing therefor the document Exhibit 5. The price of this sale was P237,722.15, excluding any amount which the defendant might be
owing to the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C. Whitaker paid the sum of P47,544.43 only. In the deed Exhibit 5, the
plaintiffs and Concepcion and Whitaker agreed, among other things, that the partnership "Palma" and "San Isidro," formed by the agreement of
February 1, 1919, between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and in behalf of his brother , Felix and Dionisio
Vidaurrazaga, should be dissolved upon the execution of this contract, and that the said partnership agreement should be totally cancelled and of no
force and effect whatever.
So it results that the "Hacienda Palma," with the entire railroad, the subject-matter of the contract of partnership between plaintiffs and defendant,
became the property of Whitaker and Concepcion. Phil. C. Whitaker and Venancio Concepcion having failed to pay to the defendant a part of the
purchase price, that is, P750,000, the vendor, the herein defendant, foreclosed the mortgage upon the said hacienda, which was adjudicated to him
at the public sale held by the sheriff for the amount of P500,000, and the defendant put in possession thereof, including what was planted at the
time, together with all the improvements made by Messrs. Phil. C. Whitaker and Venancio Concepcion.
Since the defendant Salvador Serra failed to pay one-half of the amount expended by the plaintiffs upon the construction of the railroad line, that is,
P113,046.46, as well as Phil. C. Whitaker and Venancio Concepcion, the plaintiffs instituted the present action praying: (1) That the deed of February
1, 1919, be declared valid and binding; (2) that after the execution of the said document the defendant improved economically so as to be able to
pay the plaintiffs the amount owed, but that he refused to pay either in part or in whole the said amount notwithstanding the several demands made
on him for the purpose; and (3) that the defendant be sentenced to pay plaintiffs the aforesaid sum of P113,046.46, with the stipulated interest at 10
per cent per annum beginning June 4, 1920, until full payment thereof, with the costs of the present action.
Defendant set up three special defenses: (1) The novation of the contract by the substitution of the debtor with the conformity of the creditors; (2)
the confusion of the rights of the creditor and debtor; and (3) the extinguishment of the contract, Exhibit A.
The court a quo in its decision held that there was a novation of the contract by the substitution of the debtor, and therefore absolved the defendant
from the complaint with costs against the plaintiffs. With regard to the prayer that the said contract be declared valid and binding, the court held
that there was no way of reviving the contract which the parties themselves in interest had spontaneously and voluntarily extinguished. (Exhibit 5.)
Plaintiffs have appealed from this judgment and as causes for the review, they allege that the trial court erred: (a) In holding that Messrs. Whitaker
and Concepcion, upon purchasing the "Palma" Central, were subrogated in the place of the defendant in all his rights and obligations under the
contract relating to the railroad line existing between the "Palma" and the "San Isidro" centrals and that the plaintiffs agreed to this subrogation; (b)
in holding that the deed Exhibit A of February 1, 1919, had been extinguished in its entirety and made null and void by the agreement Exhibit 5 dated
December 16, 1920; (c) in absolving the defendant from the complaint and in sentencing the plaintiffs to pay the costs; and (d) in not sentencing the
defendant to pay the plaintiffs the sum of P113,046.46, with legal interest at 10 per cent per annum from June 4, 1920, until full payment, with costs
against the defendant.
Taking for granted that the defendant was under obligation to pay the plaintiffs one-half of the cost of the construction of the railroad line in
question, by virtue of the contract of partnership Exhibit A, the decisive point here to determine is whether there was a novation of the contract by
the substitution of the debtor with the consent of the creditor, as required by article 1205 of the Civil Code. If so, it is clear that the obligation of the
defendant was, in accordance with article 1156 of the same code, extinguished.
It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor.
This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by
new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express under the principle
that renuntiatio non praesumitur, recognized by the law in declaring that a waiver of right may not be performed unless the will to waive is
indisputably shown by him who holds the right.
The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's obligation to the plaintiffs is of no avail, if the latter
have not expressly consented to the substitution of the first debtor. Neither can the letter, Exhibit 6, on page 87 of the record be consider ed as proof
of the consent of the plaintiffs to the substitution of the debtor, because that exhibit is a letter written by plaintiffs to Phil. C. Whitaker and Venancio
Concepcion for the very reason that the defendant had told them (plaintiffs) that after the sale of the "Hacienda Palma" to Messrs. Phil. C. Whitaker
and Venancio Concepcion, the latter from then on would bear the cost of the repairs and maintenance of the railroad line and of the construction of
whatever addition thereto might be necessary. So the plaintiffs by their letter of August 14th, submitted a statement of account to Phil. C. Whitaker
and Venancio Concepcion containing the accounts of the "San Isidro" Central, as stated June 30, 1920, saying that they had already explained
previously the reason for the increase in the expenses and since the retiring partner, Mr. Serra, had already given conformity with the accounts, as
stated May 15, 1920, it remained only to hear the conformity of the new purchasers for the accounts covering the period from May 15 to June 30,
1920, and their authority for future investments, or their objection, if any, to the amounts previously expended. Neither can the testimony of Julio
Infante in connection with Exhibit 7 be taken as evidence of the consent of the plaintiffs to the change of the person of the debtor for that of Messrs.
Phil. C. Whitaker and Venancio Concepcion. This witness testified, in substance, that he is acquainted with the partnership formed by the owners of
the "Hacienda Palma" and Hacienda San Isidro" for the construction of the railroad line; that the cost of the construction thereof was originally
estimated at P150,000; that the owner of the "Hacienda Palma" would pay one-half of this amount; that when the "Hacienda Palma" was sold to
Messrs. Phil. C. Whitaker and Venancio Concepcion, the latter agreed to pay one-half of the cost of P150,000; that as the cost of construction
exceeded P200,000, he, as an employee of Messrs. Phil. C. Whitaker and Venancio Concepcion, could not O.K. the accounts as pr esented by the
plaintiffs, and suggested that they take up in writing their points of view directly with Messrs. Phil. C. Whitaker and Venancio Concepcion. Then the
plaintiffs did as suggested, and wrote the letter Exhibit 7 in which they asked the new owners of the "Hacienda Palma" their decision upon the
following three questions: 1. Will the "Palma" Central accept the statement of account as presented by the "San Isidro" Central regarding the actual
cost of the railroad line "Palma-San Isidro-Nandong?" 2. Is the "Palma" Central willing to continue as co-proprietor of the railroad line for the
exploitation of the sugar-cane business of "Nandong" and neighboring barrios, and therefore to pay 50 per cent of the expenses that may be
incurred in completing the line?
It was but natural that the plaintiffs should have done this. Defendant transferred his hacienda to Messrs. Phil. C. Whitaker and Venancio Concepcion
and made it known to the plaintiffs that the new owners would hold themselves liable for the cost of constructing the said railroad line. Plaintiffs
could not prevent the defendant from selling to Phil. C. Whitaker and Venancio Concepcion his "Hacienda Palma" with the rights that he had over the
railroad in question. The defendant ceased to be a partner in said line and, therefore, the plaintiffs had to take the vendee s as their new partners.
Plaintiffs had to come to an understanding with the new owners of the "Hacienda Palma" in connection with the railroad line "Palma-San Isidro-
Nandong." But in all of this, there was nothing to show the express consent, the manifest and deliberate intention of the plaintiffs to exempt the
defendant from his obligation and to transfer it to his successors in interest, Messrs. Phil. C. Whitaker and Venancio Concepcion.
The plaintiffs were not a party to the document Exhibit 1. Neither in this document, nor in others in the record, do we find any stipulation whereby
the obligation of the defendant was novated with the consent of the creditor, and as it has been held in the case of Martinez vs. Cavives (25 Phil.,
581), the oral evidence tending to prove such a fact as this is not in law sufficient.
As has been said, in all contracts of novation consisting in the change of the debtor, the consent of the creditor is indispensable, pursuant to article
1205 of the Civil Code which reads as follows:
Novation which consists in the substitution of a new debtor in the place of the original one may be made without the knowledge of the
latter, but not without the consent of the creditor.
Mr. Manresa in his commentaries on articles 1205 and 1206 of the Civil Code (vol. 8, 1907 ed., pp. 424-426) says as follows:
Article 1205 clearly says in what this kind of novation must consist, because in stating that another person must be substituted in lieu of
the debtor, it means that it is not enough to extend the juridical relation to that other person, but that it is necessary to place the latter in
the same position occupied by the original debtor.
Consequently, the obligation contracted by a third person to answer for the debtor, as in the case of suretyship, in the last analysis, does
not work as a true novation, because the third person is not put in the same position as the debtor — the latter continues in his same place
and with the same obligation which is guaranteed by the former.
Since it is necessary that the third person should become a debtor in the same position as the debtor whom he substitutes, this change and
the resulting novation may be respected as to the whole debt, thus untying the debtor from his obligation, except the eventual
responsibilities of which we shall speak later, or he may continue with the character of such debtor and also allow the third person to
participate in the obligation. In the first case, there is a complete and perfect novation; in the second, there is a change that does not free
the debtor nor authorize the extinguishment of the accessory obligations of the latter. In this last hypothesis, if there has been no
agreement as to solidarity, the first and the new debtor should be considered as obligated severally.
The provisions of article 1205 which require the consent of the creditor as an indispensable requisite in this kind of novation and not
always that of the debtor, while not making it impossible to express the same, imply the distinction between these two forms of novation
and it is based on the simple consideration of justice that since the consequences of the substitution may be prejudicial to the creditor, but
not to the debtor, the consent of the creditor alone is necessary.
The two forms of this novation, also impliedly recognized by article 1206 which employs the word "delegate," as applied to the debt, are
the expromission and the delegation. Between these, there is a marked difference of meaning and, as a consequence, a logical difference
of requisite and another clear difference as to their effects, of which we shall speak later.
In the expromission, the initiative of the change does not emanate from the debtor and may be made even without his consent, since it
consists in a third person assuming his obligation; it logically requires the consent of this third man and of the creditor and in this last
requisite lies the difference between novation and payment, as the latter can be effected by a third person even against the will of the
creditor, whereas in the former case it cannot.
In the delegation, the debtor offers and the creditor accepts a third person who consents to the substitution so that the intervention and
the consent of these three persons are necessary and they are respectively known as delegante, delegatario, and delegado. It must be
noted that the consent need not be given simultaneously and that it may be given afterwards, as for example, that of the creditor
delegatario to the proposition of the debtor accepted by the delegado.
Delegation notably differs from the mere indication made by the debtor that a third person shall pay the debt; in this case, there is no
novation and the former is not acquitted of his obligation and his relations with the third person are regulated by the rules of agency. The
French Code in article 1276 expressly provides for this case, as well as the inverse one where the debtor points out somebody else to
answer for the payment, declaring that there is no novation in either case. The same sound criterion is impliedly accepted by our Code.
In the case of E.C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), it appears that McCullough and Co., Inc., sold to Veloso a real estate worth
P700,000 on account of which Veloso paid P50,000, promising to pay the balance at the times and manner stipulated in the contract. He further
bound himself to pay 10 per cent of the amount of the debt as attorney's fees in case of litigation. To secure the unpaid balance of the purchaser
price he executed a first mortgage upon the property in favor of the vendor. Subsequently, Veloso sold the property for P100,000 to Joaquin Serna
who bound himself to respect the mortgage in favor of McCullough and Co., Inc., and to assume Veloso's obligation to pay the unpaid balance of the
purchase price of the property at the times agreed upon in the contract between Veloso and McCullough and Co., Inc.
Veloso had paid on account of the price the amount of P50,000, and Serna also made several payments aggregating the total amount of P250,000.
But after this, neither Veloso nor Serna made further payments and thus gave cause for a litigation. The court in deciding the case said:
The defendant contends that having sold the property to Serna, and the latter having assumed the obligation to pay the plaintiff the unpaid
balance of the price secured by the mortgage upon the property, he was relieved from this obligation and it then devolved upon Serna to
pay the plaintiff. This means that as a consequence of the contract between the defendant and Serna, the contract between the defendant
and the plaintiff was novated by the substitution of Serna as a new debtor. This is untenable. In order that this novation may take place,
the law requires the consent of the creditor (art. 1205 of the Civil Code). The plaintiff did not intervene in the contract between Veloso and
Serna and did not expressly give his consent to this substitution. Novation must be express, and cannot be presumed.
In Martinez vs. Cavives (25 Phil., 581), it was held that:
. . . The consent of the new debtor is as essential to the novation as is that of the creditor . . . .
There is no express stipulation in any of the documents of record that the obligation of the defendant was novated, and the parol evidence
tending to show that it was novated is not sufficient in law to establish that fact.
The same doctrine was upheld in the case of Vaca vs. Kosca (26 Phil., 388):
A new debtor cannot be substituted for the original obligor in the first contract without the creditor's consent.
The supreme court of Spain has constantly laid down the same doctrine with regard to novation of contracts:
The obligations and rights in a contract cannot be novated with regard to a third person who has not intervened in the execution thereof.
(Decision of June 28, 1860.)
Novation by the change of debtors cannot be effected without the express approval of the creditor. (Decisions of February 8, 1862 and
June 12, 1867.)
Novation should not be established by presumptions but by the express will of the parties. (Decisions of February 14, 1876 and June 16,
1883.)
In order that novation of a contract by subrogation of the debtor may take effect and thus liberate the first debtor from the obligation, it is
necessary that the subrogation be made with the consent of the creditor. (Decision of March 2, 1897.)
It is undeniable that obligations judicially declared, as well as those acquired by any title, can be novated by substituting a new debtor in
place of the primitive, only when the creditor gives his consent to the substitution. (Decision of November 15, 1899.)
Novation can in no case be presumed in contracts, but it is necessary that it should result from the will of the parties, or that the old and
the new one be altogether incompatible. (Decision of December 31, 1904.)
An obligation cannot be deemed novated by means of modifications which do not substantially change the essence thereof, nor when it is
not extinguished by another obligation, nor when the debtor is not substituted. (Decision of March 14, 1908.)
The consent of the creditor required in a novation consisting of the change of debtors (art. 1205, Civil Code) must appear in an express and
positive manner and must be given with the deliberate intention of exonerating the primitive debtor of his obligations and tr ansfer them
wholly upon the new debtor. (Decision of June 22, 1911.)
In the decision in the case of Martinez vs. Cavives, supra, the following decisions of the several courts of the United States are cited, wherein this
question was decided in the same manner:
In Latiolais, admrx. vs. Citizens' Bank of Louisiana (33 La. Ann., 1444), one Duclozel mortgaged property to the defendant bank for the triple
purpose of obtaining shares in the capital stock of the bank, bonds which the bank was authorized to issue, and loans to him as a
stockholder. Duclozel subsequently sold this mortgaged property to one Sproule, who, as one of the terms of the sale, assumed the
liabilities of his vendor to the bank. Sproule sold part of the property to Graff and Chalfant. The debt becoming due, the bank brought suit
against the last two named and Sproule as owners. Duclozel was not made a party. The bank discontinued these proceedings and
subsequently brought suit against Latiolais, administratrix of Duclozel, who had died.
The court said: "But the plaintiff insists that in its petition in the proceeding first brought the bank ratified the sale made by Duclozel to
Sproule, and by the latter to other parties, in treating them as owners. Be that so, but it does not follow in the absence of either a formal
and express or of an implied consent to novate, which should be irresistibly inferred from surrounding circumstances, that it has
discharged Duclozel unconditionally, and has accepted those parties as new delegated debtors in his place. Nemo presumitur donare.
"Novation is a contract, the object of which is: either to extinguish an existing obligation and to substitute a new one in its place;
or to discharge an old debtor and substitute a new one to him; or to substitute a new creditor to an old creditor with regard to
whom the debtor is discharged.
"It is never presumed. The intention must clearly result from the terms of the agreement or by a full discharge of the original
debt. Novation by the substitution of a new debtor can take place without the consent of the debtor, but the delegation does not
operate a novation, unless the creditor has expressly declared that he intends to discharge with delegating debtor, and the
delegating debtor was not in open failure or insolvency at the time. The mere indication by a debtor of a person who is to pay in
his place does not operate a novation. Delegatus debitor est odiosus in lege.
 "The most that could be inferred would be that the bank in the exercise of a sound discretion, proposed to better its condition by
accepting an additional debtor to be and remain bound with the original one."
In Fidelity L. & T. Co. vs. Engleby (99 Va., 168), the court said: "Whether or not a debt has been novated is a question of fact and depends
entirely upon the intention of the parties to the particular transaction claimed to be novated. In the absence of satisfactory proof to the
contrary, the presumption is that the debt has not been extinguished by taking the new evidence in the absence of an intention expressed
or implied, being treated as a conditional payment merely."
In Hamlin vs. Drummond (91 Me., 175; 39 A., 551), it was said that novation is never presumed but must always be proven. In
Netterstorn vs. Gallistel (110 Ill. App., 352), it was said that the burden of establishing a novation is on the party who asserts its existence;
that novation is not easily presumed; and that it must clearly appear before the court will recognize it.
Notwithstanding the doctrines above quoted, defendant's counsel calls our attention to the decision of the supreme court of S pain of June 16, 1908,
wherein it was held that the provisions of article 1205 of Code do not mean nor require that the consent of the creditor to the change of a debtor
must be given just at the time when the debtors agree on the substitution, because its evident object being the full protection of the rights of the
creditor, it is sufficient if the latter manifests his consent in any form and at any time as long as the agreement among the debtors holds good. And
defendant insists that the acts performed by the plaintiffs after the "Hacienda Palma" was sold to Messrs. Phil. C. Whitaker and Venancio Concepcion
constitute evidence of the consent of the creditor. First of all, we should have an idea of the facts upon which that decision was rendered by the
supreme court of Spain.
A partnership known as "La Azucarera de Pravia" obtained a fire insurance policy from the company "La Union y Fenix Espanol," by virtue of which,
said company insured in consideration of an annual premium of 3,000 pesetas, the buildings, machinery and other apparatuses pertaining to the
"Pravia Factory" for ten years and for half their value, and another insurance from another insurance company insuring the same property and
effects for the other half of their value.
Later, "La Azucarera de Pravia," with other sugar companies, ceded all its property to another company known as "Sociedad General Azucarera de
España," in which in consideration of certain amount of stock that the said "Sociedad General Azucarera de España" issued to the "La Azucarera de
Pravia," the latter was merged with the former. After the cession, "La Union y Fenix Expañol" sued the "Sociedad General Azucarera de España"
demanding the payment of the premium that should have been paid by the "La Azucarera de Pravia," which payment the "Sociedad General
Azucarera de España" refused to make on the ground that the "La Azucarera de Pravia" was not merged with the "Sociedad General Azucarera de
España," but merely transferred its properties to the latter in consideration of the stock that was issued to the "La Azucarera de Pravia." It was
further contended by the "Sociedad General Azucarera de España" that even if it were true that in the contract of cession it appeared that the "La
Azucarera de Pravia" was merged with the "Sociedad General Azucarera de España," nevertheless, there was no such merger in law, for in truth and
in fact, the "La Azucarera de Pravia" had ceded only its property, but not its rights and obligations; that the existence of the partnership known as "La
Azucarera de Pravia" was proven by its registration in the mercantile register, which was not cancelled, did it contain any statement to the effect that
the "La Azucarera de Pravia" had been extinguished or had ceased to do business even after the cession of properties to the "Sociedad General
Azucarera de España." Another argument advanced by the "Sociedad General" was that at the time the "Azucarera de Pravia" ceded its properties to
the "Sociedad General Azucarera de España," the insurance company "La Union y Fenix Espanol" did not assent to the subrogation of the "Sociedad
General Azucarera" into the rights and obligations of the "Azucarera de Pravia," assuming that there had been such a subrogation or substitution of a
debtor by another.
The supreme court of Spain gave judgment in favor of the "La Union y Fenix Español" insurance company for the following reasons:
1. While it is true that it cannot be strictly said that "La Azucarera de Pravia" was merged with the "Sociedad General Azucarera de España,"
the document whereby the property of the "La Azucarera de Pravia" was ceded to the "Sociedad General Azucarera de España" clearly and
expressly recites that this company upon taking charge of the immovable property of the "La Azucarera de Pravia" accepted in general,
with respect to the property ceded, "everything belonging to the same," after making provisions about active and passive easements,
contracts for transportation and other matters.
The supreme court held that by virtue of the words hereinabove quoted, the "Sociedad General Azucarera de España" took over the obligation to pay
the insurance premiums of the "La Azucarera de Pravia" inasmuch as said insurance pertained to the property that was ceded.
2. While it is true that "La Union y Fenix Español" insurance company did not give its consent to the contract of cession at the moment of
its execution, yet the mere fact that the said insurance company now sues the "Sociedad General Azucarera de España" is an
incontrovertible proof that the said insurance company accepts the substitution of the new debtor.
By comparing the facts of that case with the defenses of the case at bar, it will be seen that, whereas in the former case the creditor sued the new
debtor, in the instant case the creditor sues the original debtor. The supreme court of Spain in that case held that the fact that the creditor sued the
new debtor was proof incontrovertible of his assent to the substitution of the debtor. This would seem evident because the judicial demand made on
the new debtor to comply with the obligation of the first debtor is the best proof that the creditor accepts the change of the debtor. His complaint is
an authentic document where his consent is given to the change of the debtor. We are not holding that the creditor's consent must necessarily be
given in the same instrument between the first and the new debtor. The consent of the creditor may be given subsequently, but in either case it
must be expressly manifested. In the present case, however, the creditor makes judicial demand upon the first debtor for the fulfillment of his
obligation, evidently showing by this act that he does not give his consent to the substitution of the new debtor. We are of the opinion that the
decision of the supreme court of Spain of June 16, 1908, cannot be successfully invoked in support of defendant's contention. Wherefore, we hold
that in accordance with article 1205 of the Civil Code, in the instant case, there was no novation of the contract, by the change of the person of the
debtor.
Another defense urged by the defendant is the merger of the rights of debtor and creditor, whereby under article 1192 of the Civil Code, the
obligation, the fulfillment of which is demanded in the complaint, became extinguished. It is maintained in appellee's brief that the debt of the
defendant was transferred to Phil. C. Whitaker and Venancio Concepcion by the document Exhibit 1. These in turn acquired the credit of the
plaintiffs by virtue of the debt, Exhibit 5; thus the rights of the debtor and creditor were merged in one person. The argument would at first seem to
be incontrovertible, but if we bear in mind that the rights and titles which the plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only
to one-half of the railroad line in question, it will be seen that the credit which they had against the defendant for the amount of one-half of the cost
of construction of the said line was not included in the sale contained in Exhibit 5. That the plaintiffs sold their rights and titles over one-half of the
line, is evident from the very Exhibit 5. The purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the payment of the price, executed a
mortgage in favor of the plaintiffs on the same rights and titles that they had bought and also upon what they had purchased from Mr. Salvador
Serra. In other words, Phil. C. Whitaker and Venancio Concepcion mortgaged unto the plaintiffs what they had bought from the plaintiffs and also
what they had bought from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased something from Mr. Salvador Serra,
the herein defendant, regarding the railroad line, it was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that
the rights and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were only those they had over the other half of the
railroad line. Therefore, as already stated, since there was no novation of the contract between the plaintiffs and the defendant, as regards the
obligation of the latter to pay the former one-half of the cost of the construction of the said railroad line, and since the plaintiffs did not include in
the sale, evidenced by Exhibit 5, the credit that they had against the defendant, the allegation that the obligation of the defendant became
extinguished by the merger of the rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion is wholly
untenable.
Appellants assign also as a ground of their appeal the holding of the court that by the termination of the partnership, as shown by the document
Exhibit 5, no legal rights can be derived therefrom.
By virtue of the contract Exhibit 5, the plaintiffs and Phil. C. Whitaker and Venancio Concepcion, by common consent, decided to dissolve the
partnership between the "Hacienda Palma" and "Hacienda San Isidro," thus cancelling the contract of partnership of February 1 , 1919.
Counsel for appellee in his brief and oral argument maintains that the plaintiffs cannot enforce any right arising out of that contract of partnership,
which has been annulled, such as the right to claim now a part of the cost of the construction of the railroad line stipulated in that contract.
Defendant's contention signifies that any person, who has contracted a valid obligation with a partnership, is exempt from complying with his
obligation by the mere fact of the dissolution of the partnership. Defendant's contention is untenable. The dissolution of a partnership must not be
understood in the absolute and strict sense so that at the termination of the object for which it was created the partnership is extinguished, pending
the winding up of some incidents and obligations of the partnership, but in such case, the partnership will be reputed as existing until the juridical
relations arising out of the contract are dissolved. This doctrine has been upheld by the supreme court of Spain in its decision of February 6, 1903, in
the following case: There was a partnership formed between several persons to purchase some lands sold by the state. The partnership paid the
purchase price and distributed among its members the lands so acquired, but after the lapse of some time, one of the partners instituted an action in
the court of Badajoz, praying that he be accepted as a partner with the same rights and obligations as the others, for the reason that he had not been
allowed all that he had a right to. The court granted the petition, which judgment was affirmed by the Audiencia de Caceres.
From that decision the defendant sued out a writ of error alleging infringement of articles 1680 and 1700 of the Civil Code, on the proposition that all
contracts are reputed consummated and therefore extinguished, when the contracting parties fulfill all the obligations arising therefrom and that by
the payment of the money and the granting and distribution of the lands without any opposition, the juridical relations between the contracting
parties become extinguished and none of the parties has any right of action under the contract. The supreme court, holding that some corrections
and liquidations asked by the actor were still pending, denied the writ, ruling that the articles cited were not infringed because a partnership cannot
be considered as extinguished until all the obligations pertaining to it are fulfilled. (11 Manresa, page 312.)
The dissolution of a firm does not relieve any of its members from liability for existing obligations, although it does save them from new obligations
to which they have not expressly or impliedly assented, and any of them may be discharged from old obligations by novation of other form of
release. It is often said that a partnership continues, even after dissolution, for the purpose of winding up its affairs. (30 Cyc., page 659.)
Another question presented by appellee's counsel in his memorandum and oral argument is that as in the partnership articles of February 1, 1919, it
was covenanted that the defendant would put up one-half of the cost of the railroad line within five years from the date, that is, from February 1,
1919, with interest at 10 per cent per annum, the present action is premature since, from the execution of the contract until October 25, 1922, the
date of the complaint, the five years, within which the defendant could pay his part of the cost of the construction of the line, had not yet elapsed.
Suffice it to say that the plaintiff and the successors in interest of the defendant, by mutual consent, dissolved the partnership on June 16, 1920,
cancelling the contract Exhibit A to all of which the defendant consented as evidence by his allegations in his answer. If this is so, there is no reason
for waiting for the expiration of the five years which the parties themselves had seen fit to stipulate and therefore the provisions of article 113,
regarding the fulfillment of pure obligations, must be applied in this case.
For all of the foregoing, the judgment appealed from is reversed, and we hold that the defendant Salvador Serra is indebted to the plaintiffs, the
Testate Estate of Lazaro Mota, et al., in the amount of P113,046.46, and said defendant is hereby sentenced to pay the plaintiffs the said amount,
together with the agreed interest at the rate of 10 per cent per annum from the date of the filing of the complaint.
Without special pronouncement as to costs, it is so ordered.

G.R. No. L-5837 May 31, 1954

CRISTOBAL BONNEVIE, ET AL., plaintiffs-appellants,
vs.
JAIME HERNANDEZ, defendant-appellee.
Ojeda and Vilgera for appellants.
Cea and Zurbano for appellee.
REYES, J.:
This is an action for the recovery of the sum of P115,312.50, with interests, as plaintiffs' alleged share in the profits of a partnership.
It appears that prior to January, 1947, plaintiffs with other associates formed a syndicate or secret partnership for the purpose of acquiring the
plants, franchises and other properties of the Manila Electric Co. — hereinafter called the Meralco — in the provinces of Camarines Sur, Albay, and
Sorsogon, with the idea of continuing that company's business in that region. No formal articles were drawn for it was the purpose of the members
to incorporate once the deal had been consummated. But in the meantime they elected Pedro Serranzana and David Serrano general manager and
secretary-treasurer, respectively, of the partnership.
Negotiation for the purchase was commenced, but as it made no headway, defendant was taken in as a member of the partnership so that he could
push the deal through, and to that end he was given the necessary power of attorney. Using partnership funds, defendant was able to buy the
Meralco properties for P122,000, paying P40,000 upon the signing of the deed of sale and agreeing to pay the balance in two equal installments, that
is, P41,000 on or before July 31, 1947, and another P41,000 on or before January 31, 1948, with interest at 6 per cent per annum and with a penalty
clause which reads:
(6) That in case the VENDEE fails to make the payment or payments of the balance due or any part thereof as herein provided, this contract
shall, at the option of the VENDOR, be annuled and, in such an event, all payments made by the VENDEE to the VENDOR by virtue of this
contract shall be forfeited and retained by the VENDOR in full satisfaction as the liquidated damages sustained by said VENDOR; and the
said VENDOR shall have the right to forthwith reenter and take possession of the premises, properties and rights which are the subject-
matter of this contract.
Although defendant was the one named vendee in the deed of sale, there is no question that the transaction was in penalty made for the
partnership so that the latter assumed control of the business the day following the sale.
About the latter half of the following month the members of the partnership proceeded with the formation of the proposed corporation,
apportioning among themselves its shares of stock in proportion to their respective contributions to the capital of the partnership and their
individual efforts in bringing about the acquisition of the Meralco properties. But before the incorporation papers could be perfected, several
partners, not satisfied with the way matters were being run and fearful that the venture might prove a failure because the business was not going
well and there was a possibility of their being assessed more than their original investments when the time came to meet the two installments of the
unpaid purchase price due the Meralco, expressed their desire to withdraw from the partnership and get back the money they had invested therein.
In accordance with this wish, one of them, Judge Jaime Reyes, in a meeting held on April 10, 1947, to consider various matters connected with the
business, presented a resolution to the effect that those partners who did not want to remain in the association should be allowed to withdraw and
get back their contributions. The resolution was approved, with the herein plaintiffs voting affirmatively, and on that same day plaintiffs and Judge
Reyes withdrew from the partnership, and, as admitted by both parties, the partnership was then dissolved. In accordance with the terms of the
resolution, the withdrawing partners were, on the following day, reimbursed their respective contributions to the partnership fund.
Following the dissolution of the partnership, the members who preferred to remain in the business went ahead with the formation of the
corporation, taking in new associates as stockholders. And defendant, on his part, in fulfillment of his trust, made a formal assignment of the Meralco
properties to the treasurer of the corporation, giving them a book value of P365,000, in return for which the corporation issued, to the various
subscribers to its capital stock, shares of stock of the total face value of P225,000 and assumed the obligation of paying what was still due the
Meralco on the purchase price. The new corporation was named "Bicol Electric Company."
Though business was losing during the first year, that is, in 1947, the corporation, thanks to a loan obtained from the RFC later prospered and made
money. Then trouble began for one of its big stockholders, the defendant herein.
Two years from their withdrawal from the partnership, when the corporate business was already in a prosperous condition, plaintiffs brought the
present suit against Jaime Hernandez, claiming a share in the profit the latter is supposed to have made from the assignment of the Meralco
properties to the corporation, estimated by plaintiffs to be P225,000 and their share of it to be P115,312.50.
Defendant's answer denies that he has made any profit out of the assignment in question and alleges that in any event plaintiffs, after their
withdrawal from the partnership, ceased to have any further interest in the subsequent transactions of the remaining members.
After trial the lower court found that the partnership had not realized any profit out of the assignment of the Meralco properties to the corporation
and that, even supposing that profit had really been made, defendant would not be the one to answer to plaintiffs for their share thereof, because
he did not receive the consideration for the assignment, which according to the court, consisted of the subscriptions of various persons to the capital
stock of the corporation. The court therefore dismissed the complaint with costs against the plaintiffs. From this decision plaintiffs appealed. The
case comes within our jurisdiction because of the amount involved.
We find no merit in the appeal.
In the first place, the profit alleged to have been realized from the assignment of the Meralco properties to the new corporation, the Bicol Electric
Company, is more apparent than real. It is true that the value set for those properties in the deed of assignment was P365,000 when the acquisition
price was only P122,000. But one should not jump to the conclusion that a profit, consisting of the difference between the two sums was really made
out of the transaction, for the assignment was not made for cash but in payment for subscriptions to shares of stock in the assignee, and while those
shares had a total face value of P225,000, this is not necessarily their real worth. Needless to say, the real value of the shares of stock of a
corporation depends upon the value of its assets over and above its liabilities. It does not appear that the Bicol Electric Company had any assets
other than those acquired from the Meralco, and according to the evidence the company, aside from owing the Meralco, P82,000 was, in the
language of the court below, actually "in the red."
In the second place, assuming that the assignment actually brought profit to the partnership, it is hard to see how defendant could be made to
answer for plaintiffs' alleged share thereof. As stated in the decision below, defendant did not receive the consideration for the assignment for, as
already stated, the assignment was made in payment for subscriptions of various persons to the capital stock of the new corporation. Plaintiffs, in
order to give color of legality to their claim against defendant, maintain that the latter should be held liable for damages caused to them, consisting
of the loss of their share of the profits, due to defendant's failure properly to perform his duty as a liquidator of the dissolved partnership, this on the
theory that as managing partner of the partnership, it was defendant's duty to liquidate its affairs upon its dissolutions. But it does not appear that
plaintiffs have ever asked for a liquidation, and as will presently be explained no liquidation was called for because when plaintiffs withdrew from the
partnership the understanding was that after they had been reimbursed their investment, they were no longer to have any further interest in the
partnership or its assets and liabilities. Moreover, the stipulation of facts made at the hearing does not bear out the claim that defendant was the
managing partner of the partnership, for if there appears that the partnership had its general manager in the person of Pedro Serranzana, who upon
the formation of the new corporation also became its vice-president and general manager.
As a general rule, when a partner retires from the firm, he is entitled to the payment of what may be due him after a liquidation. But certainly no
liquidation is necessary where there is already a settlement or an agreement as to what the retiring partner shall receive. In the instant case, it
appears that a settlement was agreed upon on the very day the partnership was dissolved. For when plaintiffs and Judge Jaime Reyes withdrew from
the partnership on that day they did so as agreed to by all the partners, subject to the only condition that they were to be repaid their contributions
or investments within three days from said date. And this condition was fulfilled when on the following day they were reimbur sed the respective
amounts due them pursuant to the agreement.
There is evidence that the partnership was at that time operating its business at a loss and that the partnership did not have necessary funds to meet
its obligation to Meralco for the balance of the purchase price. And in that connection it should be recalled that nonpayment of that obligation would
result in the partnership losing its entire investment because of the penalty clause in the deed of sale. Because of these circumstances there is every
reason to believe that plaintiffs together with Judge Jaime Reyes, withdrew from the partnership for fear that they might lose their entire investment
should they choose to remain in the partnership which then faced the danger of losing its entire assets. As testified to by Judge Reyes, one of the
withdrawing partners, it was clearly understood that upon their withdrawal and return to them of their investment they would have nothing more to
do with the association. It must, therefore, have been the intention or understanding of the parties that the withdrawing par tners were relinquishing
all their rights and interest in the partnership upon the return to them of their investment. That Judge Reyes did not join the plaintiffs in this action is
a clear indication that such was really the understanding. Judge Reyes has testified that when he was invited to join in the present claim he refused
because he did not want to be a "sin verguenza." And, indeed, if the agreement was that the withdrawing partners were still to have participation in
the subsequent transactions of the partnership so that they would have a share not only in the profits but also in the losses, it is not likely that their
investment would have been returned to them.
It is, therefore, our conclusion that the acceptance by the withdrawing partners, including the plaintiffs, of their investment in the instant case was
understood and intended by all the parties as a final settlement of whatever rights or claim the withdrawing partners might have in the dissolved
partnership. Such being the case they are now precluded from claiming any share in the alleged profits, should there be any, at the time of the
dissolution.
In view of the foregoing, we find plaintiffs' claim against defendant to be without legal basis so that the judgment of dismissal rendered by the court
below should be, as it is hereby, affirmed, with costs against the appellants.
G.R. No. L-45624 April 25, 1939

GEORGE LITTON, petitioner-appellant vs. HILL & CERON, ET AL., respondents-appellees.

CONCEPCION, J.:

This is a petition to review on certiorari the decision of the Court of Appeals in a case originating from the
Court of First Instance of Manila wherein the herein petitioner George Litton was the plaintiff and the
respondents Hill & Ceron, Robert Hill, Carlos Ceron and Visayan Surety & Insurance Corporation were
defendants.

The facts are as follows: On February 14, 1934, the plaintiff sold and delivered to Carlos Ceron, who is
one of the managing partners of Hill & Ceron, a certain number of mining claims, and by virtue of said
transaction, the defendant Carlos Ceron delivered to the plaintiff a document reading as follows:

Feb. 14, 1934

Received from Mr. George Litton share certificates Nos. 4428, 4429 and 6699 for 5,000, 5,000 and
7,000 shares respectively — total 17,000 shares of Big Wedge Mining Company, which we have
sold at P0.11 (eleven centavos) per share or P1,870.00 less 1/2 per cent brokerage.

HILL & CERON

By: (Sgd.) CARLOS CERON

Ceron paid to the plaintiff the sum or P1,150 leaving an unpaid balance of P720, and unable to collect this
sum either from Hill & Ceron or from its surety Visayan Surety & Insurance Corporation, Litton filed a
complaint in the Court of First Instance of Manila against the said defendants for the recovery of the said
balance. The court, after trial, ordered Carlos Ceron personally to pay the amount claimed and absolved
the partnership Hill & Ceron, Robert Hill and the Visayan Surety & Insurance Corporation. On appeal to the
Court of Appeals, the latter affirmed the decision of the court on May 29, 1937, having reached the
conclusion that Ceron did not intend to represent and did not act for the firm Hill & Ceron in the
transaction involved in this litigation.

Accepting, as we cannot but accept, the conclusion arrived at by the Court of Appeals as to the question of
fact just mentioned, namely, that Ceron individually entered into the transaction with the plaintiff, but in
view, however, of certain undisputed facts and of certain regulations and provisions of the Code of
Commerce, we reach the conclusion that the transaction made by Ceron with the plaintiff should be
understood in law as effected by Hill & Ceron and binding upon it.

In the first place, it is an admitted fact by Robert Hill when he testified at the trial that he and Ceron,
during the partnership, had the same power to buy and sell; that in said partnership Hill as well as Ceron
made the transaction as partners in equal parts; that on the date of the transaction, February 14, 1934,
the partnership between Hill and Ceron was in existence. After this date, or on February 19th, Hill & Ceron
sold shares of the Big Wedge; and when the transaction was entered into with Litton, it was neither
published in the newspapers nor stated in the commercial registry that the partnership Hill & Ceron had
been dissolved.

Hill testified that a few days before February 14th he had a conversation with the plaintiff in the course of
which he advised the latter not to deliver shares for sale or on commission to Ceron because the
partnership was about to be dissolved; but what importance can be attached to said advice if the
partnership was not in fact dissolved on February 14th, the date when the transaction with Ceron took
place?

Under article 226 of the Code of Commerce, the dissolution of a commercial association shall not ca use
any prejudice to third parties until it has been recorded in the commercial registry. (See also
Cardell vs. Mañeru, 14 Phil., 368.) The Supreme Court of Spain held that the dissolution of a partnership
by the will of the partners which is not registered in the commercial registry, does not prejudice third
persons. (Opinion of March 23, 1885.)

Aside from the aforecited legal provisions, the order of the Bureau of Commerce of December 7, 1933,
prohibits brokers from buying and selling shares on their own account. Said order reads:

The stock and/or bond broker is, therefore, merely an agent or an intermediary, and as such, shall
not be allowed. . . .

(c) To buy or to sell shares of stock or bonds on his own account for purposes of speculation and/or
for manipulating the market, irrespective of whether the purchase or sale is made from or to a
private individual, broker or brokerage firm.

In its decision the Court of Appeals states:

But there is a stronger objection to the plaintiff's attempt to make the firm responsible to him.
According to the articles of copartnership of 'Hill & Ceron,' filed in the Bureau of Commerce.

Sixth. That the management of the business affairs of the copartnership shall be entrusted to both
copartners who shall jointly administer the business affairs, transactions and activities of the
copartnership, shall jointly open a current account or any other kind of account in any bank or
banks, shall jointly sign all checks for the withdrawal of funds and shall jointly or singly sign, in the
latter case, with the consent of the other partner. . . .

Under this stipulation, a written contract of the firm can only be signed by one of the partners if the
other partner consented. Without the consent of one partner, the other cannot bind the firm by a
written contract. Now, assuming for the moment that Ceron attempted to represent the firm in this
contract with the plaintiff (the plaintiff conceded that the firm name was not mentioned at that
time), the latter has failed to prove that Hill had consented to such contract.

It follows from the sixth paragraph of the articles of partnership of Hill &n Ceron above quoted that the
management of the business of the partnership has been entrusted to both partners thereof, but we
dissent from the view of the Court of Appeals that for one of the partners to bind the partnership the
consent of the other is necessary. Third persons, like the plaintiff, are not bound in entering into a
contract with any of the two partners, to ascertain whether or not this partner with whom the transaction
is made has the consent of the other partner. The public need not make inquires as to the agreements
had between the partners. Its knowledge, is enough that it is contracting with the partnership which is
represented by one of the managing partners.

There is a general presumption that each individual partner is an authorized agent for the firm and
that he has authority to bind the firm in carrying on the partnership transactions. (Mills vs. Riggle,
112 Pac., 617.)

The presumption is sufficient to permit third persons to hold the firm liable on transactions entered
into by one of members of the firm acting apparently in its behalf and within the scope of his
authority. (Le Roy vs. Johnson, 7 U. S. [Law. ed.], 391.)

The second paragraph of the articles of partnership of Hill & Ceron reads in part:

Second: That the purpose or object for which this copartnership is organized is to engage in the
business of brokerage in general, such as stock and bond brokers, real brokers, investment
security brokers, shipping brokers, and other activities pertaining to the business of brokers in
general.

The kind of business in which the partnership Hill & Ceron is to engage being thus determined, none of the
two partners, under article 130 of the Code of Commerce, may legally engage in the business of
brokerage in general as stock brokers, security brokers and other activities pertaining to the business of
the partnership. Ceron, therefore, could not have entered into the contract of sale of shares with Litton as
a private individual, but as a managing partner of Hill & Ceron.

The respondent argues in its brief that even admitting that one of the partners could not, in his individual
capacity, engage in a transaction similar to that in which the partnership is engaged without binding the
latter, nevertheless there is no law which prohibits a partner in the stock brokerage business for engaging
in other transactions different from those of the partnership, as it happens in the present case, because
the transaction made by Ceron is a mere personal loan, and this argument, so it is said, is corroborated by
the Court of Appeals. We do not find this alleged corroboration because the only finding of fact made by
the Court of Appeals is to the effect that the transaction made by Ceron with the plaintiff was in his
individual capacity.

The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointly and
severally, the sum of P720, with legal interest, from the date of the filing of the complaint, minus the
commission of one-half per cent (½%) from the original price of P1,870, with the costs to the
respondents. So ordered.

RESOLUTION

July 13, 1939

CONCEPCION, J.:

A motion has been presented in this case by Robert Hill, one of the defendants sentenced in our decision
to pay to the plaintiff the amount claimed in his complaint. It is asked that we reconsider our decision, the
said defendant insisting that the appellant had not established that Carlos Ceron, another of the
defendants, had the consent of his copartner, the movant, to enter with the appellant into the contract
whose breach gave rise to the complaint. It is argued that, it being stipulated in the articles of partnership
that Hill and Ceron, only partners of the firm Hill & Ceron, would, as managers, have the management of
the business of the partnership, and that either may contract and sign for the partnership with the consent
of the other; the parties of partnership having been, so it is said, recorded in the commercial registry, the
appellant could not ignore the fact that the consent of the movant was necessary for the validity of the
contract which he had with the other partner and defendant, Ceron, and there being no evidence that said
consent had been obtained, the complaint to compel compliance with the said contract had to be, as it
must be in fact, a procedural failure.

Although this question has already been considered and settled in our decision, we nevertheless take
cognizance of the motion in order to enlarge upon our views on the matter.

The stipulation in the articles of partnership that any of the two managing partners may contract and sign
in the name of the partnership with the consent of the other, undoubtedly creates an obligation between
the two partners, which consists in asking the other's consent before contracting for the partnership. This
obligation of course is not imposed upon a third person who contracts with the partnership. Neither is it
necessary for the third person to ascertain if the managing partner with whom he contracts has previously
obtained the consent of the other. A third person may and has a right to presume that the partner with
whom he contracts has, in the ordinary and natural course of business, the consent of his copartner; for
otherwise he would not enter into the contract. The third person would naturally not presume that the
partner with whom he enters into the transaction is violating the articles of partnership but, on the
contrary, is acting in accordance therewith. And this finds support in the legal presumption that the
ordinary course of business has been followed (No. 18, section 334, Code of Civil Procedure), and that the
law has been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which
have the force of law between the parties.

Wherefore, unless the contrary is shown, namely, that one of the partners did not consent to his copartner
entering into a contract with a third person, and that the latter with knowledge thereof entered into said
contract, the aforesaid presumption with all its force and legal effects should be taken into account.
There is nothing in the case at bar which destroys this presumption; the only thing appearing in he
findings of fact of the Court of Appeals is that the plaintiff "has failed to prove that Hill had consented to
such contract". According to this, it seems that the Court of Appeals is of the opinion that the two partners
should give their consent to the contract and that the plaintiff should prove it. The clause of the articles of
partnership should not be thus understood, for it means that one of the two partners should have the
consent of the other to contract for the partnership, which is different; because it is possible that one of
the partners may not see any prospect in a transaction, but he may nevertheless consent to the
realization thereof by his copartner in reliance upon his skill and ability or otherwise. And here we have to
hold once again that it is not the plaintiff who, under the articles of partnership, should obtain and prove
the consent of Hill, but the latter's partner, Ceron, should he file a complaint against the partnership for
compliance with the contract; but in the present case, it is a third person, the plaintiff, who asks for it.
While the said presumption stands, the plaintiff has nothing to prove.

Passing now to another aspect of the case, had Ceron in any way stated to the appellant at the time of the
execution of the contract, or if it could be inferred by his conduct, that he had the consent of Hill, and
should it turn out later that he did not have such consent, this alone would not annul the contract judging
from the provisions of article 130 of the Code of Commerce reading as follows:

No new obligation shall be contracted against the will of one of the managing partners, should he
have expressly stated it; but if, however, it should be contracted it shall not be annulled for this
reason, and shall have its effects without prejudice to the liability of the partner or partners who
contracted it to reimburse the firm for any loss occasioned by reason thereof. (Emphasis supplied.)

Under the aforequoted provisions, when, not only without the consent but against the will of any of the
managing partners, a contract is entered into with a third person who acts in good faith, and the
transaction is of the kind of business in which the partnership is engaged, as in the present case, said
contract shall not be annulled, without prejudice to the liability of the guilty partner.

The reason or purpose behind these legal provisions is no other than to protect a third person who
contracts with one of the managing partners of the partnership, thus avoiding fraud and deceit to which
he may easily fall a victim without this protection which the Code of Commerce wisely provides.

If we are to interpret the articles of partnership in question by holding that it is the obligation of the third
person to inquire whether the managing copartner of the one with whom he contracts has given his
consent to said contract, which is practically casting upon him the obligation to get such consent, this
interpretation would, in similar cases, operate to hinder effectively the transactions, a thing not desirable
and contrary to the nature of business which requires promptness and dispatch one the basis of good faith
and honesty which are always presumed.

In view of the foregoing, and sustaining the other views expressed in the decision, the motion is denied.
So ordered.

G.R. No. L-11840 July 26, 1960

ANTONIO C. GOQUIOLAY and THE PARTNERSHIP "TAN SIN AN and ANTONIO C.

GOQUIOLAY, plaintiffs-appellants, vs. WASHINGTON Z. SYCIP, ET AL., defendants-appellees.

REYES, J. B. L., J.:

Direct appeal from the decision of the Court of First Instance of Davao (the amount involved being more
than P200,00) dismissing the plaintiffs-appellants' complaint.

From the stipulation of facts of the parties and the evidence on record, it would appear that on May 29,
1940, Tan Sin An and Antonio C. Goquiolay", entered into a general commercial partnership under the
partnership name "Tan Sin An and Antonio C. Goquiolay", for the purpose in dealing in real state. The
partnership had a capital of P30,000.00, P18,000.00 of which was contributed by Goquiolay and
P12,000.00 by Tan Sin An. The agreement lodge upon Tan Sin An the sole management of the partnership
affairs, stipulating that —

III. The co-partnership shall be composed of said Tan Sin An as sole managing and partner (sic),
and Antonio C. Goquiolay as co-partner.

IV. Vhe affairs of co-partnership shall be managed exclusively by the managing and partner (sic) or
by his authorized agent, and it is expressly stipulated that the managing and partner (sic) may
delegate the entire management of the affairs of the co-partnership by irrevocable power of
attorney to any person, firm or corporation he may select upon such terms as regards
compensation as he may deem proper, and vest in such persons, firm or corporation full power and
authority, as the agent of the co-partnership and in his name, place and stead to do anything for it
or on his behalf which he as such managing and partner (sic) might do or cause to be done.

V. The co-partner shall have no voice or participation in the management of the affairs of the co-
partnership; but he may examine its accounts once every six (6) months at any time during
ordinary business hours, and in accordance with the provisions of the Code of Commerce. (Article
of Co-Partnership).

The lifetime of the partnership was fixed at ten (10) years and also that —

In the event of the death of any of the partners at any time before the expiration of said term, the
co-partnership shall not be dissolved but will have to be continued and the deceased partner shall
be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of Co-Partnership).

However, the partnership could be dissolved and its affairs liquidated at any time upon mutual agreement
in writing of the partners (Art. XIII, articles of Co-Partnership).

On May 31, 1940, Antonio Goquiolay executed a general power of attorney to this effect:

That besides the powers and duties granted the said Tan Sin An by the articles of co-partnership of
said co-partnership "Tan Sin An and Antonio Goquiolay", that said Tan Sin An should act as the
Manager for said co-partnership for the full period of the term for which said co-partnership was
organized or until the whole period that the said capital of P30,000.00 of the co-partnership should
last, to carry on to the best advantage and interest of the said co-partnership, to make and
execute, sign, seal and deliver for the co-partnership, and in its name, all bills, bonds, notes,
specialties, and trust receipts or other instruments or documents in writing whatsoever kind or
nature which shall be necessary to the proper conduction of the said businesses, including the
power to mortgage and pledge real and personal properties, to secure the obligation of the co-
partnership, to buy real or personal properties for cash or upon such terms as he may deem
advisable, to sell personal or real properties, such as lands and buildings of the co-partnership in
any manner he may deem advisable for the best interest of said co-partnership, to borrow money
on behalf of the co-partnership and to issue promissory notes for the repayment thereof, to deposit
the funds of the co-partnership in any local bank or elsewhere and to draw checks against funds so
deposited ... .

On May 29, 1940, the plaintiff partnership "Tan Sin An and Goquiolay" purchased the three (3) parcels of
land, known as Lots Nos. 526, 441 and 521 of the Cadastral Survey of Davao, subject-matter of the
instant litigation, assuming the payment of a mortgage obligation of P25,000.00, payable to "La Urbana
Sociedad Mutua de Construccion y Prestamos" for a period of ten (10) years, with 10% interest per
annum. Another 46 parcels were purchased by Tan Sin An in his individual capacity, and he assumed
payment of a mortgage debt thereon for P35,000.00 with interest. The downpayment and the
amortization were advanced by Yutivo and Co., for the account of the purchasers.

On September 25, 1940, the two separate obligations were consolidated in an instrument executed by the
partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of the "Banco Hipotecario
de Filipinas" (as successor to "La Urbana") and the covenantors bound themselves to pay, jointly and
severally, the remaining balance of their unpaid accounts amounting to P52,282.80 within eight 8 years,
with 8% annual interest, payable in 96 equal monthly installments.

On June 26, 1942, Tan Sin An died, leaving as surviving heirs his widow, Kong Chai Pin, and four minor
children, namely: Tan L. Cheng, Tan L. Hua, Tan C. Chiu and Tan K. Chuan. Defendant Kong Chai Pin was
appointed administratrix of the intestate estate of her deceased husband.

In the meantime, repeated demands for payment were made by the Banco Hipotecario on the partnership
and on Tan Sin An. In March, 1944, the defendant Sing Yee and Cuan, Co., Inc., upon request of
defendant Yutivo Sans Hardware Co., paid the remaining balance of the mortgage debt, and the mortgage
was cancelled.

Then in 1946, Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. filed their claims in the intestate
proceedings of Tan Sin An for P62,415.91 and P54,310.13, respectively, as alleged obligations of the
partnership "Tan Sin An and Antonio C. Goquiolay" and Tan Sin An, for advances, interest and taxes paid
in amortizing and discharging their obligations to "La Urbana" and the "Banco Hipotecario". Disclaiming
knowledge of said claims at first, Kong Chai Pin later admitted the claims in her amended answer and they
were accordingly approved by the Court.

On March 29, 1949, Kong Chai Pin filed a petition with the probate court for authority to sell all the 49
parcels of land to Washington Z, Sycip and Betty Y. Lee, for the purpose preliminary of settling the
aforesaid debts of Tan Sin An and the partnership. Pursuant to a court order of April 2, 1949, the
administratrix executed on April 4, 1949, a deed of sale 1 of the 49 parcels of land to the defendants
Washington Sycip and Betty Lee in consideration of P37,000.00 and of vendees' assuming payments of
the claims filed by Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. Later, in July, 1949,
defendants Sycip and Betty Lee executed in favor of the Insular Development Co., Inc. a deed of transfer
covering the said 49 parcels of land.

Learning about the sale to Sycip and Lee, the surviving partner Antonio Goquiolay filed, on or about July
25, 1949, a petition in the intestate proceedings seeking to set aside the order of the probate court
approving the sale in so far as his interest over the parcels of land sold was concerned. In its order of
December 29, 1949, the probate court annulled the sale executed by the administratrix with respect to
the 60% interest of Antonio Goquiolay over the properties sold. Kong Chai Pin appealed to the Court of
Appeals, which court later certified the case to us (93 Phil., 413; 49 Off. Gaz. [7] 2307). On June 30,
1953, we rendered decision setting aside the orders of the probate court complained of and remanding the
case for new trial, due to the non-inclusion of indispensable parties. Thereafter, new pleadings were filed.

The second amended complaint in the case at bar prays, among other things, for the annulment of the
sale in favor of Washington Sycip and Betty Lee, and their subsequent conveyance in favor of Insular
Development Co., Inc., in so far as the three (3) lots owned by the plaintiff partnership are concerned.
The answer averred the validity of the sale by Kong Chai Pin as successor partner, in lieu of the late Tan
Sin An. After hearing, the complaint was dismissed by the lower court in its decision dated October 30,
1956; hence, this appeal taken directly to us by the plaintiffs, as the amount involved is more than
P200,000.00. Plaintiffs-appellants assign as errors that —

I — The lower court erred in holding that Kong Chai Pin became the managing partner of the
partnership upon the death of her husband, Tan Sin An, by virtue of the articles of Partnership
executed between Tan Sin An and Antonio Goquiolay, and the general power of attorney granted
by Antonio Goquiolay.

II — The lower court erred in holding that Kong Chai Pin could act alone as sole managing partner
in view of the minority of the other heirs.

III — The lower court erred in holding that Kong Chai Pin was the only heir qualified to act as
managing partner.
 IV — The lower court erred in holding that Kong Chai Pin had authority to sell the partnership
properties by virtue of the articles of partnership and the general power of attorney granted to Tan
Sin An in order to pay the partnership indebtedness.

V — The lower court erred in finding that the partnership did not pay its obligation to the Banco
Hipotecario.

VI — The lower court erred in holding that the consent of Antonio Goquiolay was not necessary to
consummate the sale of the partnership properties.

VII — The lower court erred in finding that Kong Chai Pin managed the business of the partnership
after the death of her husband, and that Antonio Goquiolay knew it.

VIII — The lower court erred in holding that the failure of Antonio Goquiolay to oppose the
management of the partnership by Kong Chai Pin estops him now from attacking the validity of the
sale of the partnership properties.

IX — The lower court erred in holding that the buyers of the partnership properties acted in good
faith.

X — The lower court erred in holding that the sale was not fraudulent against the partnership and
Antonio Goquiolay.

XI — The lower court erred in holding that the sale was not only necessary but beneficial to the
partnership.

XII — The lower court erred in dismissing the complaint and in ordering Antonio Goquiolay to pay
the costs of suit.

There is a merit in the contention that the lower court erred in holding that the widow, Kong C hai Pin,
succeeded her husband, Tan Sin An, in the sole management of the partnership, upon the latter's death.
While, as we previously stated in our narration of facts, the Articles of Co-Partnership and the power of
attorney executed by Antonio Goquiolay, conferred upon Tan Sin An the exclusive management of the
business, such power, premised as it is upon trust and confidence, was a mere personal right that
terminated upon Tan's demise. The provision in the articles stating that "in the event of death of any one
of the partners within the 10-year term of the partnership, the deceased partner shall be represented by
his heirs", could not have referred to the managerial right given to Tan Sin An; more appropriately, it
related to the succession in the proprietary interest of each partner. The covenant that Antonio Goquiolay
shall have no voice or participation in the management of the partnership, being a limitation upon his right
as a general partner, must be held coextensive only with Tan's right to manage the affairs, the contrary
not being clearly apparent.

Upon the other hand, consonant with the articles of co-partnership providing for the continuation of the
firm notwithstanding the death of one of the partners, the heirs of the deceased, by never repudiating or
refusing to be bound under the said provision in the articles, became individual partners with Antonio
Goquiolay upon Tan's demise. The validity of like clauses in partnership agreements is expressly
sanctioned under Article 222 of the Code of Commerce.2

Minority of the heirs is not a bar to the application of that clause in the articles of co-partnership (2
Vivante, Tratado de Derecho Mercantil, 493; Planiol, Traite Elementaire de Droit Civil, English translation
by the Louisiana State Law Institute, Vol. 2, Pt. 2, p. 177).

Appellants argue, however, that since the "new" members' liability in the partnership was limited merely
to the value of the share or estate left by the deceased Tan Sin An, they became no more than limited
partners and, as such, were disqualified from the management of the business under Article 148 of the
Code of Commerce. Although ordinarily, this effect follows from the continuance of the heirs in the
partnership,3 it was not so with respect to the widow Kong Chai Pin, who, by her affirmative actions,
manifested her intent to be bound by the partnership agreement not only as a limited but as a general
partner. Thus, she managed and retained possession of the partnership properties and was admittedly
deriving income therefrom up to and until the same were sold to Washington Sycip and Betty Lee. In fact,
by executing the deed of sale of the parcels of land in dispute in the name of the partnership, she was
acting no less than as a managing partner. Having thus preferred to act as such, she could be held liable
for the partnership debts and liabilities as a general partner, beyond what she might have derived only
from the estate of her deceased husband. By allowing her to retain control of the firm's property from
1942 to 1949, plaintiff estopped himself to deny her legal representation of the partnership, with the
power to bind it by the proper contracts.

The question now arises as to whether or not the consent of the other partners was necessary to perfect
the sale of the partnership properties to Washington Sycip and Betty Lee. The answer is, we believe, in
the negative. Strangers dealing with a partnership have the right to assume, in the absence of restrictive
clauses in the co-partnership agreement, that every general partner has power to bind the partnership,
specially those partners acting with ostensible authority. And so, we held in one case:

. . . Third persons, like the plaintiff, are not bound in entering into a contract with any of the two
partners, to ascertain whether or not this partner with whom the transaction is made has the
consent of the other partner. The public need not make inquiries as to the agreements had
between the partners. Its knowledge is enough that it is contracting with the partnership which is
represented by one of the managing partners.

"There is a general presumption that each individual partner is an agent for the firm and that he
has authority to bind the firm in carrying on the partnership transactions." [Mills vs. Riggle, 112
Pac., 617]

"The presumption is sufficient to permit third persons to hold the firm liable on transactions
entered into by one of the members of the firm acting apparently in its behalf and within the scope
of his authority." [Le Roy vs. Johnson, 7 U.S. Law, Ed., 391] (George Litton vs. Hill & Ceron, et al.,
67 Phil., 513-514).

We are not unaware of the provision of Article 129 of the Code of Commerce to the effect that —

If the management of the general partnership has not been limited by special agreement to any of
the members, all shall have the power to take part in the direction and management of the
common business, and the members present shall come to an agreement for all contracts or
obligations which may concern the association. (Emphasis supplied)

but this obligation is one imposed by law on the partners among themselves, that does not necessarily
affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business
of the partnership, as regards third persons without notice. The latter may rightfully assume that the
contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he
would not ordinarily act to the prejudice of his co-partners. The regular course of business procedure does
not require that each time a third person contracts with one of the managing partners, he should inquire
as to the latter's authority to do so, or that he should first ascertain whether or not the other partners had
given their consent thereto. In fact, Article 130 of the same Code of Commerce provides that even if a
new obligation was contracted against the express will of one of the managing partners, "it shall not
be annulled for such reason, and it shall produce its effects without prejudice to the responsibility of the
member or members who contracted it, for the damages they may have caused to the common fund."

Cesar Vivante (2 Tratado de Derecho Mercantil, pp. 114-115) points out:

367. Primera hipotesis. — A falta de pactos especiales, la facultad de administrar corresponde a

cada socio personalmente. No hay que esperar ciertamente concordia con tantas cabezas, y para
cuando no vayan de acuerdo, la disciplina del Codigo no ofrece un sistema eficaz que evite los
inconvenientes. Pero, ante el silencio del contrato, debia quiza el legislador privar de la
administracion a uno de los socios en beneficio del otro? Seria una arbitrariedad. Debera quiza
 declarar nula la Sociedad que no haya elegido Administrador? El remedio seria peor que el mal.
Debera, tal vez, pretender que todos los socios concurran en todo acto de la Sociedad? Pero este
concurso de todos habria reducido a la impotencia la administracion, que es asunto d todos los dias
y de todas horas. Hubieran sido disposiciones menos oportunas que lo adoptado por el Codigo, el
cual se confia al espiritu de reciproca confianza que deberia animar la colaboracion de los socios, y
en la ley inflexible de responsabilidad que implica comunidad en los intereses de los mismos.

En esta hipotesis, cada socio puede ejercer todos los negocios comprendidos en el contrato social
sin dar de ello noticia a los otros, porque cada uno de ellos ejerce la administracion en la totalidad
de sus relaciones, salvo su responsabilidad en el caso de una administracion culpable. Si debiera
dar noticia, el beneficio de su simultania actividad, frecuentemente distribuida en lugares y en
tiempos diferentes, se echaria a perder. Se objetara el que de esta forma, el derecho de oposicion
de cada uno de los socios puede quedar frustrado. Pero se puede contestar que este derecho de
oposicion concedido por la ley como un remedio excepcional, debe subordinarse al derecho de
ejercer el oficio de Administrador, que el Codigo concede sin limite: "se presume que los socios se
han concedido reciprocamente la facultad de administrar uno para otro." Se haria precipitar esta
hipotesis en la otra de una administracion colectiva (art. 1,721, Codigo Civil) y se acabaria con
pedir el consentimiento, a lo menos tacito, de todos los socios — lo que el Codigo excluye ........, si
se obligase al socio Administrador a dar noticia previa del negocio a los otros, a fin de que pudieran
oponerse si no consintieran.

Commenting on the same subject, Gay de Montella (Codigo de Comercio, Tomo II, 147-148) opines:

Para obligar a las Compañias enfrente de terceros (art. 128 del Codigo), no es bastante que los
actos y contratos hayan sido ejecutados por un socio o varios en nombre colectivo, sino que es
preciso el concurso de estos dos elementos, uno, que el socio o socios tengan reconocida la
facultad de administrar la Compañia, y otro, que el acto o contrato haya sido ejecutado en nombre
de la Sociedad y usando de su firma social. Asi se que toda obligacion contraida bajo la razon
social, se presume contraida por la Compañia. Esta presunion es impuesta por motivos de
necesidad practica. El tercero no puede cada vez que trata con la Compañia, inquirir si realmente el
negocio concierne a la Sociedad. La presuncion es juris tantum y no juris et de jure, de modo que
si el gerente suscribe bajo la razon social una obligacion que no interesa a la Sociedad, este podra
rechazar la accion del tercero probando que el acreedor conocia que la obligacion no tenia ninguna
relacion con ella. Si tales actos y contratos no comportasen la concurrencia de ambos elementos,
seria nulos y podria decretarse la responsabilidad civil o penal contra sus autores.

En el caso que tales actos o contratos hayan sido tacitamente aprobados por la Compañia, o
contabilizados en sus libros, si el acto o contrato ha sido convalidado sin protesta y se trata de acto
o contrato que ha producido beneficio social, tendria plena validez, aun cuando le faltase algunos o
ambos de aquellos requisitos antes señalados.

Cuando los Estatutos o la escritura social no contienen ninguna clausula relativa al nombramiento o
designacion de uno o mas de un socio para administrar la Compañia (art. 129 del Codigo) todos
tienen por un igual el derecho de concurir a la decision y manejo de los negocios comunes. . . .

Although the partnership under consideration is a commercial partnership and, therefore, to be governed
by the Code of Commerce, the provisions of the old Civil Code may give us some light on the right of one
partner to bind the partnership. States Art. 1695 thereof:

Should no agreement have been made with respect to the form of management, the following rules
shall be observed:

1. All the partners shall be considered agents, and whatever any one of the may do individually
shall bind the partnership; but each one may oppose any act of the others before it has become
legally binding.
The records fail to disclose that appellant Goquiolay made any opposition to the sale of the partnership
realty to Washington Z. Sycip and Betty Lee; on the contrary, it appears that he (Goquiolay) only
interposed his objections after the deed of conveyance was executed and approved by the probate court,
and, consequently, his opposition came too late to be effective.

Appellants assails the correctness of the amounts paid for the account of the partnership as found by the
trial court. This question, however, need not be resolved here, as in the deed of conveyance executed by
Kong Chai Pin, the purchasers Washington Sycip and Betty Lee assumed, as part consideration of the
purchase, the full claims of the two creditors, Sing Yee and Cuan Co., Inc. and Yutivo Sons Hardware Co.

Appellants also question the validity of the sale covering the entire firm realty, on the ground that it, in
effect, threw the partnership into dissolution, which requires consent of all the partners. This view is
untenable. That the partnership was left without the real property it originally had will not work its
dissolution, since the firm was not organized to exploit these precise lots but to engage in buying and
selling real estate, and "in general real estate agency and brokerage business". Incidentally, it is to be
noted that the payment of the solidary obligation of both the partnership and the late Tan Sin An, leaves
open the question of accounting and contribution between the co-debtors, that should be ventilated
separately.

Lastly, appellants point out that the sale of the partnership properties was only a fraudulent device by the
appellees, with the connivance of Kong Chai Pin, to ease out Antonio Goquiolay from the partnership. The
"devise", according to the appellants, started way back sometime in 1945, when one Yu Khe Thai sounded
out Antonio Goquiolay on the possibility of selling his share in the partnership; and upon his refusal to sell,
was followed by the filing of the claims of Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. in
the intestate estate proceedings of Tan Sin An. As creditors of Tan Sin An and the plaintiff partnership
(whose liability was alleged to be joint and several), Yutivo Sons Hardware Co., and Sing Yee Cuan Co.,
Inc. had every right to file their claims in the intestate proceedings. The denial of the claims at first by
Kong Chai Pin ( for lack of sufficient knowledge) negatives any conspiracy on her part in the alleged
fraudulent scheme, even if she subsequently decided to admit their validity after studying the claims and
finding it best to admit the same. It may not be amiss to remark that the probate court approved the
questioned claims.

There is complete failure of proof, moreover, that the price for which the properties were sold was
unreasonably low, or in any way unfair, since appellants presented no evidence of the market value of the
lots as of the time of their sale to appellees Sycip and Lee. The alleged value of P31,056.58 in May of
1955 is no proof of the market value in 1949, specially because in the interval, the new owners appear to
have converted the land into a subdivision, which they could not do without opening roads and otherwise
improving the property at their own expense. Upon the other hand, Kong Chai Pin hardly had any choice
but to execute the questioned sale, as it appears that the partnership had neither cash nor other
properties with which to pay its obligations. Anyway, we cannot consider seriously the inferences freely
indulged in by the appellants as allegedly indicating fraud in the questioned transactions, leading to the
conveyance of the lots in dispute to the appellee Insular Development Co., Inc.

Wherefore, finding no reversible error in the appealed judgment, we affirm the same, with costs against
appellant Antonio Goquiolay.

RESOLUTION

December 10, 1963

REYES, J. B. L., J.:

The matter now pending is the appellant's motion for reconsideration of our main decision, wherein we
have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin An, made
in 1949 by the widow of the managing partner, Tan Sin An (executed in her dual capacity of Administratrix
of her husband's estate and as partner, in lieu of the husband), in favor of buyers Washington Sycip and
Betty Lee for the following consideration:

Cash paid P37,000.00

Debts assumed by
purchase:
To Yutivo 62,415.91
To Sing Yee Cuan & 54,310.13
Co.
TOTAL P153,726.04

Appellant Goquiolay, in his motion for reconsideration, insists that, contrary to our holding, Kong Chai Pin,
widow of the deceased partner Tan Sin An, never became more than a limited partner, incapacitated by
law to manage the affairs of the partnership; that the testimony of her witnesses Young and Lim belies
that she took over administration of the partnership property; and that, in any event, the sale should be
set aside because it was executed with the intent to defraud appellant of his share in the properties sold.

Three things must be always held in mind in the discussion of this motion to reconsider, being basic and
beyond controversy:

(a) That we are dealing here with the transfer of partnership property by one partner, acting in behalf of
the firm, to a stranger. There is no question between partners inter se, and this aspects of the case was
expressly reserved in the main decision of 26 July 1960;

(b) That the partnership was expressly organized "to engage in real estate business, either by buying and
selling real estate". The Article of co-partnership, in fact, expressly provided that:

IV. The object and purpose of the co-partnership are as follows:

1. To engage in real estate business, either by buying and selling real estates; to subdivide real
estates into lots for the purpose of leasing and selling them.;

(c) That the properties sold were not part of the contributed capital (which was in cash) but land precisely
acquired to be sold, although subject a mortgage in favor of the original owners, from whom the
partnership had acquired them.

With these points firmly in mind, let us turn to the points insisted upon by appellant.

It is first averred that there is "not one iota evidence" that Kong Chai Pin managed and retained
possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself admitted
that —

. . . Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the properties
(as) she had no other means of income. Then I said, because I wanted to help Mrs. Kong Chai
Pin, she could just do it and besides I am not interested in agricultural lands. I allowed her to take
care of the properties in order to help her and because I believe in God and I wanted to help her.

Q. — So the answer to my question is you did not take any steps?

A. — I did not.

Q. — And this conversation which you had with Mrs. Yu Eng Lai was few months after 1945?

A. — In the year 1945. (Emphasis supplied)

The appellant subsequently ratified this testimony in his deposition of 30 June 1956, page 8-9, wherein he
sated:

that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course they
are receiving quite a lot of benefit from that plantation.

Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to greater
weight than those of Hernando Young and Rufino Lim, having been made against the party's own interest.

Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found the
properties "abandoned and undeveloped", omits to mention that said part of the testimony started with
the question:

Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai Pin
there in Davao at that time?

Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were
undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the
partnership properties, was given in answer to the question:

According to Mr. Goquiolay, during the Japanese occupation Tan Sin An and his family lived on the
plantation of the partnership and derived their subsistence from that plantation. What can you say
to that? (Dep. 19 July 1956, p. 8)

And also —

What can you say so to the development of these other properties of the partnership which you
saw during the occupation?" (Dep., p. 13, Emphasis supplied)

to which witness gave the following answer:

I saw the properties in Mamay still undeveloped. The third property which is in Tigatto is about
eleven (11) hectares and planted with abaca seedlings planted by Mr. Sin An. When I went there
with Hernando Young we saw all the abaca destroyed. The place was occupied by the Japanese
Army. They planted camotes and vegetables to feed the Japanese Army. Of course they never paid
any money to Tan Sin An or his family. (Dep., Lim. pp. 13-14.) (Emphasis supplied)

Plainly, Both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that he told
Mr. Yu Eng Lai that the widow "could just do it" (i e., continue to manage the properties. Witnesses Lim
and Young referred to the period of Japanese occupation; but Goquiolay's authority was, in fact, given to
the widow in 1945, after the occupation.

Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts of
management during the Japanese occupation (1942-1944) does not mean that she did not do so from
1945 to 1949.

We thus fine that Goquiolay did not merely rely on reports from Lim and Young; he actually manifested his
willingness that the widow should manage the partnership properties. Whether or not she complied with
this authority is a question between her and the appellant, and is not here involved. But the authority was
given, and she did have it when she made the questioned sale, because it has never revoked.

It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the
property, and that it did not include the power to alienate, citing Article 1713 of the Civil Code of 1889.
What this argument overlooks is that the widow was not a mere agent, because she had become a partner
upon her husband's death, as expressly provided by the articles of co-partnership. Even more, granting
that by succession to her husband, Tan Sin An, the widow only a became the limited partner, Goquiolay's
authorization to manage the partnership property was proof that he considered and recognized her has
general partner, at least since 1945. The reason is plain: Under the law (Article 148, last paragraph, Code
of Commerce), appellant could not empower the widow, if she were only a limited partner, to administer
the properties of the firm, even as a mere agent:

Limited partners may not perform any act of administration with respect to the interests of the co-
partnership, not even in the capacity agents of the managing partners.(Emphasis supplied)

By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired to be
considered a general partner. By authorizing the widow to manage partnership property (which a limited
partner could not be authorized to do), Goquiolay recognized her as such partner, and is now in estoppel
to deny her position as a general partner, with authority to administer and alienate partnership property.

Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say "necessarily")
becomes a limited partner for his own protection, because he would normally prefer to avoid any liability
in excess of the value of the estate inherited so as not to jeopardize his personal assets. But this statutory
limitation of responsibility being designed to protect the heir, the latter may disregard it and instead elect
to become a collective or general partner, with all the rights and privileges of one, and answering for the
debts of the firm not only with the inheritance bud also with the heir's personal fortune. This choice
pertains exclusively to the heir, and does not require the assent of the surviving partner.

It must be remembered that the articles of co-partnership here involved expressly stipulated that:

In that event of the death of any of the partners at any time before the expiration of said te rm, the
co-partnership shall not be dissolved but will have to be continued and the deceased partner shall
be represented by his heirs or assigns in said co-partnership" (Art. XII, Articles of Co-Partnership).

The Articles did not provide that the heirs of the deceased would be merely limited partner; on the
contrary they expressly stipulated that in case of death of either partner "the co-partnership ... will have
to be continued" with the heirs or assigns. It certainly could not be continued if it were to be converted
from a general partnership into a limited partnership, since the difference between the two kinds of
associations is fundamental; and specially because the conversion into a limited association would leave
the heirs of the deceased partner without a share in the management. Hence, the contractual stipulation
does actually contemplate that the heirs would become general partners rather than limited ones.

Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to assume
personal and unlimited responsibility for the obligations of the firm. The heirs, in other words, can not be
compelled to become general partners against their wishes. But because they are not so compellable, it
does not legitimately follow that they may not voluntarily choose to become general partners, waiving the
protective mantle of the general laws of succession. And in the latter event, it is pointless to discuss the
legality of any conversion of a limited partner into a general one. The heir never was a limited partner, but
chose to be, and became, a general partner right at the start.

It is immaterial that the heirs name was not included in the firm name, since no conversion of status is
involved, and the articles of co-partnership expressly contemplated the admission of the partner's heirs
into the partnership.

It must never be overlooked that this case involves the rights acquired by strangers, and does not deal
with the rights arising between partners Goquiolay and the widow of Tan Sin An. The issues between the
partners inter se were expressly reversed in our main decision. Now, in determining what kind of partner
the widow of partner Tan Sin An had elected to become, strangers had to be guided by her conduct and
actuations and those of appellant Goquiolay. Knowing that by law a limited partner is barred from
managing the partnership business or property, third parties (like the purchasers) who found the widow
possessing and managing the firm property with the acquiescense (or at least without apparent
opposition) of the surviving partners were perfectly justified in assuming that she had become a general
partner, and, therefore, in negotiating with her as such a partner, having authority to act for, and in
behalf of, the firm. This belief, be it noted, was shared even by the probate court that approved the sale
by the widow of the real property standing in the partnership name. That belief was fostered by the very
inaction of appellant Goquiolay. Note that for seven long years, from partner Tan Sin An's death in 1942
to the sale in 1949, there was more than ample time for Goquiolay to take up the management of these
properties, or at least ascertain how its affairs stood. For seven years Goquiolay could have asserted his
alleged rights, and by suitable notice in the commercial registry could have warned strangers that they
must deal with him alone, as sole general partner. But he did nothing of the sort, because he was not
interested (supra), and he did not even take steps to pay, or settle, the firm debts that were overdue
since before the outbreak of the last war. He did not even take steps, after Tan Sin An died, to cancel, or
modify, the provisions of the partnership articles that he (Goquiolay) would have no intervention in the
management of the partnership. This laches certainly contributed to confirm the view that the widow of
Tan Sin An had, or was given, authority to manage and deal with the firm's properties, apart from the
presumption that a general partner dealing with partnership property has the requisite authority from his
co-partners (Litton vs. Hill and Ceron, et al., 67 Phil., 513; quoted in our main decision, p. 11).

The stipulation in the articles of partnership that any of the two managing partners may contract
and sign in the name of the partnership with the consent of the other, undoubtedly creates an
obligation between the two partners, which consists in asking the other's consent before
contracting for the partnership. This obligation of course is not imposed upon a third person who
contracts with the partnership. Neither is it necessary for the third person to ascertain if the
managing partner with whom he contracts has previously obtained the consent of the other. A third
person may and has a right to presume that the partner with whom he contracts has, in the
ordinary and natural course of business, the consent of his co-partner; for otherwise he would not
enter into the contract. The third person would naturally not presume that the partner with whom
he enters into the transaction is violating the articles of partnership, but on the contrary, is acting
in accordance therewith. And this finds support in the legal presumption that the ordinary course of
business has been followed (No. 18, section 334, Code of Civil Procedure), and that the law has
been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which
have the force of law between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil., 509, 516)
(Emphasis supplied)

It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm. This
argument is lamentably superficial because it fails to differentiate between real estate acquired and held
as stock-in-trade and real state held merely as business site (Vivante's "taller o banco social") for the
partnership. Where the partnership business is to deal in merchandise and goods, i.e., movable property,
the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not
in line with the normal business of the firm. But where the express and avowed purpose of the partnership
is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm form part
of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the
ordinary powers of the partner. This distinction is supported by the opinion of Gay de Montella 1, in the
very passage quoted in the appellant's motion for reconsideration:

La enajenacion puede entrar en las facultades del gerente: cuando es conforme a los fines sociales.
Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a
los objetos de comecio o a los productos de la fabrica para explotacion de los cuales se ha
constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la
compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas
que fuere necesario. (Montella) (Emphasis supplied)

The same rule obtains in American law.

In Rosen vs. Rosen, 212 N. Y. Supp. 405, 406, it was held:

a partnership to deal in real estate may be created and either partner has the legal right to sell the
firm real estate

In Chester vs. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550:

And hence, when the partnership business is to deal in real estate, one partner has ample power,
as a general agent of the firm, to enter into an executory contract for the sale of real estate.
And in Rovelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St., Rep. 83:

If the several partners engaged in the business of buying and selling real estate can not bind the
firm by purchases or sales of such property made in the regular course of business, then they are
incapable of exercising the essential rights and powers of general partners and their association is
not really a partnership at all, but a several agency.

Since the sale by the widow was in conformity with the express objective of the partnership, "to engage *
* * in buying and selling real estate" (Art IV, No. 1, Articles of Copartnership), it can not be maintained
that the sale was made in excess of her powers as general partner.

Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et al., vs.
Cowen, et al., 49 N. E., 338. But the facts of that case are vastly different from the one before us. In the
McGrath case, the Court expressly found that:

The firm was then, and for some time had been, insolvent, in the sense that its property was
insufficient to pay its debts, though it still had good credit, and was actively engaged in the
prosecution of its business. On that day, which was Saturday, the plaintiff caused to be prepared,
ready for execution, the four chattel mortgages in question, which cover all the tangible property
then belonging to the firm, including the counters, shelving, and other furnishings and fixtures
necessary for, and used in carrying on, its business, and signed the same in this form: "In witness
whereof, the said Cowen & McGrath, a firm, and Owen McGrath, surviving partner of said firm, and
Owen McGrath, individually, have here-unto set their hands, this 20th day of May, A. D. 1893.
Cowen & McGrath, by Owen McGrath. Owen McGrath, Surviving partner of Cowen & McGrath.
Owen McGrath" At the same time, the plaintiff had prepared, ready for filing, the petition for the
dissolution of the partnership and appointment of a receiver, which he subsequently filed, as
hereinafter stated. On the day the mortgages were signed, they were placed in the hands of the
mortgagees, which was the first intimation to them that there was any intention to make then. At
that time none of the claims secured by the mortgages were due, except, it may be, a small part of
one of them, and none of the creditors to whom the mortgages were made had requested security,
or were pressing for the payment of their debts. ... The mortgages appear to be without a sufficient
condition of defeasance, and contain a stipulation authorizing the mortgagees to take immediate
possession of the property, which they did as soon as the mortgages were filed, through the
attorney who then represented them, as well as the plaintiff; and the stores were at once
closed, and possession delivered by them to the receiver appointed upon the filing of the
petition. The avowed purpose of the plaintiff in the course pursued by him, was to terminate the
partnership, place its property beyond the control of the firm, and insure the preference of the
mortgages, all of which was known to them at the time: ... . (Cas cit., p. 343, Emphasis supplied)

It is natural that from these facts the Supreme Court of Ohio should draw the conclusion that conveyances
were made with intent to terminate the partnership, and that they were not within the powers of McGrath
as partner. But there is no similarly between those acts and the sale by the widow of Tan Sin An. In the
McGrath case, the sale included even the fixtures used in the business, in our case, the lands sold were
those acquired to be sold. In the McGrath case, none of the creditors were pressing for payment; in our
case, the creditors had been unpaid for more than seven years, and their claims had been approved by
the probate court for payment. In the McGrath case, the partnership received nothing beyond the
discharge of its debts; in the present case, not only were its debts assumed by the buyers, but the latter
paid, in addition, P37,000.00 in cash to the widow, to the profit of the partnership. Clearly, the McGrath
ruling is not applicable.

We will now turn to the question to fraud. No direct evidence of it exists; but appellant points out, as
indicia thereof, the allegedly low price paid for the property, and the relationship between the buyers, the
creditors of the partnership, and the widow of Tan Sin An.

First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of which
P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser. These debts
(P62,415.91 to Yutivo, and P54,310.13 to Sing Yee Cuan & Co.) are not questioned; they were approved
by the Court, and its approval is now final. The claims were, in fact, for the balance on the original
purchase price of the land sold (due first to La Urbana, later to the Banco Hipotecario) plus accrued
interests and taxes, redeemed by the two creditors-claimants. To show that the price was inadequate,
appellant relies on the testimony of the realtor Mata, who in 1955, six years after the sale in question,
asserted that the land was worth P312,000.00. Taking into account the continued rise of real estate values
since liberation, and the fact that the sale in question was practically a forced sale because the partnership
had no other means to pay its legitimate debts, this evidence certainly does not show such "gross
inadequacy" as to justify rescission of the sale. If at the time of the sale (1949 the price of P153,726.04
was really low, how is it that appellant was not able to raise the amount, even if the creditor's
representative, Yu Khe Thai, had already warned him four years before (1946) that the creditors wanted
their money back, as they were justly entitled to?

It is argued that the land could have been mortgaged to raise the sum needed to discharge the debts. But
the lands were already mortgaged, and had been mortgaged since 1940, first to La Urbana, and then to
the Banco Hipotecario. Was it reasonable to expect that other persons would loan money to the
partnership when it was unable even to pay the taxes on the property, and the interest on the principal
since 1940? If it had been possible to find lenders willing to take a chance on such a bad financial record,
would not Goquiolay have taken advantage of it? But the fact is clear on the record that since liberation
until 1949 Goquiolay never lifted a finger to discharge the debts of the partnership. Is he entitled now to
cry fraud after the debts were discharged with no help from him?

With regard to the relationship between the parties, suffice it to say that the Supreme Court has ruled that
relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil., 243; also Hermandad de
Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence that the original buyers,
Washington Sycip and Betty Lee, were without independent means to purchase the property. That the
Yutivos should be willing to extend credit to them, and not to appellant, is neither illegal nor immoral; at
the very least, these buyers did not have a record of inveterate defaults like the partnership "Tan Sin An &
Goquiolay".

Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo firm
and their component members. But no proof is adduced. If he was such a victim, he could have easily
defeated the conspirators by raising money and paying off the firm's debts between 1945 and 1949; but
he did; he did not even care to look for a purchaser of the partnership assets. Were it true that the
conspiracy to defraud him arose (as he claims) because of his refusal to sell the lands when in 1945 Yu
Khe Thai asked him to do so, it is certainly strange that the conspirators should wait 4 years, until 1949,
to have the sale effected by the widow of Tan Sin An, and that the sale should have been routed through
the probate court taking cognizance of Tan Sin An's estate, all of which increased the risk that the
supposed fraud should be detected.

Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as
subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An. This for
two reasons: First, Tan Sin An and the partnership "Tan Sin An & Goquiolay" were solidary (joint and
several) debtors (Exhibit "N" mortgage to the Banco Hipotecario), and Rule 87, section 6, is to the effect
that:

Where the obligation of the decedent is joint and several with another debtor, the claim shall be
filed against the decedent as if he were the only debtor, without prejudice to the right of the estate
to recover contribution from the other debtor. (Emphasis supplied)

Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the partnership and
those of Tan Sin An personally, and a mortgage in indivisible, in the sense that each and every pa rcel
under mortgage answers for the totality of the debt (Civ. Code of 1889, Article 1860; New Civil Code, Art.
2089).

A final and conclusive consideration. The fraud charged not being one used to obtain a party's consent to
a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at all, it can only be a fraud of
creditors that gives rise to a rescission of the offending contract. But by express provision of law (Article
1294, Civil Code of 1889; Article 1383, New Civil Code), "the action for rescission is subsidiary; it can not
be instituted except when the party suffering damage has no other legal means to obtain reparation for
the same". Since there is no allegation, or evidence, that Goquiolay can not obtain reparation from the
widow and heirs of Tan Sin An, the present suit to rescind the sale in question is not maintenable, even if
the fraud charged actually did exist.

Premises considered, the motion for reconsideration is denied.

Separate Opinion

BAUTISTA ANGELO, J., dissenting:

This is an appeal from a decision of the Court of First Instance of Davao dismissing the complaint filed by
Antonio C. Goquiolay, et al., seeking to annul the sale made by Kong Chai Pin of three parcels of land to
Washington Z. Sycip and Betty Y. Lee on the ground that it was executed without proper authority and
under fraudulent circumstances. In a decision rendered on July 26, 1960, we affirmed this decision
although on grounds different from those on which the latter is predicated. The case is once more before
us on a motion for reconsideration filed by appellants raising both questions of fact and of law.

On May 29, 1940, Tan Sin An and Antonio C. Goquiolay executed in Davao City a commercial partnership
for a period of ten years with a capital of P30,000.00 of which Goquiolay contributed P18,000.00
representing 60% while Tan Sin An P12,000.00 representing 40%. The business of the partnership was to
engage in buying real estate properties for subdivision, resale and lease. The partnership was duly
registered, and among the conditions agreed upon in the partnership agreement which are material to this
case are: (1) that Tan Sin An would be the exclusive managing partner, and (2) in the event of the death
of any of the partners the partnership would continue, the deceased to be represented by his heirs. On
May 31, 1940, Goquiolay executed a general power of attorney in favor of Tan Sin An appointing the latter
manager of the partnership and conferring upon him the usual powers of management.

On May 29, 1940, the partnership acquired three parcels of land known as Lots Nos. 526, 441 and 521 of
the cadastral survey of Davao, the only assets of the partnership, with the capital originally invested,
financing the balance of the purchase price with a mortgage in favor of "La Urbana Sociedad Mutua de
Construccion Prestamos" in the amount of P25,000.00 payable in ten years. On the same date, Tan Sin
An, in his individual capacity, acquired 46 parcels of land executing a mortgage thereon in favor of the
same company for the sum of P35,000.00. On September 25, 1940, these two mortgage obligations were
consolidated and transferred to the Banco Hipotecario de Filipinas and as a result Tan Sin An, in his
individual capacity, and the partnership bound themselves to pay jointly and severally the total amount of
P52,282.80, with 8% annual interest thereon within the period of eight years mortgaging in favor of said
entity the 3 parcels of land belonging to the partnership to Tan Sin An.

Tan Sin An died on June 26, 1942 and was survived by his widow, defendant Kong Chai Pin, and four
children, all of whom are minors of tender age. On March 18, 1944, Kong Chai Pin was appointed
administratrix of the intestate estate of Tan Sin An. And on the same date, Sing, Yee and Cuan Co., Inc.
paid to the Banco Hipotecario the remaining unpaid balance of the mortgage obligation of the partnership
amounting to P46,116.75 in Japanese currency.

Sometime in 1945, after the liberation of Manila, Yu Khe Thai, president and general manager of Yutivo
Sons Hardware Co. and Sing, Yee and Cuan Co., Inc., called for Goquiolay and the two had a conference
in the office of the former during which he offered to buy the interest of Goquiolay in the partnership. In
1948, Kong Chai Pin, the widow, sent her counsel, Atty. Dominador Zuño, to ask Goquiolay to execute in
her favor a power of attorney. Goquiolay refused both to sell his interest in the partnership as well as to
execute the power of attorney.

Having failed to get Goquiolay to sell his share in the partnership, Yutivo Sons Hardware Co., and Sing,
Yee and Cuan Co., Inc. filed in November, 1946 a claim each in the intestate proceedings of Tan Sin An for
the sum of P84,705.48 and P66,529.91, respectively, alleging that they represent obligations of both Tan
Sin An and the partnership. After first denying any knowledge of the claims, Kong Chai Pin, as
administratrix, admitted later without qualification the two claims in an amended answer she filed on
February 28, 1947. The admission was predicated on the ground that she and the creditors were closely
related by blood, affinity and business ties. On due course, these two claims were approved by the court.

On March 29, 1949, more than two years after the approval of the claims, Kong Chai Pin filed a petition in
the probate court to sell all the properties of the partnership as well as some of the conjugal properties
left by Tan Sin An for the purpose of paying the claims. Following approval by the court of the petition for
authority to sell, Kong Chai Pin, in her capacity as administratrix, and presuming to act as managing
partner of the partnership, executed on April 4, 1949 a deed of sale of the properties owned by Tan Sin An
and by the partnership in favor of Betty Y. Lee and Washington Z. Sycip in consideration of the payment
to Kong Chai Pin of the sum of P37,000.00, and the assumption by the buyers of the claims filed by Yutivo
Sons Hardware Co. and Sing, Yee and Cuan Co., Inc. in whose favor the buyers executed a mortgage on
the properties purchased. Betty Y. Lee and Washington Z. Sycip subsequently executed a deed of sale of
the same properties in favor of their co-defendant Insular Development Company, Inc. It should be noted
that these transactions took place without the knowledge of Goquiolay and it is admitted that Betty Y. Lee
and Washington Z. Sycip bought the properties on behalf of the ultimate buyer, the Insular Development
Company, Inc., with money given by the latter.

Upon learning of the sale of the partnership properties, Goquiolay filed on July 25, 1949 in the intestate
proceedings a petition to set aside the order of the court approving the sale. The court granted the
petition. While the order was pending appeal in the Supreme Court, Goquiolay filed the present case on
January 15, 1953 seeking to nullify the sale as stated in the early part of this decision. In the meantime,
the Supreme Court remanded the original case to the probate court for rehearing due to lack of necessary
parties.

The plaintiffs in their complaint challenged the authority of Kong Chai Pin to sell the partnership properties
on the ground that she had no authority to sell because even granting that she became a partner upon the
death of Tan Sin An the power of attorney granted in favor of the latter expired after his death.

Defendants, on the other hand, defended the validity of the sale on the theory that she succeeded to all
the rights and prerogatives of Tan Sin An as managing partner.

The trial court sustained the validity of the sale on the ground that under the provisions of the articles of
partnership allowing the heirs of the deceased partner to represent him in the partnership after hid death
Kong Chai Pin became a managing partner, this being the capacity held by Tan Sin An when he died.

In the decision rendered by this Court on July 26, 1960, we affirmed this decision but on different
grounds, among which the salient points are: (1) the power of attorney given by Goquiolay to Tan Sin An
as manager of the partnership expired after his death; (2) his widow Kong Chai Pin did not inherit the
management of the partnership, it being a personal right; (3) as a general rule, the heirs of a deceased
general partner come into the partnership in the capacity only of limited partners; (4) Kong Chai Pi n,
however, became a general partner because she exercised certain alleged acts of management; and (5)
the sale being necessary to pay the obligations of the partnership, she was therefore authorized to sell the
partnership properties without the consent of Goquiolay under the principle of estoppel, the buyers having
the right to rely on her acts of management and to believe her to be in fact the managing partner.

Considering that some of the above findings of fact and conclusions of law are without legal or factual
basis, appellants have in due course filed a motion for reconsideration which because of the importance of
the issues therein raised has been the subject of mature deliberation.

In support of said motion, appellants advanced the following arguments:

1. If the conclusion of the Court is that heirs as a general rule enter the partnership as limited
partners only, therefore Kong Chai Pin, who must necessarily have entered the partnership as a
limited partner originally, could have not chosen to be a general partner by exercising the alleged
acts of management, because under Article 148 of the Code of Commerce a limited partner cannot
intervene in the management of the partnership even if given a power of attorney by the general
 partners. An Act prohibited by law cannot give rise to any right and is void under the express
provisions of the Civil Code.

2. The buyers were not strangers to Kong Chai Pin, all of them being members of the Yu (Yutivo)
family, the rest, members of the law firm which handles the Yutivo interests and handled the
papers of sale. They did not rely on the alleged acts of management — they believed (this was the
opinion of their lawyers) that Kong Chai Pin succeeded her husband as a managing partner and it
was on this theory alone that they submitted the case in the lower court.

3. The alleged acts of management were denied and repudiated by the very witnesses presented
by the defendants themselves.

The arguments advanced by appellants are in our opinion well-taken and furnish sufficient basis to
reconsider our decision if we want to do justice to Antonio C. Goquiolay. And to justify this conclusion, it is
enough that we lay stress on the following points: (1) there is no sufficient factual basis to conclude that
Kong Chai Pin executed acts of management to give her the character of general manager of the
partnership, or to serve as basis for estoppel that may benefit the purchasers of the partnership
properties; (2) the alleged acts of management, even if proven, could not give Kong Chai Pin the
character of general manager for the same is contrary to law and well-known authorities; (3) even if Kong
Chai Pin acted as general manager she had no authority to sell the partnership properties as to make it
legal and valid; and (4) Kong Chai Pin had no necessity to sell the properties to pay the obligation of the
partnership and if she did so it was merely to favor the purchasers who were close relatives to the
prejudice of Goquiolay.

1. This point is pivotal for if Kong Chai Pin did not execute the acts of management imputed to her our
ruling we apparently gave particular importance to the fact that it was Goquiolay himself who tried to
prove the acts of management. Appellants, however, have emphasized the fact, and with reason, that
the appellees themselves are the ones who denied and refuted the so-called acts of management imputed
to Kong Chai Pin. To have a clear view of this factual situation, it becomes necessary that we analyze the
evidence of record.

Plaintiff Goquiolay, it is intimated, testified on cross-examination that he had a conversation with one
Hernando Young in Manila in the year 1945 who informed him that Kong Chai Pin "was attending to the
properties and deriving some income therefrom and she had no other means of livelihood except those
properties and some rentals derived from the properties." He went on to say by way of remark that she
could continue doing this because he wanted to help her. On point that he emphasized was that he was
"not interested in agricultural lands."

On the other hand, defendants presented Hernando Young, the same person referred to by Goquiolay,
who was a close friend of the family of Kong Chai Pin, for the purpose of denying the testimony of
Goquiolay. Young testified that in 1945 he was still in Davao, and insisted no less than six times during his
testimony that he was not in Manila in 1945, the year when he allegedly gave the information to
Goquiolay, stating that he arrived in Manila for the first time in 1947. He testified further that he had
visited the partnership properties during the period covered by the alleged information given by him to
Goquiolay and that he found them "abandoned and underdeveloped," and that Kong Chai Pin was not
deriving any income from them.

The other witness for the defendants, Rufino Lim, also testified that he had seen the partnership
properties and corroborated the testimony of Hernando Young in all respects: "the properties in Mamay
were underdeveloped, the shacks were destroyed in Tigato, and the family of Kong Chai Pin did not
receive any income from the partnership properties." He specifically rebutted the testimony of Goquiolay
in his deposition given on June 30, 1956 that Kong Chai Pin and her family were living in the partnership
properties and stated that the 'family never actually lived in the properties of the partnership even before
the war or after the war."

It is unquestionable that Goquiolay was merely repeating an information given to him by a third person,
Hernando Young — he stressed this point twice. A careful analysis of the substance of Goquiolay's
testimony will show that he merely had no objection to allowing Kong Chai Pin to continue attending to the
properties in order to give her some means of livelihood, because, according to the information given him
by Hernando Young, which he assumed to be true, Kong Chai Pin had no other means of livelihood. But
certainly he made it very clear that he did not allow her to manage the partnership when he explained his
reason for refusing to sign a general power of attorney for Kong Chai Pin which her counsel, Atty. Zuño,
brought with him to his house in 1948. He said:

. . . Then Mr. Yu Eng Lai told me that he brought with him Atty. Zuño and he asked me if I could
execute a general power of attorney for Mrs. Kong Chai Pin. Then I told Atty. Zuño what is the use
of executing a general power of attorney for Mrs. Kong Chai Pin when Mrs. Kong Chai Pin had
already got that plantation for agricultural purposes, I said for agricultural purposes she can use
that plantation ... (T.s.n., p. 9, Hearing on May 5, 1955)

It must be noted that in his testimony Goquiolay was categorically stating his opposition to the
management of the partnership by Kong Chai Pin and carefully made the distinction that his conformity
was for her to attend to the partnership properties in order to give her merely a means of livelihood. It
should be stated that the period covered by the testimony refers to the period of occupation when living
condition was difficult and precarious. And Atty. Zuño, it should also be stated, did not deny the statement
of Goquiolay.

It can therefore be seen that the question as to whether Kong Chai Pin exercised certain acts of
management of the partnership properties is highly controverted. The most that we can say is that the
alleged acts are doubtful more so when they are disputed by the defendants themselves who later became
the purchasers of the properties, and yet these alleged acts, if at all, only refer to management of the
properties and not to management of the partnership, which are two different things.

In resume, we may conclude that the sale of the partnership properties by Kong Chai Pin cannot be
upheld on the ground of estoppel, first, because the alleged acts of management have not been clearly
proven; second, because the record clearly shows that the defendants, or the buyers, were not misled nor
did they rely on the acts of management, but instead they acted solely on the opinion of their counsel,
Atty. Quisumbing, to the effect that she succeeded her husband in the partnership as managing partner
by operation of law; and third, because the defendants are themselves estopped to invoke a defense
which they tried to dispute and repudiate.

2. Assuming arguendo that the acts of management imputed to Kong Chai Pin are true, could such acts
give her the character of general manager of the partnership as we have concluded in our decision?

Out answer is in the negative because it is contrary to law and precedents. Garrigues, a well-known
commentator, is clearly of the opinion that mere acceptance of the inheritance does not make the heir of a
general partner a general partner himself. He emphasized that the heir must declare that he is entering
the partnership as a general partner unless the deceased partner has made it an express condition in his
will that the heir accepts the condition of entering the partnership as a prerequisite of inheritance, in
which case acceptance of the inheritance is enough.1 But here Tan Sin An died intestate.

Now, could Kong Chai Pin be deemed to have declared her intention to become general partner by
exercising acts of management? We believe not, for, in consonance with out ruling that as a general rule
the heirs of a deceased partner succeed as limited partners only by operation of law, it is obvious that the
heir, upon entering the partnership, must make a declaration of his character, otherwise he should be
deemed as having succeeded as limited partner by the mere acceptance of inheritance. And here Kong
Chai Pin did not make such declaration. Being then a limited partner upon the death of Tan Sin An by
operation of law, the peremptory prohibition contained in Article 148 2 of the Code of Commerce became
binding upon her and as a result she could not change her status by violating its provisions not only under
the general principle that prohibited acts cannot produce any legal effect, but also because under the
provisions of Article 1473 of the same Code she was precluded from acquiring more rights than those
pertaining to her as a limited partner. The alleged acts of management, therefore, did not give Kong Chai
Pin the character of general manager to authorize her to bind the partnership.
Assuming also arguendo that the alleged acts of management imputed to Kong Chai Pin gave her the
character of a general partner, could she sell the partnership properties without authority from the other
partners?

Our answer is also in the negative in the light of the provisions of the articles of partnership and the
pertinent provisions of the Code of Commerce and the Civil Code. Thus, Article 129 of the Code of
Commerce says:

If the management of the general partnership has not been limited by special agreement to any of
the members, all shall have the power to take part in the direction and management of the
common business, and the members present shall come to an agreement for all contracts or
obligations which may concern the association.

And the pertinent portions of the Articles of partnership provides:

VII. The affairs of the co-partnership shall be managed exclusively by the managing partner or by
his authorized agent, and it is expressly stipulated that the managing partner may delegate the
entire management of the affairs of the co-partnership by irrevocable power of attorney to any
person, firm or corporation he may select, upon such terms as regards compensation as he may
deem proper, and vest in such person, firm or corporation full power and authority, as the agent of
the co-partnership and in his name, place and stead to do anything for it or on his behalf which he
as such managing partner might do or cause to be done. (Page 23, Record on Appeal)

It would thus be seen that the powers of the managing partner are not defined either under the provisions
of the Code of Commerce or in the articles of partnership, a situation which, under Article 2 of the same
Code, renders applicable herein the provisions of the Civil Code, And since, according to well-known
authorities, the relationship between a managing partner and the partnership is substantially the same as
that of the agent and his principal, 4 the extent of the power of Kong Chai Pin must, therefore, be
determined under the general principles governing agency. And, on this point, the law says that an agency
created in general terms includes only acts of administration, but with regard to the power to compromise,
sell, mortgage, and other acts of strict ownership, an express power of attorney is required. 5 Here Kong
Chai Pin did not have such power when she sold the properties of the partnership.

Of course, there is authority to the effect that a managing partner, even without express power of
attorney, may perform acts affecting ownership if the same are necessary to promote or accomplish a
declared object of the partnership, but here the transaction is not for this purpose. It was effected not to
promote any avowed object of the partnership. 6 Rather, the sale was effected to pay an obligation of the
partnership by selling its real properties which Kong Chai Pin could not do without express authority. The
authorities supporting this view are overwhelming.

La enajenacion puede entrar en las facultades del gerente, cuando es conforme a los fines sociales.
Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a
los objetos de comercio, o los productos de la fabrica para explotacion de los cuales se ha
constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la
compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas
que fuere necesario. Por el contrario, el gerente no tiene atribuciones para vender las instalaciones
del comercio ni la fabrica, ni las maquinarias, vehiculos de transporte, etc., que forman parte de la
explotacion social. En todos estas casos, igualmente que si tratase de la venta de una marca o
procedimiento mecanico o quimico, etc., siendo actos de disposicion seria necesario contar con la
conformidad expresa de todos los socios. (R. Gay de Montella, id., pp. 223-224, Emphasis
supplied)

Los poderes de los Administradores no tienen ante el silencio del contrato otros limites que los
señalados por el objeto de la Sociedad y, por consiguiente, pueden llevar a cabo todas las
operaciones que sirven para aquel ejercicio, incluso cambiando repetidas veces los propios
acuerdos segun el interes convenido de la Sociedad. Pueden contratar y despedir a los empleados,
tomar en arriendo almacenas y tiendas, expedir cambiales, girarlas, avalarlas, dar en prenda o en
hipoteca los bienes de la sociedad y adquirir inmuebles destinados a su explotacion o al empleo
 estable de sus capitales. Pero no podran ejecutar los actos que estan en contradiccion con la
explotacion que les fue confiada no podran cambiar el objeto, el domicilio la razon social; fundir a
la Sociedad en otra; ceder la accion, y por tanto, el uso de la firma social a otro renunciar
definitivamente el ejercicio de uno de otro ramo comercio que se les haya confiado y enajenar o
piqnorar el taller o el banco social excepto que la venta o piqnoracion tengan por el objeto procurar
los medios necesarios para la continuacion de la empresa social. (Cesar Vivante, Tratado de
Derecho Mercantil, pp. 124-125, Vol II, la. ed.; Emphasis supplied)

The act of one partner to bind the firm, must be necessary for the carrying on of its business. If all
that can be said of it was that it was convenient, or that it facilitated the transaction of the
business of the firm, that is not sufficient, in the absence of evidence of saction by other partners.
Nor, it seems, will necessity itself be sufficient if it be an extraordinary necessity. What is
necessary for carrying on the business of the firm under ordinary circumstances and in the usual
way, is the test. Lindl. Partn. Sec. 126. While, within this rule, one member of a partnership may,
in the usual and ordinary course of its business, make a valid sale or pledge, by way of mortgage
or otherwise, of all or part of its effects intended for sale, to a bona fide purchaser or mortgage,
without the consent of the other members of the firm, it is not within the scope of his implied
authority to make a final disposition of all of its effects, including those employed as the means of
carrying on its business, the object and effect of which is to immediately terminate the partnership,
and place its property beyond its control. Such a disposition, instead of being within the scope of
the partnership business, or in the usual and ordinary way of carrying it on, is necessarily
subversive of the object of the partnership, and contrary to the presumed intention of the
partnership in its formation. (McGrath, et al. vs. Cowen, et al., 49 N.F. 338, 343; Emphasis
supplied)

Since Kong Chai Pin sold the partnership properties not in line with the business of the partnership but to
pay its obligation without first obtaining the consent of the other partners, the sale is invalid being in
excess of her authority.

4. Finally, the same under consideration was effected in a suspicious manner as may be gleaned from the
following circumstances:

(a) The properties subject of the instant sale which consist of three parcels of land situated in the City of
Davao have an area of 200 hectares more or less, or 2,000,000 square meters. These properties were
purchased by the partnership for purposes of subdivision. According to realtor Mata, who testified in court,
these properties could command at the time he testified a value of not less than P312,000.00, and
according to Dalton Chen, manager of the firm which took over the administration, since the date of sale
no improvement was ever made thereon precisely because of this litigation. And yet, for said properties,
aside from the sum of P37,000.00 which was paid for the properties of the deceased and the partnership,
only the paltry sum of P66,529.91 was paid as a consideration therefor, of which the sum of P46,116.75
was even paid in Japanese currency.

(b) Considering the area of the properties Kong Chai Pin had no valid reason to sell them if her purpose
was only to pay the partnership's obligation. She could have negotiated a loan if she wanted to pay it by
placing the properties as security, but preferred to sell them even at such low prices because of her clo se
relationship with the purchasers and creditors who conveniently organized a partnership to exploit them,
as may be seen from the following relationship of their pedigree:

KONG CHAI PIN, the administratrix, was a granddaughter of Jose P. Yutivo, founder of the
defendant Yutivo Sons Hardware Co. YUTIVO SONS HARDWARE CO, and SIN YEE CUAN CO, INC.,
alleged creditors, are owned by the heirs of Jose P. Yutivo (Sing, Yee & Cuan are the three children
of Jose). YU KHE THAI is a grandson of the same Jose P. Yutivo, and president of the two alleged
creditors. He is the acknowledged head of the Yu families. WASHINGTON Z. SYCIP, one of the
original buyers, is married to Ana Yu, a daughter of Yu Khe Thai, BETTY Y. LEE, the other original
buyer is also a daughter of Yu Khe Thai. The INSULAR DEVELOPMENT CO., the ultimate buyer, was
organized for the specific purpose of buying the partnership properties. Its incorporators were: Ana
Yu and Betty V. Lee, Atty. Quisumbing and Salazar the lawyers who studied the papers of sale and
have been counsel for the Yutivo interests; Dalton Chen a brother-in-law of Yu Khe Thai and an
 executive of Sing Yee & Cuan Co; Lillian Yu, daughter of Yu Eng Poh, an executive of Yutivo Sons
Hardware, and Simeon Daguiwag, a trusted employee of the Yutivos.

(c) Lastly, even since Tan Sin An died in 1942 the creditors, who were close relatives of Kong Chai Pin,
have already conceived the idea of possessing the lands for purposes of subdivision, excluding Goquiolay
from their plan, and this is evident from the following sequence of events:

Tan Sin An died in 1942 and intestate proceedings were opened in 1944. In 1946, the creditors of
the partnership filed their claim against the partnership in the intestate proceedings. The creditors
studied ways and means of liquidating the obligation of the partnership, leading to the formation of
the defendant Insular Development Co., composed of members of the Yutivo family and the
counsel of record of the defendants, which subsequently bought the properties of the partnership
and assumed the obligation of the latter in favor of the creditors of the partnership, Yutivo Sons
Hardware and Sing, Yee & Cuan, also of the Yutivo family. The buyers took time to study the
commercial potentialities of the partnership properties and their lawyers carefully studied the
document and other papers involved in the transaction. All these steps led finally to the sale of the
three partnership properties.

Upon the strength of the foregoing considerations, I vote to grant motion for reconsideration.

G.R. No. L-3146 September 14, 1907

NICOLAS CO-PITCO, plaintiff-appellee, vs. PEDRO YULO, defendant-appellant.

WILLIARD, J.:

The appellee makes the point in his brief in this court that although the defendant excepted to the order of
the court below denying his motion for a new trial on the ground of the insufficiency of the evidence, yet
we can not review such evidence because it is not properly certified. We think that this point is well taken.
The testimony of one witness is certified to by the stenographer, who says that it is all the evidence which
took during the trial. The testimony of this witness is unimportant. There follow in the record several
pages of what purports to be evidence of different witnesses taken in narrative form, but neither the
judge, nor the clerk, nor the stenographer certify in any way what these pages are or that they contain
evidence taken during the trial of this case. For the purpose of this review, therefore, we can only consider
the facts admitted by the pleadings and those stated in the decision of the court below. In that decision
the court makes the following finding of fact, among others:

Before February, 1903, Florencio Yulo and Jaime Palacios were partners in the operation of a sugar
estate in Victorias, Island of Negros, and had commercial dealings with a Chinaman named Dy-
Sianco, who furnished them with money and goods, and used to buy their crop of sugar. In
February, 1903, the defendant, Pedro Yulo, father of the said Florencio, took charge of the latter's
interest in the above-mentioned partnership, and he became a general partner with the said Jaime
Palacios in the same business, and he continued as such partner until about the end of 1904,
dealing with Dy-Sianco in the same manner as the old partnership had dealt with the latter.

He then finds that the balance due from the firm Pedro Yulo and Jaime Palacios was 1,638.40 pesos,
Philippine currency, and orders judgment against the defendant, Pedro Yulo, for the entire amount, with
interest.

The partnership of Yulo and Palacios was engaged in the operation of a sugar estate in Negros. It was,
therefore a civil partnership, as distinguished from a mercantile partnership. Being a civil partnership, by
the express provisions of articles 1698 and 1137 of the Civil Code, the partners are not liable each for the
whole debt of the partnership. The liability is pro rata and in this case Pedro Yulo is responsible to plaintiff
for only one-half of the debt. The fact that the other partner, Jaime Palacios, had left the country can not
increase the liability of Pedro Yulo.
The judgment of the court below is reversed and judgment is ordered in favor of the plaintiff and against
the defendant, Pedro Yulo, for the sum of P819.20 pesos, Philippine Currency, with interest thereon at the
rate of 6 per cent per annum from the 12th day of January, 1905, and the costs of the Court of First
Instance. No costs will be allowed to either party in this court. So ordered.

G.R. No. L-11624 January 21, 1918

E. M. BACHRACH, plaintiff-appellee, vs. "LA PROTECTORA", ET AL., defendants-appellants.

STREET, J.:

In the year 1913, the individuals named as defendants in this action formed a civil partnership, called "La
Protectora," for the purpose of engaging in the business of transporting passengers and freight at Laoag,
Ilocos Norte. In order to provide the enterprise with means of transportation, Marcelo Barba, acti ng as
manager, came to Manila and upon June 23, 1913, negotiated the purchase of two automobile trucks from
the plaintiff, E. M. Bachrach, for the agree price of P16,500. He paid the sum of 3,000 in cash, and for the
balance executed promissory notes representing the deferred payments. These notes provided for the
payment of interest from June 23, 1913, the date of the notes, at the rate of 10 per cent per annum.
Provision was also made in the notes for the payment of 25 per cent of the amount due if it sho uld be
necessary to place the notes in the hands of an attorney for collection. Three of these notes, for the sum
of P3,375 each, have been made the subject of the present action, and there are exhibited with the
complaint in the cause. One was signed by Marcelo Barba in the following manner:

P. P. La Protectora
By Marcelo Barba
Marcelo Barba.

The other two notes are signed in the same way with the word "By" omitted before the name of Marcelo
Barba in the second line of the signature. It is obvious that in thus signing the notes Marcelo Barba
intended to bind both the partnership and himself. In the body of the note the word "I" ( yo) instead of
"we" (nosotros) is used before the words "promise to pay" (prometemos) used in the printed form. It is
plain that the singular pronoun here has all the force of the plural.

As preliminary to the purchase of these trucks, the defendants Nicolas Segundo, Antonio Adiarte, Ignacio
Flores, and Modesto Serrano, upon June 12, 1913, executed in due form a document in which they
declared that they were members of the firm "La Protectora" and that they had granted to its president
full authority "in the name and representation of said partnership to contract for the purchase of two
automobiles" (en nombre y representacion de la mencionada sociedad contratante la compra de dos
automoviles). This document was apparently executed in obedience to the requirements of subsection 2 of
article 1697 of the Civil Code, for the purpose of evidencing the authority of Marcelo Barba to bind the
partnership by the purchase. The document in question was delivered by him to Bachrach at the time the
automobiles were purchased.

From time to time after this purchase was made, Marcelo Barba purchased of the plaintiff various
automobile effects and accessories to be used in the business of "La Protectora." Upon May 21, 1914, the
indebtedness resulting from these additional purchases amounted to the sum of P2,916.57

In May, 1914, the plaintiff foreclosed a chattel mortgage which he had retained on the trucks in order to
secure the purchase price. The amount realized from this sale was P1,000. This was credited unpaid. To
recover this balance, together with the sum due for additional purchases, the present action was instituted
in the Court of First Instance of the city of Manila, upon May 29, 1914, against "La Protectora" and the five
individuals Marcelo Barba, Nicolas Segundo, Antonio Adiarte, Ignacio Flores, and Modesto Serrano. No
question has been made as to the propriety of impleading "La Protectora" as if it were a legal entity. At
the hearing, judgment was rendered against all of the defendants. From this judgment no appeal was
taken in behalf either of "La Protectora" or Marcelo Barba; and their liability is not here under
consideration. The four individuals who signed the document to which reference has been made,
authorizing Barba to purchase the two trucks have, however, appealed and assigned errors. The question
here to be determined is whether or not these individuals are liable for the firm debts and if so to what
extent.

The amount of indebtedness owing to the plaintiff is not in dispute, as the principal of the debt is agreed
to be P7,037. Of this amount it must now be assumed, in view of the finding of the trial court, from which
no appeal has been taken by the plaintiff, that the unpaid balance of the notes amounts to P4,121, while
the remainder (P2,916) represents the amount due for automobile supplies and accessories.

The business conducted under the name of "La Protectora" was evidently that of a civil partnership; and
the liability of the partners to this association must be determined under the provisions of the Civil Code.
The authority of Marcelo Barba to bind the partnership, in the purchase of the trucks, is fully established
by the document executed by the four appellants upon June 12, 1913. The transaction by which Barba
secured these trucks was in conformity with the tenor of this document. The promissory notes constitute
the obligation exclusively of "La Protectora" and of Marcelo Barba; and they do not in any sense constitute
an obligation directly binding on the four appellants. Their liability is based on the fact that they are
members of the civil partnership and as such are liable for its debts. It is true that article 1698 of the Civil
Code declares that a member of a civil partnership is not liable in solidum (solidariamente) with his fellows
for its entire indebtedness; but it results from this article, in connection with article 1137 of the Civil Code,
that each is liable with the others (mancomunadamente) for his aliquot part of such indebtedness. And so
it has been held by this court. (Co-Pitco vs. Yulo, 8 Phil. Rep., 544.)

The Court of First Instance seems to have founded its judgment against the appellants in part upon the
idea that the document executed by them constituted an authority for Marcelo Barba to bind them
personally, as contemplated in the second clause of article 1698 of the Civil Code. That cause says that no
member of the partnership can bind the others by a personal act if they have not given him authority to
do so. We think that the document referred to was intended merely as an authority to enable Barba to
bind the partnership and that the parties to that instrument did not intend thereby to confer upon Barba
an authority to bind them personally. It is obvious that the contract which Barba in fact executed in
pursuance of that authority did not by its terms profess to bind the appellants personally at all, but only
the partnership and himself. It follows that the four appellants cannot be held to have been personally
obligated by that instrument; but, as we have already seen, their liability rests upon the general principles
underlying partnership liability.

As to so much of the indebtedness as is based upon the claim for automobile supplies and accessories, it
is obvious that the document of June 12, 1913, affords no authority for holding the appellants liable. Their
liability upon this account is, however, no less obvious than upon the debt incurred by the purchase of the
trucks; and such liability is derived from the fact that the debt was lawfully incurred in the prosecution of
the partnership enterprise.

There is no proof in the record showing what the agreement, if any, was made with regard to the form o f
management. Under these circumstances it is declared in article 1695 of the Civil Code that all the
partners are considered agents of the partnership. Barba therefore must be held to have had authority to
incur these expenses. But in addition to this he is shown to have been in fact the president or manager,
and there can be no doubt that he had actual authority to incur this obligation.

From what has been said it results that the appellants are severally liable for their respective shares of the
entire indebtedness found to be due; and the Court of First Instance committed no error in giving
judgment against them. The amount for which judgment should be entered is P7,037, to which shall be
added (1) interest at 10 per cent per annum from June 23, 1913, to be calculated upon the sum of
P4.121; (2) interest at 6 per cent per annum from July 21, 1915, to be calculated upon the sum of
P2,961; (3) the further sum of P1,030.25, this being the amount stipulated to be paid by way of
attorney's fees. However, it should be noted that any property pertaining to "La Protectora" should first be
applied to this indebtedness pursuant to the judgment already entered in this case in the court below; and
each of the four appellants shall be liable only for the one-fifth part of the remainder unpaid.

Let judgment be entered accordingly, without any express finding of costs of this instance. So ordered.
ISLAND SALES, INC., plaintiff-appellee, vs. UNITED PIONEERS GENERAL CONSTRUCTION
COMPANY, ET. AL defendants. BENJAMIN C. DACO, defendant-appellant.

CONCEPCION JR., J.:

This is an appeal interposed by the defendant Benjamin C. Daco from the decision of the Court of First
Instance of Manila, Branch XVI, in Civil Case No. 50682, the dispositive portion of which reads:

WHEREFORE, the Court sentences defendant United Pioneer General Construction Company
to pay plaintiff the sum of P7,119.07 with interest at the rate of 12% per annum until it is
fully paid, plus attorney's fees which the Court fixes in the sum of Eight Hundred Pesos
(P800.00) and costs.

The defendants Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim and Augusto Palisoc are
sentenced to pay the plaintiff in this case with the understanding that the judgment against
these individual defendants shall be enforced only if the defendant company has no more
leviable properties with which to satisfy the judgment against it. .

The individual defendants shall also pay the costs.

On April 22, 1961, the defendant company, a general partnership duly registered under the laws of the
Philippines, purchased from the plaintiff a motor vehicle on the installment basis and for this purpose
executed a promissory note for P9,440.00, payable in twelve (12) equal monthly installments of P786.63,
the first installment payable on or before May 22, 1961 and the subsequent installments on the 22nd day
of every month thereafter, until fully paid, with the condition that failure to pay any of said installments as
they fall due would render the whole unpaid balance immediately due and demandable.

Having failed to receive the installment due on July 22, 1961, the plaintiff sued the defendant company for
the unpaid balance amounting to P7,119.07. Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim, Romulo
B. Lumauig, and Augusto Palisoc were included as co-defendants in their capacity as general partners of
the defendant company.

Daniel A. Guizona failed to file an answer and was consequently declared in default.1

Subsequently, on motion of the plaintiff, the complaint was dismissed insofar as the defendant Romulo B.
Lumauig is concerned.2

When the case was called for hearing, the defendants and their counsels failed to appear notwithstanding
the notices sent to them. Consequently, the trial court authorized the plaintiff to present its evidence ex-
parte3 , after which the trial court rendered the decision appealed from.

The defendants Benjamin C. Daco and Noel C. Sim moved to reconsider the decision claiming that since
there are five (5) general partners, the joint and subsidiary liability of each partner should not exceed
one-fifth (1/5 ) of the obligations of the defendant company. But the trial court denied the said motion
notwithstanding the conformity of the plaintiff to limit the liability of the defendants Daco and Sim to only
one-fifth (1/5 ) of the obligations of the defendant company. 4 Hence, this appeal.

The only issue for resolution is whether or not the dismissal of the complaint to favor one of the general
partners of a partnership increases the joint and subsidiary liability of each of the remaining partners for
the obligations of the partnership.

Article 1816 of the Civil Code provides:

Art. 1816. All partners including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts which
may be entered into in the name and for the account of the partnership, under its signature
 and by a person authorized to act for the partnership. However, any partner may enter into
a separate obligation to perform a partnership contract.

In the case of Co-Pitco vs. Yulo (8 Phil. 544) this Court held:

The partnership of Yulo and Palacios was engaged in the operation of a sugar estate in
Negros. It was, therefore, a civil partnership as distinguished from a mercantile partnership.
Being a civil partnership, by the express provisions of articles l698 and 1137 of the Civil
Code, the partners are not liable each for the whole debt of the partnership. The liability
is pro rata and in this case Pedro Yulo is responsible to plaintiff for only one-half of the debt.
The fact that the other partner, Jaime Palacios, had left the country cannot increase the
liability of Pedro Yulo.

In the instant case, there were five (5) general partners when the promissory note in question was
executed for and in behalf of the partnership. Since the liability of the partners is pro rata, the liability of
the appellant Benjamin C. Daco shall be limited to only one-fifth (1/5 ) of the obligations of the defendant
company. The fact that the complaint against the defendant Romulo B. Lumauig was dismissed, upon
motion of the plaintiff, does not unmake the said Lumauig as a general partner in the defendant company.
In so moving to dismiss the complaint, the plaintiff merely condoned Lumauig's individual liability to the
plaintiff.

WHEREFORE, the appealed decision as thus clarified is hereby AFFIRMED, without pronouncement as to
costs. SO ORDERED.

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

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 partner, 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.

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

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;
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 plaintiff's 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 for P27,904.02 on Invoice No. 14413 for

P146,868.00 dated February 13, 1990;

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 attorney's 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 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.

3
SO ORDERED.

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 respondents 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;

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. 21

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 . . . .
Oviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is . . . . 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

14
Hence, petitioner brought this recourse before this Court.

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 LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats 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 Court's Ruling

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 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:

Art. 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 Yao's partner;

(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 (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, Chua's FB Lady Anne Mel and Yao's
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 parties-litigants 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 petitioner's 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 court's 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 petitioner's 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 petitioner's 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 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

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.

Sec. 21 of the Corporation Code of the Philippines provides:

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.

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 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 a cts 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

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.

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.

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 rapier's 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 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 agree d
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.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V. Panganiban,
particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have incurred the
liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly, the liability of partners
in a general partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or with one or
more persons not actual partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with respect to persons who rely upon the
representation. 1 The association formed by Chua, Yao and Lim, should be, as it has been deemed, a de
facto partnership with all the consequent obligations for the purpose of enforcing the rights of third
persons. The liability of general partners (in a general partnership as so opposed to a limited partnership)
is laid down in Article 1816 2 which posits that all partners shall be liable pro rata beyond the partnership
assets for all the contracts which may have been entered into in its name, under its signature, and by a
person authorized to act for the partnership. This rule is to be construed along with other provisions of the
Civil Code which postulate that the partners can be held solidarily liable with the partnership specifically in
these instances — (1) where, by any wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any
person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor
to the same extent as the partner so acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of a third person and the
money or property so received is misapplied by any partner while it is in the custody of the
partnership 3 — consistently with the rules on the nature of civil liability in delicts and quasi-delicts.

G.R. No. L-39780 November 11, 1985

ELMO MUÑASQUE, petitioner, vs. COURT OF APPEALS, CELESTINO GALAN TROPICAL
COMMERCIAL COMPANY and RAMON PONS, respondents.

GUTTIERREZ, JR., J.:

In this petition for certiorari, the petitioner seeks to annul and set added the decision of the Court of
Appeals affirming the existence of a partnership between petitioner and one of the respondents, Celestino
Galan and holding both of them liable to the two intervenors which extended credit to their partnership.
The petitioner wants to be excluded from the liabilities of the partnership.

Petitioner Elmo Muñasque filed a complaint for payment of sum of money and damages against
respondents Celestino Galan, Tropical Commercial, Co., Inc. (Tropical) and Ramon Pons, alleging that the
petitioner entered into a contract with respondent Tropical through its Cebu Branch Manager Pons for
remodelling a portion of its building without exchanging or expecting any consideration from Galan
although the latter was casually named as partner in the contract; that by virtue of his having introduced
the petitioner to the employing company (Tropical). Galan would receive some kind of compensation in
the form of some percentages or commission; that Tropical, under the terms of the contract, agreed to
give petitioner the amount of P7,000.00 soon after the construction began and thereafter, the amount of
P6,000.00 every fifteen (15) days during the construction to make a total sum of P25,000.00; that on
January 9, 1967, Tropical and/or Pons delivered a check for P7,000.00 not to the plaintiff but to a stranger
to the contract, Galan, who succeeded in getting petitioner's indorsement on the same check persuading
the latter that the same be deposited in a joint account; that on January 26, 1967 when the second check
for P6,000.00 was due, petitioner refused to indorse said cheek presented to him by Galan but through
later manipulations, respondent Pons succeeded in changing the payee's name from Elmo Muñasque to
Galan and Associates, thus enabling Galan to cash the same at the Cebu Branch of the Philippine
Commercial and Industrial Bank (PCIB) placing the petitioner in great financial difficulty in his construction
business and subjecting him to demands of creditors to pay' for construction materials, the payment of
which should have been made from the P13,000.00 received by Galan; that petitioner undertook the
construction at his own expense completing it prior to the March 16, 1967 deadline;that because of the
unauthorized disbursement by respondents Tropical and Pons of the sum of P13,000.00 to Galan
petitioner demanded that said amount be paid to him by respondents under the terms of the written
contract between the petitioner and respondent company.

The respondents answered the complaint by denying some and admitting some of the material averments
and setting up counterclaims.

During the pre-trial conference, the petitioners and respondents agreed that the issues to be resolved are:

(1) Whether or not there existed a partners between Celestino Galan and Elmo Muñasque;
and

(2) Whether or not there existed a justifiable cause on the part of respondent Tropical to
disburse money to respondent Galan.

The business firms Cebu Southern Hardware Company and Blue Diamond Glass Palace were allowed to
intervene, both having legal interest in the matter in litigation.

After trial, the court rendered judgment, the dispositive portion of which states:

IN VIEW WHEREOF, Judgment is hereby rendered:

(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the
intervenors Cebu and Southern Hardware Company and Blue Diamond Glass Palace the
amount of P6,229.34 and P2,213.51, respectively;

(2) absolving the defendants Tropical Commercial Company and Ramon Pons from any
liability,
 No damages awarded whatsoever.

The petitioner and intervenor Cebu Southern Company and its proprietor, Tan Siu filed motions for
reconsideration.

On January 15, 197 1, the trial court issued 'another order amending its judgment to make it read as
follows:

IN VIEW WHEREOF, Judgment is hereby rendered:

(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the
intervenors Cebu Southern Hardware Company and Blue Diamond Glass Palace the amount
of P6,229.34 and P2,213.51, respectively,

(2) ordering plaintiff and defendant Galan to pay Intervenor Cebu Southern Hardware
Company and Tan Siu jointly and severally interest at 12% per annum of the sum of
P6,229.34 until the amount is fully paid;

(3) ordering plaintiff and defendant Galan to pay P500.00 representing attorney's fees
jointly and severally to Intervenor Cebu Southern Hardware Company:

(4) absolving the defendants Tropical Commercial Company and Ramon Pons from any
liability,

No damages awarded whatsoever.

On appeal, the Court of Appeals affirmed the judgment of the trial court with the sole modification that the
liability imposed in the dispositive part of the decision on the credit of Cebu Southern Hardware and Blue
Diamond Glass Palace was changed from "jointly and severally" to "jointly."

Not satisfied, Mr. Muñasque filed this petition.

The present controversy began when petitioner Muñasque in behalf of the partnership of "Galan and
Muñasque" as Contractor entered into a written contract with respondent Tropical for remodelling the
respondent's Cebu branch building. A total amount of P25,000.00 was to be paid under the contract for
the entire services of the Contractor. The terms of payment were as follows: thirty percent (30%) of the
whole amount upon the signing of the contract and the balance thereof divided into three equal
installments at the lute of Six Thousand Pesos (P6,000.00) every fifteen (15) working days.

The first payment made by respondent Tropical was in the form of a check for P7,000.00 in the name of
the petitioner.Petitioner, however, indorsed the check in favor of respondent Galan to enable the latter to
deposit it in the bank and pay for the materials and labor used in the project.

Petitioner alleged that Galan spent P6,183.37 out of the P7,000.00 for his personal use so that when the
second check in the amount of P6,000.00 came and Galan asked the petitioner to indorse it again, the
petitioner refused.

The check was withheld from the petitioner. Since Galan informed the Cebu branch of Tropical that there
was a"misunderstanding" between him and petitioner, respondent Tropical changed the name of the
payee in the second check from Muñasque to "Galan and Associates" which was the duly registered name
of the partnership between Galan and petitioner and under which name a permit to do construction
business was issued by the mayor of Cebu City. This enabled Galan to encash the second check.

Meanwhile, as alleged by the petitioner, the construction continued through his sole efforts. He stated that
he borrowed some P12,000.00 from his friend, Mr. Espina and although the expenses had reached the
amount of P29,000.00 because of the failure of Galan to pay what was partly due the laborers and partly
due for the materials, the construction work was finished ahead of schedule with the total expenditure
reaching P34,000.00.

The two remaining checks, each in the amount of P6,000.00,were subsequently given to the petitioner
alone with the last check being given pursuant to a court order.

As stated earlier, the petitioner filed a complaint for payment of sum of money and damages against the
respondents,seeking to recover the following: the amounts covered by the first and second checks which
fell into the hands of respondent Galan, the additional expenses that the petitioner incurred in the
construction, moral and exemplary damages, and attorney's fees.

Both the trial and appellate courts not only absolved respondents Tropical and its Cebu Manager, Pons,
from any liability but they also held the petitioner together with respondent Galan, hable to the
intervenors Cebu Southern Hardware Company and Blue Diamond Glass Palace for the credit which the
intervenors extended to the partnership of petitioner and Galan

In this petition the legal questions raised by the petitioner are as follows: (1) Whether or not the appellate
court erred in holding that a partnership existed between petitioner and respondent Galan. (2) Assuming
that there was such a partnership, whether or not the court erred in not finding Galan guilty of malversing
the P13,000.00 covered by the first and second checks and therefore, accountable to the petitioner for the
said amount; and (3) Whether or not the court committed grave abuse of discretion in holding that the
payment made by Tropical through its manager Pons to Galan was "good payment, "

Petitioner contends that the appellate court erred in holding that he and respondent Galan were partners,
the truth being that Galan was a sham and a perfidious partner who misappropriated the amount of
P13,000.00 due to the petitioner.Petitioner also contends that the appellate court committed grave abuse
of discretion in holding that the payment made by Tropical to Galan was "good" payment when the same
gave occasion for the latter to misappropriate the proceeds of such payment.

The contentions are without merit.

The records will show that the petitioner entered into a con-tract with Tropical for the renovation of the
latter's building on behalf of the partnership of "Galan and Muñasque." This is readily seen in the first
paragraph of the contract where it states:

This agreement made this 20th day of December in the year 1966 by Galan and Muñasque
hereinafter called the Contractor, and Tropical Commercial Co., Inc., hereinafter called the
owner do hereby for and in consideration agree on the following: ... .

There is nothing in the records to indicate that the partner-ship organized by the two men was not a
genuine one. If there was a falling out or misunderstanding between the partners, such does not convert
the partnership into a sham organization.

Likewise, when Muñasque received the first payment of Tropical in the amount of P7,000.00 with a check
made out in his name, he indorsed the check in favor of Galan. Respondent Tropical therefore, had every
right to presume that the petitioner and Galan were true partners. If they were not partners as petitioner
claims, then he has only himself to blame for making the relationship appear otherwise, not only to
Tropical but to their other creditors as well. The payments made to the partnership were, therefore, valid
payments.

In the case of Singsong v. Isabela Sawmill (88 SCRA 643),we ruled:

Although it may be presumed that Margarita G. Saldajeno had acted in good faith, the
appellees also acted in good faith in extending credit to the partnership. Where one of two
innocent persons must suffer, that person who gave occasion for the damages to be caused
must bear the consequences.
No error was committed by the appellate court in holding that the payment made by Tropical to Galan was
a good payment which binds both Galan and the petitioner. Since the two were partners when the debts
were incurred, they, are also both liable to third persons who extended credit to their partnership. In the
case of George Litton v. Hill and Ceron, et al, (67 Phil. 513, 514), we ruled:

There is a general presumption that each individual partner is an authorized agent for the
firm and that he has authority to bind the firm in carrying on the partnership transactions.
(Mills vs. Riggle,112 Pan, 617).

The presumption is sufficient to permit third persons to hold the firm liable on transactions
entered into by one of members of the firm acting apparently in its behalf and within the
scope of his authority. (Le Roy vs. Johnson, 7 U.S. (Law. ed.), 391.)

Petitioner also maintains that the appellate court committed grave abuse of discretion in not holding Galan
liable for the amounts which he "malversed" to the prejudice of the petitioner. He adds that although this
was not one of the issues agreed upon by the parties during the pretrial, he, nevertheless, alleged the
same in his amended complaint which was, duly admitted by the court.

When the petitioner amended his complaint, it was only for the purpose of impleading Ramon Pons in his
personal capacity. Although the petitioner made allegations as to the alleged malversations of Galan,
these were the same allegations in his original complaint. The malversation by one partner was not an
issue actually raised in the amended complaint but the alleged connivance of Pons with Galan as a means
to serve the latter's personal purposes.

The petitioner, therefore, should be bound by the delimitation of the issues during the pre-trial because he
himself agreed to the same. In Permanent Concrete Products, Inc. v. Teodoro, (26 SCRA 336), we ruled:

xxx xxx xxx

... The appellant is bound by the delimitation of the issues contained in the trial court's
order issued on the very day the pre-trial conference was held. Such an order controls the
subsequent course of the action, unless modified before trial to prevent manifest injustice.In
the case at bar, modification of the pre-trial order was never sought at the instance of any
party.

Petitioner could have asked at least for a modification of the issues if he really wanted to include the
determination of Galan's personal liability to their partnership but he chose not to do so, as he vehemently
denied the existence of the partnership. At any rate, the issue raised in this petition is the contention of
Muñasque that the amounts payable to the intervenors should be shouldered exclusively by Galan. We
note that the petitioner is not solely burdened by the obligations of their illstarred partnership. The
records show that there is an existing judgment against respondent Galan, holding him liable for the total
amount of P7,000.00 in favor of Eden Hardware which extended credit to the partnership aside from the
P2, 000. 00 he already paid to Universal Lumber.

We, however, take exception to the ruling of the appellate court that the trial court's ordering petitioner
and Galan to pay the credits of Blue Diamond and Cebu Southern Hardware"jointly and severally" is plain
error since the liability of partners under the law to third persons for contracts executed inconnection with
partnership business is only pro rata under Art. 1816, of the Civil Code.

While it is true that under Article 1816 of the Civil Code,"All partners, including industrial ones, shall be
liable prorate with all their property and after all the partnership assets have been exhausted, for the
contracts which may be entered into the name and fm the account cd the partnership, under its signature
and by a person authorized to act for the partner-ship. ...". this provision should be construed together
with Article 1824 which provides that: "All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823." In short, while the liability of the partners
are merely joint in transactions entered into by the partnership, a third person who transacted with said
partnership can hold the partners solidarily liable for the whole obligation if the case of the third person
falls under Articles 1822 or 1823.

Articles 1822 and 1823 of the Civil Code provide:

Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partner-ship or with the authority of his co-partners, loss or
injury is caused to any person, not being a partner in the partnership or any penalty is
incurred, the partnership is liable therefor to the same extent as the partner so acting or
omitting to act.

Art. 1823. The partnership is bound to make good:

(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a
third person and t he money or property so received is misapplied by any partner while it is
in the custody of the partnership.

The obligation is solidary, because the law protects him, who in good faith relied upon the authority of a
partner, whether such authority is real or apparent. That is why under Article 1824 of the Civil Code all
partners, whether innocent or guilty, as well as the legal entity which is the partnership, are solidarily
liable.

In the case at bar the respondent Tropical had every reason to believe that a partnership existed between
the petitioner and Galan and no fault or error can be imputed against it for making payments to "Galan
and Associates" and delivering the same to Galan because as far as it was concerned, Galan was a true
partner with real authority to transact on behalf of the partnership with which it was dealing. This is even
more true in the cases of Cebu Southern Hardware and Blue Diamond Glass Palace who supplied materials
on credit to the partnership. Thus, it is but fair that the consequences of any wrongful act committed by
any of the partners therein should be answered solidarily by all the partners and the partnership as a
whole

However. as between the partners Muñasque and Galan,justice also dictates that Muñasque be reimbursed
by Galan for the payments made by the former representing the liability of their partnership to herein
intervenors, as it was satisfactorily established that Galan acted in bad faith in his dealings with Muñasque
as a partner.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the MODIFICATION that the liability of
petitioner and respondent Galan to intervenors Blue Diamond Glass and Cebu Southern Hardware is
declared to be joint and solidary. Petitioner may recover from respondent Galan any amount that he pays,
in his capacity as a partner, to the above intervenors, SO ORDERED.

[G.R. No. L-7991. May 21, 1956.]

PAUL MACDONALD, ET AL., Petitioners, vs. THE NATIONAL CITY BANK OF NEW
YORK, Respondent.

DECISION
PARAS, J.:
This is an appeal by certiorari from the decision of the Court of Appeals from which we are reproducing the
following basic findings of fact:
“STASIKINOCEY is a partnership doing business at No. 58, Aurora Boulevard, San Juan, Rizal, and formed
by Alan W. Gorcey, Louis F. da Costa, Jr., William Kusik and Emma Badong Gavino. This partnership was
denied registration in the Securities and Exchange Commission, and while it is confusing to see in this
case that the CARDINAL RATTAN, sometimes called the CARDINAL RATTAN FACTORY, is treated as a
copartnership, of which Defendants Gorcey and da Costa are considered general partners, we are satisfied
that, as alleged in various instruments appearing of record, said Cardinal Rattan is merely the business
name or style used by the partnership Stasikinocey.
“Prior to June 3, 1949, Defendant Stasikinocey had an overdraft account with The National City Bank of
New York, a foreign banking association duly licensed to do business in the Philippines. On June 3, 1949,
the overdraft showed a balance of P6,134.92 against the Defendant Stasikinocey or the Cardinal Rattan
(Exhibit D), which account, due to the failure of the partnership to make the required payment, was
converted into an ordinary loan for which the corresponding promissory ‘joint note non-negotiable’ was
executed on June 3, 1949, by Louis F. da Costa for and in the name of the Cardinal Rattan, Louis F. da
Costa and Alan Gorcey (Exhibit D). This promissory note was secured on June 7, 1949, by a chattel
mortgage executed by Louis F. da Costa, Jr., General Partner for and in the name of Stasikinocey, a lleged
to be a duly registered Philippine partnership, doing business under the name and style of Cardinal Rattan,
with principal office at 69 Riverside, San Juan, Rizal (Exhibit A). The chattels mortgaged were the
following motor vehicles:
“(a) Fargo truck with motor No. T-118-202839, Serial No. 81410206 and with plate No. T-7333 (1949);
“(b) Plymouth Sedan automobile motor No. T-5638876, Serial No. 11872718 and with plate No. 10372
and
“(c) Fargo Pick-Up FKI-16, with motor No. T-112800032,
Serial No. 8869225 and with plate No. T-7222 (1949).
The mortgage deed was fully registered by the mortgagee on June 11, 1949, in the Office of the Register
of Deeds for the province of Rizal, at Pasig, (Exhibit A), and among other provisions it contained the
following:
“‘(a) That the mortgagor shall not sell or otherwise dispose of the said chattels without the mortgagee ’s
written consent; and
“‘(b) That the mortgagee may foreclose the mortgage at any time, after breach of any condition thereof,
the mortgagor waiving the 30- day notice of foreclosure.’
“On June 7, 1949, the same day of the execution of the chattel mortgage aforementioned, Gorcey and Da
Costa executed an agreement purporting to convey and transfer all their rights, title and participation
in Defendant partnership to Shaeffer, allegedly in consideration of the cancellation of an indebtedness of
P25,000 owed by them and Defendant partnership to the latter (Exhibit J), which transaction is said to be
in violation of the Bulk Sales Law (Act No. 3952 of the Philippine Legislature).
“While the said loan was still unpaid and the chattel mortgage subsisting, Defendant partnership,
through Defendants Gorcey and Da Costa transferred to Defendant McDonald the Fargo truck and
Plymouth sedan on June 24, 1949 (Exhibit L). The Fargo pickup was also sold on June 28, 1949, by
William Shaeffer to Paul McDonald.
“On or about July 19, 1944, Paul Mcdonald, notwithstanding Plaintiff’s existing mortgage lien, in turn
transferred the Fargo truck and the Plymouth sedan to Benjamin Gonzales.”
The National City Bank of New York, Respondent herein, upon learning of the transfers made by the
partnership Stasikinocey to William Shaeffer, from the latter to Paul McDonald, and from Paul McDonald to
Benjamin Gonzales, of the vehicles previously pledged by Stasikinocey to the Respondent, filed an action
against Stasikinocey and its alleged partners Gorcey and Da Costa, as well as Paul McDonald and
Benjamin Gonzales, to recover its credit and to foreclose the corresponding chattel mortgage. McDonald
and Gonzales were made Defendants because they claimed to have a better right over the pledged
vehicle.
After trial the Court of First Instance of Manila rendered judgment in favor of the Respondent, annulling
the sale of the vehicles in question to Benjamin Gonzales; sentencing Da Costa and Gorcey to pay to
the Respondent jointly and severally the sum of P6,134.92, with legal interest from the debt of the
promissory note involved; sentencing the Petitioner Gonzales to deliver the vehicles in question to
the Respondent for sale at public auction if Da Costa and Gorcey should fail to pay the money
judgment; and sentencing Da Costa, Gorcey and Shaeffers to pay to the Respondent jointly and severally
any deficiency that may remain unpaid should the proceeds of the sale not be sufficient; and sentencing
Gorcey, Da Costa, McDonald and Shaeffer to pay the costs. Only Paul McDonald and Benjamin Gonzales
appealed to the Court of Appeals which rendered a decision the dispositive part of which reads as follows:
“WHEREFORE, the decision appealed from is hereby modified, relieving Appellant William Shaeffer of the
obligation of paying, jointly and severally, together with Alan W. Gorcey and Louis F. da Costa, Jr., any
deficiency that may remain unpaid after applying the proceeds of the sale of the said motor vehicles which
shall be undertaken upon the lapse of 90 days from the date this decision becomes final, if by
then Defendants Louis F. da Costa, Jr., and Alan W. Gorcey had not paid the amount of the judgment
debt. With this modification the decision appealed from is in all other respects affirmed, with costs
against Appellants. This decision is without prejudice to whatever action Louis F. da Costa, Jr., and Alan
W. Gorcey may take against their co-partners in the Stasikinocey unregistered partnership.”
This appeal by certiorari was taken by Paul McDonald and Benjamin Gonzales, Petitioners herein, who
have assigned the following errors:
“I
“IN RULING THAT AN UNREGISTERED COMMERCIAL CO-PARTNERSHIP WHICH HAS NO INDEPENDENT
JURIDICAL PERSONALITY CAN HAVE A ‘DOMICILE SO THAT A CHATTEL MORTGAGE REGISTERED IN THAT
‘DOMICILE’ WOULD BIND THIRD PERSONS WHO ARE INNOCENT PURCHASERS FOR VALUE.
“II
“IN RULING THAT WHEN A CHATTEL MORTGAGE IS EXECUTED BY ONE OF THE MEMBERS OF AN
UNREGISTERED COMMERCIAL CO-PARTNERSHIP WITHOUT JURIDICAL PERSONALITY INDEPENDENT OF
ITS MEMBERS, IT NEED NOT BE REGISTERED IN THE ACTUAL RESIDENCE OF THE MEMBERS WHO
EXECUTED SAME; AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF FACT AS TO
THE ACTUAL RESIDENCE OF SAID CHATTEL MORTGAGOR, DESPITE APPELLANTS’ RAISING THAT
QUESTION PROPERLY BEFORE IT AND REQUESTING A RULING THEREON.
“III
IN NOT RULING THAT, WHEN A CHATTEL MORTGAGOR EXECUTES AN AFFIDAVIT OF GOOD FAITH BEFORE
A NOTARY PUBLIC OUTSIDE OF THE TERRITORIAL JURISDICTION OF THE LATTER, THE AFFIDAVIT IS
VOID AND THE CHATTEL MORTGAGE IS NOT BINDING ON THIRD PERSONS WHO ARE INNOCENT
PURCHASERS FOR VALUE; AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF FACT
AS TO WHERE THE DEED WAS IN FACT EXECUTED, DESPITE APPELLANTS’ RAISING THAT QUESTION
PROPERLY BEFORE IT AND EXPRESSLY REQUESTING A RULING THEREON.
“IV
“IN RULING THAT A LETTER AUTHORIZING ONE MEMBER OF AN UNREGISTERED COMMERCIAL CO-
PARTNERSHIP ‘TO MAKE ALL OFFICIAL AND BUSINESS ARRANGEMENTS .. WITH THE NATIONAL CITY
BANK OF NEW YORK IN ORDER TO SIMPLIFY ALL MATTERS RELATIVE TO LCS CABLE TRANSFERS,
DRAFTS, OR OTHER BANKING MEDIUMS,’ WAS SUFFICIENT AUTHORITY FOR THE SAID MEMBER TO
EXECUTE A CHATTEL MORTGAGE IN ORDER TO GIVE THE BANK SECURITY FOR A PRE-EXISTING
OVERDRAFT, GRANTED WITHOUT SECURITY. WHICH THE BANK HAD CONVERTED INTO A DEMAND LOAN
UPON FAILURE TO PAY SAME AND BEFORE THE CHATTEL MORTGAGE WAS EXECUTED.’
This is the first question propounded by the Petitioners: “Since an unregistered commercial partnership
unquestionably has no juridical personality, can it have a domicile so that the registration of a chattel
mortgage therein is notice to the world?”.
While an unregistered commercial partnership has no juridical personality, nevertheless, where two or
more persons attempt to create a partnership failing to comply with all the legal formalities, the law
considers them as partners and the association is a partnership in so far as it is a favorable to third
persons, by reason of the equitable principle of estoppel. In Jo Chung Chang vs. Pacific Commercial Co.,
45 Phil., 145, it was held “that although the partnership with the firm name of ‘Teck Seing and Co. Ltd.,’
could not be regarded as a partnership de jure, yet with respect to third persons it will be considered a
partnership with all the consequent obligations for the purpose of enforcing the rights of such third
persons.” Da Costa and Gorcey cannot deny that they are partners of the partnership Stasikinocey,
because in all their transactions with the Respondent they represented themselves as
such. Petitioner McDonald cannot disclaim knowledge of the partnership Stasikinocey because he dealt
with said entity in purchasing two of the vehicles in question through Gorcey and Da Costa. As was held in
Behn Meyer & Co. vs. Rosatzin, 5 Phil., 660, where a partnership not duly organized has been recognized
as such in its dealings with certain persons, it shall be considered as “partnership by estoppel” and the
persons dealing with it are estopped from denying its partnership existence. The sale of the vehicles in
question being void as to Petitioner McDonald, the transfer from the latter to Petitioner Benjamin Gonzales
is also void, as the buyer cannot have a better right than the seller.
It results that if the law recognizes a defectively organized partnership as de facto as far as third persons
are concerned, for purposes of its de facto existence it should have such attribute of a partnership as
domicile. In Hung-Man Yoc vs. Kieng-Chiong-Seng, 6 Phil., 498, it was held that although “it has no legal
standing, it is a partnership de facto and the general provisions of the Code applicable to all partnerships
apply to it.” The registration of the chattel mortgage in question with the Office of the Register of Deeds of
Rizal, the residence or place of business of the partnership Stasikinocey being San Juan, Rizal, was
therefore in accordance with section 4 of the Chattel Mortgage Law.
The second question propounded by the Petitioners is: “If not, is a chattel mortgage executed by only one
of the ‘partners’ of an unregistered commercial partnership validly registered so as to constitute notice to
the world if it is not registered at the place where the aforesaid ‘partner’ actually resides but only in the
place where the deed states that he resides, which is not his real residence?” And the third question is as
follows: “If the actual residence of the chattel mortgagor — not the residence stated in the deed of chattel
mortgage — is controlling, may the Court of Appeals refuse to make a finding of fact as to where the
mortgagor resided despite your Petitioners’ having properly raised that question before it and expressly
requested a ruling thereon?”
These two questions have become academic by reason of the answer to the first question, namely, that as
a de facto partnership, Stasikinocey had its domicile in San Juan, Rizal.
The fourth question asked by the Petitioners is as follows: “Is a chattel mortgage executed by only one of
the ‘partners’ of an unregistered commercial partnership valid as to third persons when that ‘partner’
executed the affidavit of good faith in Quezon City before a notary public whose appointment is only for
the City of Manila? If not, may the Court of Appeals refuse to make a finding of fact as to where the deed
was executed, despite your Petitioners’ having properly raised that issue before it and expressly requested
a ruling thereon?”
It is noteworthy that the chattel mortgage in question is in the form required by law, and there is
therefore the presumption of its due execution which cannot be easily destroyed by the biased testimony
of the one who executed it. The interested version of Da Costa that the affidavit of good faith appearing in
the chattel mortgage was executed in Quezon City before a notary public for and in the City of Manila was
correctly rejected by the trial court and the Court of Appeals. Indeed, cumbersome legal formalities are
imposed to prevent fraud. As aptly pointed out in El Hogar Filipino vs. Olviga, 60 Phil., 17, “If the biased
and interested testimony of a grantor and the vague and uncertain testimony of his son are deemed
sufficient to overcome a public instrument drawn up with all the formalities prescribed by the law then
there will have been established a very dangerous doctrine which would throw wide open the doors to
fraud.”
The last question raised by the Petitioners is as follows: “Does only one of several ‘partners’ of an
unregistered commercial partnership have authority, by himself alone, to execute a valid chattel mortgage
over property owned by the unregistered commercial partnership in order to guarantee a pre -existing
overdraft previously granted, without guaranty, by the bank?”
In view of the conclusion that Stasikinocey is a de facto partnership, and Da Costa appears as a co -
manager in the letter of Gorcey to the Respondent and in the promissory note executed by Da Costa, and
that even the partners considered him as such, as stated in the affidavit of April 21, 1948, to the effect
that “That we as the majority partners hereby agree to appoint Louis da Costa co-managing partner of
Alan W. Gorcey, duly approved managing partner of the said firm,” the “partner” who executed the chattel
mortgage in question must be deemed to be so fully authorized. Section 6 of the Chattel Mortgage Law
provides that when a partnership is a party to the mortgage, the affidavit may be made and subscribed by
one member thereof. In this case the affidavit was executed and subscribed by Da Costa, not only as a
partner but as a managing partner.
There is no merit in Petitioners’ pretense that the motor vehicles in question are the common property of
Da Costa and Gorcey. Petitioners invoke article 24 of the Code of Commerce in arguing that an
unregistered commercial partnership has no juridical personality and cannot execute any act that would
adversely affect innocent third persons. Petitioners forget that the Respondent is a third person with
respect to the partnership, and the chattel mortgage executed by Da Costa cannot therefore be impugned
by Gorcey on the ground that there is no partnership between them and that the vehicles in question
belonged to them in common. As a matter of fact, the Respondent and the Petitioners are all third persons
as regards the partnership Stasikinocey; even assuming that the Petitioners are purchasers in good faith
and for value, the Respondent having transacted with Stasikinocey earlier than the Petitioners, it should
enjoy and be given priority.
Wherefore, the appealed decision of the Court of Appeals is affirmed with costs against the Petitioners.

G.R. No. L-17526 June 30, 1962

GREGORIO MAGDUSA, ET AL., petitioners, vs. GERUNDIO ALBARAN, ET AL., respondents.

REYES, J.B.L., J.:

Appeal from a decision of the Court of Appeals (G.R. No. 24248-R) reversing a judgment of the Court of
First Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by way of refund of
their shares as partners, the following amounts: Gerundio Albaran, P8,979.10; Pascual Albaran,
P5,394.78; Zosimo Albaran, P1,979.28; and Telesforo Bebero, P3,020.27; plus legal interests from the
filing of the complaint, and costs.

The Court of Appeals found that appellant and appellees, together with various other persons, had verbally
formed a partnership de facto, for the sale of general merchandise in Surigao, Surigao, to which appellant
contributed P2,000 as capital, and the others contributed their labor, under the condition that out of the
net profits of the business 25% would be added to the original capital, and the remaining 75% would be
divided among the members in proportion to the length of service of each. Sometime in 1953 and 1954,
the appellees expressed their desire to withdraw from the partnership, and appellant thereupon made a
computation to determine the value of the partners' shares to that date. The results of the computation
were embodied in the document Exhibit "C", drawn in the handwriting of appellant. Appellees thereafter
made demands upon appellant for payment, but appellant having refused, they filed the initial complaint
in the court below. Appellant defended by denying any partnership with appellees, whom he claimed to be
mere employees of his.

The Court of First Instance of Bohol refused to give credence to Exhibit "C", and dismissed the complaint
on the ground that the other were indispensable parties but hid not been impleaded. Upon appeal, the
Court of Appeals reversed, with the result noted at the start of this opinion.

Gregorio Magdusa then petitioned for a review of the decision, and we gave it due course.1äwphï1.ñët

The main argument of appellant is that the appellees' action can not be entertained, because in the
distribution of all or part of a partnership's assets, all the partners have no interest and are indispensable
parties without whose intervention no decree of distribution can be validly entered. This argument was
considered and answered by the Court of Appeals in the following words:

We now come to the last issue involved. While finding that some amounts are due the plaintiffs,
the lower court withheld an award in their favor, reasoning that a judgment ordering the defendant
to pay might affect the rights of other partners who were not made parties in this case. The reason
cited by the lower court does not constitute a legal impediment to a judgment for the plaintiffs in
this case. This is not an action for a dissolution of a partnership and winding up of its affa irs or
liquidation of its assets in which the interest of other partners who are not brought into the case
may be affected. The action of the plaintiffs is one for the recovery of a sum of money with
Gregorio Magdusa as the principal defendant. The partnership, with Gregorio Magdusa as managing
partner, was brought into the case as an alternative defendant only. Plaintiffs' action was based on
the allegation, substantiated in evidence, that Gregorio Magdusa, having taken delivery of their
shares, failed and refused and still fails and refuses to pay them their claims. The liability,
therefore, is personal to Gregorio Magdusa, and the judgment should be against his sole interest,
not against the partnership's although the judgment creditors may satisfy the judgment against the
 interest of Gregorio Magdusa in the partnership subject to the condition imposed by Article 1814 of
the Civil Code.

We do not find the preceding reasoning tenable. A partner's share can not be returned without first
dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the return is
dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners;
and it is self-evident that all members of the partnership are interested in his assets and business, and are
entitled to be heard in the matter of the firm's liquidation and the distribution of its property. The
liquidation Exhibit "C" is not signed by the other members of the partnership besides appellees and
appellant; it does not appear that they have approved, authorized, or ratified the same, and, therefore, it
is not binding upon them. At the very least, they are entitled to be heard upon its correctness.

In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the capital
shares of the appellees, as retiring partners, can not be repaid, for the firm's outside creditors have
preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can not be
diminished to their prejudice. Finally, the appellant can not be held liable in his personal capacity for the
payment of partners' shares for he does not hold them except as manager of, or trustee for, the
partnership. It is the latter that must refund their shares to the retiring partners. Since not all the
members of the partnership have been impleaded, no judgment for refund can be rendered, and the
action should have been dismissed.

IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is reversed and the action ordered
dismissed, without prejudice to a proper proceeding for the dissolution and liquidation of the common
enterprise. Costs against appellees.

G.R. No. 70926 January 31, 1989

DAN FUE LEUNG, petitioner, vs. HON. INTERMEDIATE APPELLATE COURT and LEUNG
YIU, respondents.

GUTIERREZ, JR., J.:

The petitioner asks for the reversal of the decision of the then Intermediate Appellate Court in AC-G.R. No.
CV-00881 which affirmed the decision of the then Court of First Instance of Manila, Branch II in Civil Case
No. 116725 declaring private respondent Leung Yiu a partner of petitioner Dan Fue Leung in the business
of Sun Wah Panciteria and ordering the petitioner to pay to the private respondent his share in the annual
profits of the said restaurant.

This case originated from a complaint filed by respondent Leung Yiu with the then Court of First Instance
of Manila, Branch II to recover the sum equivalent to twenty-two percent (22%) of the annual profits
derived from the operation of Sun Wah Panciteria since October, 1955 from petitioner Dan Fue Leung.

The Sun Wah Panciteria, a restaurant, located at Florentino Torres Street, Sta. Cruz, Manila, was
established sometime in October, 1955. It was registered as a single proprietorship and its licenses and
permits were issued to and in favor of petitioner Dan Fue Leung as the sole proprietor. Respondent Leung
Yiu adduced evidence during the trial of the case to show that Sun Wah Panciteria was actually a
partnership and that he was one of the partners having contributed P4,000.00 to its initial establishment.

The private respondents evidence is summarized as follows:

About the time the Sun Wah Panciteria started to become operational, the private respondent gave
P4,000.00 as his contribution to the partnership. This is evidenced by a receipt identified as Exhibit "A"
wherein the petitioner acknowledged his acceptance of the P4,000.00 by affixing his signature thereto.
The receipt was written in Chinese characters so that the trial court commissioned an interpreter in the
person of Ms. Florence Yap to translate its contents into English. Florence Yap issued a certification and
testified that the translation to the best of her knowledge and belief was correct. The private respondent
identified the signature on the receipt as that of the petitioner (Exhibit A-3) because it was affixed by the
latter in his (private respondents') presence. Witnesses So Sia and Antonio Ah Heng corroborated the
private respondents testimony to the effect that they were both present when the receipt (Exhibit "A")
was signed by the petitioner. So Sia further testified that he himself received from the petitioner a similar
receipt (Exhibit D) evidencing delivery of his own investment in another amount of P4,000.00 An
examination was conducted by the PC Crime Laboratory on orders of the trial court granting the private
respondents motion for examination of certain documentary exhibits. The signatures in Exhibits "A" and
'D' when compared to the signature of the petitioner appearing in the pay envelopes of employees of the
restaurant, namely Ah Heng and Maria Wong (Exhibits H, H-1 to H-24) showed that the signatures in the
two receipts were indeed the signatures of the petitioner.

Furthermore, the private respondent received from the petitioner the amount of P12,000.00 covered by
the latter's Equitable Banking Corporation Check No. 13389470-B from the profits of the operation of the
restaurant for the year 1974. Witness Teodulo Diaz, Chief of the Savings Department of the China Banking
Corporation testified that said check (Exhibit B) was deposited by and duly credited to the private
respondents savings account with the bank after it was cleared by the drawee bank, the Equitable Banking
Corporation. Another witness Elvira Rana of the Equitable Banking Corporation testified that the check in
question was in fact and in truth drawn by the petitioner and debited against his own account in said
bank. This fact was clearly shown and indicated in the petitioner's statement of account after the check
(Exhibit B) was duly cleared. Rana further testified that upon clearance of the check and pursuant to
normal banking procedure, said check was returned to the petitioner as the maker thereof.

The petitioner denied having received from the private respondent the amount of P4,000.00. He contested
and impugned the genuineness of the receipt (Exhibit D). His evidence is summarized as follows:

The petitioner did not receive any contribution at the time he started the Sun Wah Panciteria. He used his
savings from his salaries as an employee at Camp Stotsenberg in Clark Field and later as waiter at the
Toho Restaurant amounting to a little more than P2,000.00 as capital in establishing Sun Wah Panciteria.
To bolster his contention that he was the sole owner of the restaurant, the petitioner presented various
government licenses and permits showing the Sun Wah Panciteria was and still is a single proprietorship
solely owned and operated by himself alone. Fue Leung also flatly denied having issued to the private
respondent the receipt (Exhibit G) and the Equitable Banking Corporation's Check No. 13389470 B in the
amount of P12,000.00 (Exhibit B).

As between the conflicting evidence of the parties, the trial court gave credence to that of the plaintiffs.
Hence, the court ruled in favor of the private respondent. The dispositive portion of the decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering the latter to deliver and pay to the former, the sum equivalent to 22%
of the annual profit derived from the operation of Sun Wah Panciteria from October, 1955,
until fully paid, and attorney's fees in the amount of P5,000.00 and cost of suit. (p. 125,
Rollo)

The private respondent filed a verified motion for reconsideration in the nature of a motion for new trial
and, as supplement to the said motion, he requested that the decision rendered should include the net
profit of the Sun Wah Panciteria which was not specified in the decision, and allow private respondent to
adduce evidence so that the said decision will be comprehensively adequate and thus put an end to
further litigation.

The motion was granted over the objections of the petitioner. After hearing the trial court rendered an
amended decision, the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the motion for reconsideration filed by the
plaintiff, which was granted earlier by the Court, is hereby reiterated and the decision
rendered by this Court on September 30, 1980, is hereby amended. The dispositive portion
of said decision should read now as follows:
 WHEREFORE, judgment is hereby rendered, ordering the plaintiff (sic) and against the
defendant, ordering the latter to pay the former the sum equivalent to 22% of the net profit
of P8,000.00 per day from the time of judicial demand, until fully paid, plus the sum of
P5,000.00 as and for attorney's fees and costs of suit. (p. 150, Rollo)

The petitioner appealed the trial court's amended decision to the then Intermediate Appellate Court. The
questioned decision was further modified by the appellate court. The dispositive portion of the appellate
court's decision reads:

WHEREFORE, the decision appealed from is modified, the dispositive portion thereof reading
as follows:

1. Ordering the defendant to pay the plaintiff by way of temperate damages 22% of the net
profit of P2,000.00 a day from judicial demand to May 15, 1971;

2. Similarly, the sum equivalent to 22% of the net profit of P8,000.00 a day from May 16,
1971 to August 30, 1975;

3. And thereafter until fully paid the sum equivalent to 22% of the net profit of P8,000.00 a
day.

Except as modified, the decision of the court a quo is affirmed in all other respects. (p. 102,
Rollo)

Later, the appellate court, in a resolution, modified its decision and affirmed the lower court's decision.
The dispositive portion of the resolution reads:

WHEREFORE, the dispositive portion of the amended judgment of the court a quo reading as
follows:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant,
ordering the latter to pay to the former the sum equivalent to 22% of the net profit of
P8,000.00 per day from the time of judicial demand, until fully paid, plus the sum of
P5,000.00 as and for attorney's fees and costs of suit.

is hereby retained in full and affirmed in toto it being understood that the date of judicial demand is July
13, 1978. (pp. 105-106, Rollo).

In the same resolution, the motion for reconsideration filed by petitioner was denied.

Both the trial court and the appellate court found that the private respondent is a partner of the petitioner
in the setting up and operations of the panciteria. While the dispositive portions merely ordered the
payment of the respondents share, there is no question from the factual findings that the respondent
invested in the business as a partner. Hence, the two courts declared that the private petitioner is entitled
to a share of the annual profits of the restaurant. The petitioner, however, claims that this factual finding
is erroneous. Thus, the petitioner argues: "The complaint avers that private respondent extended
'financial assistance' to herein petitioner at the time of the establishment of the Sun Wah Panciteria, in
return of which private respondent allegedly will receive a share in the profits of the restaurant. The same
complaint did not claim that private respondent is a partner of the business. It was, therefore, a serious
error for the lower court and the Hon. Intermediate Appellate Court to grant a relief not called for by the
complaint. It was also error for the Hon. Intermediate Appellate Court to interpret or construe 'financial
assistance' to mean the contribution of capital by a partner to a partnership;" (p. 75, Rollo)

The pertinent portions of the complaint state:

xxx xxx xxx

 2. That on or about the latter (sic) of September, 1955, defendant sought the financial
assistance of plaintiff in operating the defendant's eatery known as Sun Wah Panciteria,
located in the given address of defendant; as a return for such financial assistance. plaintiff
would be entitled to twenty-two percentum (22%) of the annual profit derived from the
operation of the said panciteria;

3. That on October 1, 1955, plaintiff delivered to the defendant the sum of four thousand
pesos (P4,000.00), Philippine Currency, of which copy for the receipt of such amount, duly
acknowledged by the defendant is attached hereto as Annex "A", and form an integral part
hereof; (p. 11, Rollo)

In essence, the private respondent alleged that when Sun Wah Panciteria was established, he gave
P4,000.00 to the petitioner with the understanding that he would be entitled to twenty-two percent (22%)
of the annual profit derived from the operation of the said panciteria. These allegations, which were
proved, make the private respondent and the petitioner partners in the establishment of Sun Wah
Panciteria because Article 1767 of the Civil Code provides that "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".

Therefore, the lower courts did not err in construing the complaint as one wherein the private respondent
asserted his rights as partner of the petitioner in the establishment of the Sun Wah Panciteria,
notwithstanding the use of the term financial assistance therein. We agree with the appellate court's
observation to the effect that "... given its ordinary meaning, financial assistance is the giving out of
money to another without the expectation of any returns therefrom'. It connotes an ex gratia dole out in
favor of someone driven into a state of destitution. But this circumstance under which the P4,000.00 was
given to the petitioner does not obtain in this case.' (p. 99, Rollo) The complaint explicitly stated that "as
a return for such financial assistance, plaintiff (private respondent) would be entitled to twenty-two
percentum (22%) of the annual profit derived from the operation of the said panciteria.' (p. 107, Rollo)
The well-settled doctrine is that the '"... nature of the action filed in court is determined by the facts
alleged in the complaint as constituting the cause of action." (De Tavera v. Philippine Tuberculosis Society,
Inc., 113 SCRA 243; Alger Electric, Inc. v. Court of Appeals, 135 SCRA 37).

The appellate court did not err in declaring that the main issue in the instant case was whether or not the
private respondent is a partner of the petitioner in the establishment of Sun Wah Panciteria.

The petitioner also contends that the respondent court gravely erred in giving probative value to the PC
Crime Laboratory Report (Exhibit "J") on the ground that the alleged standards or specimens used by the
PC Crime Laboratory in arriving at the conclusion were never testified to by any witness nor has any
witness identified the handwriting in the standards or specimens belonging to the petitioner. The supposed
standards or specimens of handwriting were marked as Exhibits "H" "H-1" to "H-24" and admitted as
evidence for the private respondent over the vigorous objection of the petitioner's counsel.

The records show that the PC Crime Laboratory upon orders of the lower court examined the signatures in
the two receipts issued separately by the petitioner to the private respondent and So Sia (Exhibits "A" and
"D") and compared the signatures on them with the signatures of the petitioner on the various pay
envelopes (Exhibits "H", "H-1" to 'H-24") of Antonio Ah Heng and Maria Wong, employees of the
restaurant. After the usual examination conducted on the questioned documents, the PC Crime Laboratory
submitted its findings (Exhibit J) attesting that the signatures appearing in both receipts (Exhibits "A" and
"D") were the signatures of the petitioner.

The records also show that when the pay envelopes (Exhibits "H", "H-1" to "H-24") were presented by the
private respondent for marking as exhibits, the petitioner did not interpose any objection. Neither did the
petitioner file an opposition to the motion of the private respondent to have these exhibits together with
the two receipts examined by the PC Crime Laboratory despite due notice to him. Likewise, no explanation
has been offered for his silence nor was any hint of objection registered for that purpose.

Under these circumstances, we find no reason why Exhibit "J" should be rejected or ignored. The records
sufficiently establish that there was a partnership.
The petitioner raises the issue of prescription. He argues: The Hon. Respondent Intermediate Appellate
Court gravely erred in not resolving the issue of prescription in favor of petitioner. The alleged receipt is
dated October 1, 1955 and the complaint was filed only on July 13, 1978 or after the lapse of twenty-two
(22) years, nine (9) months and twelve (12) days. From October 1, 1955 to July 13, 1978, no written
demands were ever made by private respondent.

The petitioner's argument is based on Article 1144 of the Civil Code which provides:

Art. 1144. The following actions must be brought within ten years from the time the right of
action accrues:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

in relation to Article 1155 thereof which provides:

Art. 1155. The prescription of actions is interrupted when they are filed before the court,
when there is a written extra-judicial demand by the creditor, and when there is any written
acknowledgment of the debt by the debtor.'

The argument is not well-taken.

The private respondent is a partner of the petitioner in Sun Wah Panciteria. The requisites of a partnership
which are — 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 (Article
1767, Civil Code; Yulo v. Yang Chiao Cheng, 106 Phil. 110)-have been established. As stated by the
respondent, a partner shares not only in profits but also in the losses of the firm. If excellent relations
exist among the partners at the start of 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. It
would be incorrect to state that if a partner does not assert his rights anytime within ten years from the
start of operations, such rights are irretrievably lost. The private respondent's cause of action is premised
upon the failure of the petitioner to give him the agreed profits in the operation of Sun Wah Panciteria. In
effect the private respondent was asking for an accounting of his interests in the partnership.

It is Article 1842 of the Civil Code in conjunction with Articles 1144 and 1155 which is applicable. Article
1842 states:

The right to an account of his interest shall accrue to any partner, or his legal representative
as against the winding up partners or the surviving partners or the person or partnership
continuing the business, at the date of dissolution, in the absence or any agreement to the
contrary.

Regarding the prescriptive period within which the private respondent may demand an accounting, Articles
1806, 1807, and 1809 show that the right to demand an accounting exists as long as the partnership
exists. Prescription begins to run only upon the dissolution of the partnership when the final accounting is
done.

Finally, the petitioner assails the appellate court's monetary awards in favor of the private respondent for
being excessive and unconscionable and above the claim of private respondent as embodied in his
complaint and testimonial evidence presented by said private respondent to support his claim in the
complaint.

Apart from his own testimony and allegations, the private respondent presented the cashier of Sun Wah
Panciteria, a certain Mrs. Sarah L. Licup, to testify on the income of the restaurant.
Mrs. Licup stated:

ATTY. HIPOLITO (direct examination to Mrs. Licup).

Q Mrs. Witness, you stated that among your duties was that you were in
charge of the custody of the cashier's box, of the money, being the cashier, is
that correct?

A Yes, sir.

Q So that every time there is a customer who pays, you were the one who
accepted the money and you gave the change, if any, is that correct?

A Yes.

Q Now, after 11:30 (P.M.) which is the closing time as you said, what do you
do with the money?

A We balance it with the manager, Mr. Dan Fue Leung.

ATTY. HIPOLITO:

I see.

Q So, in other words, after your job, you huddle or confer together?

A Yes, count it all. I total it. We sum it up.

Q Now, Mrs. Witness, in an average day, more or less, will you please tell us,
how much is the gross income of the restaurant?

A For regular days, I received around P7,000.00 a day during my shift alone
and during pay days I receive more than P10,000.00. That is excluding the
catering outside the place.

Q What about the catering service, will you please tell the Honorable Court
how many times a week were there catering services?

A Sometimes three times a month; sometimes two times a month or more.

xxx xxx xxx

Q Now more or less, do you know the cost of the catering service?

A Yes, because I am the one who receives the payment also of the catering.

Q How much is that?

A That ranges from two thousand to six thousand pesos, sir.

Q Per service?

A Per service, Per catering.

 Q So in other words, Mrs. witness, for your shift alone in a single day from
3:30 P.M. to 11:30 P.M. in the evening the restaurant grosses an income of
P7,000.00 in a regular day?

A Yes.

Q And ten thousand pesos during pay day.?

A Yes.

(TSN, pp. 53 to 59, inclusive, November 15,1978)

xxx xxx xxx

COURT:

Any cross?

ATTY. UY (counsel for defendant):

No cross-examination, Your Honor. (T.S.N. p. 65, November 15, 1978).

(Rollo, pp. 127-128)

The statements of the cashier were not rebutted. Not only did the petitioner's counsel waive the cross-
examination on the matter of income but he failed to comply with his promise to produce pertinent
records. When a subpoena duces tecum was issued to the petitioner for the production of their records of
sale, his counsel voluntarily offered to bring them to court. He asked for sufficient time prompting the
court to cancel all hearings for January, 1981 and reset them to the later part of the following month. The
petitioner's counsel never produced any books, prompting the trial court to state:

Counsel for the defendant admitted that the sales of Sun Wah were registered or recorded
in the daily sales book. ledgers, journals and for this purpose, employed a bookkeeper. This
inspired the Court to ask counsel for the defendant to bring said records and counsel for the
defendant promised to bring those that were available. Seemingly, that was the reason why
this case dragged for quite sometime. To bemuddle the issue, defendant instead of
presenting the books where the same, etc. were recorded, presented witnesses who claimed
to have supplied chicken, meat, shrimps, egg and other poultry products which, however,
did not show the gross sales nor does it prove that the same is the best evidence. This
Court gave warning to the defendant's counsel that if he failed to produce the books, the
same will be considered a waiver on the part of the defendant to produce the said books
inimitably showing decisive records on the income of the eatery pursuant to the Rules of
Court (Sec. 5(e) Rule 131). "Evidence willfully suppressed would be adverse if produced."
(Rollo, p. 145)

The records show that the trial court went out of its way to accord due process to the petitioner.

The defendant was given all the chance to present all conceivable witnesses, after the
plaintiff has rested his case on February 25, 1981, however, after presenting several
witnesses, counsel for defendant promised that he will present the defendant as his last
witness. Notably there were several postponement asked by counsel for the defendant and
the last one was on October 1, 1981 when he asked that this case be postponed for 45 days
because said defendant was then in Hongkong and he (defendant) will be back after said
period. The Court acting with great concern and understanding reset the hearing to
November 17, 1981. On said date, the counsel for the defendant who again failed to present
the defendant asked for another postponement, this time to November 24, 1981 in order to
give said defendant another judicial magnanimity and substantial due process. It was
however a condition in the order granting the postponement to said date that if the
 defendant cannot be presented, counsel is deemed to have waived the presentation of said
witness and will submit his case for decision.

On November 24, 1981, there being a typhoon prevailing in Manila said date was declared a
partial non-working holiday, so much so, the hearing was reset to December 7 and 22,
1981. On December 7, 1981, on motion of defendant's counsel, the same was again reset to
December 22, 1981 as previously scheduled which hearing was understood as intransferable
in character. Again on December 22, 1981, the defendant's counsel asked for postponement
on the ground that the defendant was sick. the Court, after much tolerance and judicial
magnanimity, denied said motion and ordered that the case be submitted for resolution
based on the evidence on record and gave the parties 30 days from December 23, 1981,
within which to file their simultaneous memoranda. (Rollo, pp. 148-150)

The restaurant is located at No. 747 Florentino Torres, Sta. Cruz, Manila in front of the Republic
Supermarket. It is near the corner of Claro M. Recto Street. According to the trial court, it is in the heart
of Chinatown where people who buy and sell jewelries, businessmen, brokers, manager, bank employees,
and people from all walks of life converge and patronize Sun Wah.

There is more than substantial evidence to support the factual findings of the trial court and the appellate
court. If the respondent court awarded damages only from judicial demand in 1978 and not from the
opening of the restaurant in 1955, it is because of the petitioner's contentions that all profits were being
plowed back into the expansion of the business. There is no basis in the records to sustain the petitioners
contention that the damages awarded are excessive. Even if the Court is minded to modify the factual
findings of both the trial court and the appellate court, it cannot refer to any portion of the records for
such modification. There is no basis in the records for this Court to change or set aside the factual findings
of the trial court and the appellate court. The petitioner was given every opportunity to refute or rebut the
respondent's submissions but, after promising to do so, it deliberately failed to present its books and other
evidence.

The resolution of the Intermediate Appellate Court ordering the payment of the petitioner's obligation
shows that the same continues until fully paid. The question now arises as to whether or not the payment
of a share of profits shall continue into the future with no fixed ending date.

Considering the facts of this case, the Court may decree a dissolution of the partnership under Article
1831 of the Civil Code which, in part, provides:

Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:

xxx xxx xxx

(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on
of the business;

(4) A partner willfully or persistently commits a breach of the partnership agreement, or

otherwise so conducts himself in matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership with him;

xxx xxx xxx

(6) Other circumstances render a dissolution equitable.

There shall be a liquidation and winding up of partnership affairs, return of capital, and other incidents of
dissolution because the continuation of the partnership has become inequitable.

WHEREFORE, the petition for review is hereby DISMISSED for lack of merit. The decision of the
respondent court is AFFIRMED with a MODIFICATION that as indicated above, the partnership of the
parties is ordered dissolved. SO ORDERED.
G.R. No. 126334 November 23, 2001

EMILIO EMNACE, petitioner, vs. COURT OF APPEALS, ESTATE OF VICENTE TABANAO, SHERWIN
TABANAO, VICENTE WILLIAM TABANAO, JANETTE TABANAO DEPOSOY, VICENTA MAY TABANAO
VARELA, ROSELA TABANAO and VINCENT TABANAO, respondents.

YNARES-SANTIAGO, J.:

Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business concern
known as Ma. Nelma Fishing Industry. Sometime in January of 1986, they decided to dissolve their
partnership and executed an agreement of partition and distribution of the partnership properties among
them, consequent to Jacinto Divinagracia's withdrawal from the partnership. 1 Among the assets to be
distributed were five (5) fishing boats, six (6) vehicles, two (2) parcels of land located at Sto. Niño and
Talisay, Negros Occidental, and cash deposits in the local branches of the Bank of the Philippine Islands
and Prudential Bank.

Throughout the existence of the partnership, and even after Vicente Tabanao's untimely demise in 1994,
petitioner failed to submit to Tabanao's heirs any statement of assets and liabilities of the partnership, and
to render an accounting of the partnership's finances. Petitioner also reneged on his promise to turn over
to Tabanao's heirs the deceased's 1/3 share in the total assets of the partnership, amounting to
P30,000,000.00, or the sum of P10,000,000.00, despite formal demand for payment thereof. 2

Consequently, Tabanao' s heirs, respondents herein, filed against petitioner an action for accounting,
payment of shares, division of assets and damages. 3 In their complaint, respondents prayed as follows:

1. Defendant be ordered to render the proper accounting of all the assets and liabilities of the
partnership at bar; and

2. After due notice and hearing defendant be ordered to pay/remit/deliver/surrender/yield to the

plaintiffs the following:

A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s), fishing
vessels, trucks, motor vehicles, and other forms and substance of treasures which belong
and/or should belong, had accrued and/or must accrue to the partnership;

B. No less than Two Hundred Thousand Pesos (P200,000.00) as moral damages;

C. Attorney's fees equivalent to Thirty Percent (30%) of the entire share/amount/award

which the Honorable Court may resolve the plaintiffs as entitled to plus P1,000.00 for every
appearance in court. 4

Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of jurisdiction
over the nature of the action or suit, and lack of capacity of the estate of Tabanao to sue. 5 On August 30,
1994, the trial court denied the motion to dismiss. It held that venue was properly laid because, while
realties were involved, the action was directed against a particular person on the basis of his personal
liability; hence, the action is not only a personal action but also an action in personam. As regards
petitioner's argument of lack of jurisdiction over the action because the prescribed docket fee was not paid
considering the huge amount involved in the claim, the trial court noted that a request for accounting was
made in order that the exact value of the partnership may be ascertained and, thus, the correct docket
fee may be paid. Finally, the trial court held that the heirs of Tabanao had aright to sue in their own
names, in view of the provision of Article 777 of the Civil Code, which states that the rights to the
succession are transmitted from the moment of the death of the decedent.6

The following day, respondents filed an amended complaint,7 incorporating the additional prayer that
petitioner be ordered to "sell all (the partnership's) assets and thereafter
pay/remit/deliver/surrender/yield to the plaintiffs" their corresponding share in the proceeds thereof. In
due time, petitioner filed a manifestation and motion to dismiss, 8 arguing that the trial court did not
acquire jurisdiction over the case due to the plaintiffs' failure to pay the proper docket fees. Further, in a
supplement to his motion to dismiss, 9 petitioner also raised prescription as an additional ground
warranting the outright dismissal of the complaint.

On June 15, 1995, the trial court issued an Order,10 denying the motion to dismiss inasmuch as the
grounds raised therein were basically the same as the earlier motion to dismiss which has been denied.
Anent the issue of prescription, the trial court ruled that prescription begins to run only upon the
dissolution of the partnership when the final accounting is done. Hence, prescription has not set in the
absence of a final accounting. Moreover, an action based on a written contract prescribes in ten years
from the time the right of action accrues.

Petitioner filed a petition for certiorari before the Court of Appeals,11 raising the following issues:

I. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in taking cognizance of a case despite the failure to pay the required docket fee;

II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in insisting to try the case which involve (sic) a parcel of land situated outside of its territorial
jurisdiction;

III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in allowing the estate of the deceased to appear as party plaintiff, when there is no intestate case
and filed by one who was never appointed by the court as administratrix of the estates; and

IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in not dismissing the case on the ground of prescription.

On August 8, 1996, the Court of Appeals rendered the assailed decision, 12 dismissing the petition for
certiorari, upon a finding that no grave abuse of discretion amounting to lack or excess of jurisdiction was
committed by the trial court in issuing the questioned orders denying petitioner's motions to dismiss.

Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved by the Court
of Appeals, namely:

I. Failure to pay the proper docket fee;

II. Parcel of land subject of the case pending before the trial court is outside the said court's
territorial jurisdiction;

III. Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and

IV. Prescription of the plaintiff heirs' cause of action.

It can be readily seen that respondents' primary and ultimate objective in instituting the action below was
to recover the decedent's 1/3 share in the partnership' s assets. While they ask for an accounting of the
partnership' s assets and finances, what they are actually asking is for the trial court to compel petitioner
to pay and turn over their share, or the equivalent value thereof, from the proceeds of the sale of the
partnership assets. They also assert that until and unless a proper accounting is done, the exact value of
the partnership' s assets, as well as their corresponding share therein, cannot be ascertained.
Consequently, they feel justified in not having paid the commensurate docket fee as required by the Rules
of Court.1âwphi1.nêt

We do not agree. The trial court does not have to employ guesswork in ascertaining the estimated value
of the partnership's assets, for respondents themselves voluntarily pegged the worth thereof at Thirty
Million Pesos (P30,000,000.00). Hence, this case is one which is really not beyond pecuniary estimation,
but rather partakes of the nature of a simple collection case where the value of the subject assets or
amount demanded is pecuniarily determinable. 13 While it is true that the exact value of the partnership's
total assets cannot be shown with certainty at the time of filing, respondents can and must ascertain,
through informed and practical estimation, the amount they expect to collect from the partnership,
particularly from petitioner, in order to determine the proper amount of docket and other fees.14 It is thus
imperative for respondents to pay the corresponding docket fees in order that the trial court may acquire
jurisdiction over the action. 15

Nevertheless, unlike in the case of Manchester Development Corp. v. Court of Appeals, 16 where there was
clearly an effort to defraud the government in avoiding to pay the correct docket fees, we see no attempt
to cheat the courts on the part of respondents. In fact, the lower courts have noted their expressed desire
to remit to the court "any payable balance or lien on whatever award which the Honorable Court may
grant them in this case should there be any deficiency in the payment of the docket fees to be computed
by the Clerk of Court." 17 There is evident willingness to pay, and the fact that the docket fee paid so far is
inadequate is not an indication that they are trying to avoid paying the required amount, but may simply
be due to an inability to pay at the time of filing. This consideration may have moved the trial court and
the Court of Appeals to declare that the unpaid docket fees shall be considered a lien on the judgment
award.

Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning the non-
payment of the proper legal fees and in allowing the same to become a lien on the monetary or property
judgment that may be rendered in favor of respondents. There is merit in petitioner's assertion. The third
paragraph of Section 16, Rule 141 of the Rules of Court states that:

The legal fees shall be a lien on the monetary or property judgment in favor of the pauper-litigant.

Respondents cannot invoke the above provision in their favor because it specifically applies to pauper-
litigants. Nowhere in the records does it appear that respondents are litigating as paupers, and as such
are exempted from the payment of court fees. 18

The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which defines the
two kinds of claims as: (1) those which are immediately ascertainable; and (2) those which cannot be
immediately ascertained as to the exact amount. This second class of claims, where the exact amount still
has to be finally determined by the courts based on evidence presented, falls squarely under the third
paragraph of said Section 5(a), which provides:

In case the value of the property or estate or the sum claimed is less or more in accordance with
the appraisal of the court, the difference of fee shall be refunded or paid as the case may
be. (Underscoring ours)

In Pilipinas Shell Petroleum Corporation v. Court of Appeals, 19 this Court pronounced that the above-
quoted provision "clearly contemplates an Initial payment of the filing fees corresponding to the estimated
amount of the claim subject to adjustment as to what later may be proved." 20 Moreover, we reiterated
therein the principle that the payment of filing fees cannot be made contingent or dependent on the result
of the case. Thus, an initial payment of the docket fees based on an estimated amount must be paid
simultaneous with the filing of the complaint. Otherwise, the court would stand to lose the filing fees
should the judgment later turn out to be adverse to any claim of the respondent heirs.

The matter of payment of docket fees is not a mere triviality. These fees are necessary to defray court
expenses in the handling of cases. Consequently, in order to avoid tremendous losses to the judiciary, and
to the government as well, the payment of docket fees cannot be made dependent on the outcome o f the
case, except when the claimant is a pauper-litigant.

Applied to the instant case, respondents have a specific claim - 1/3 of the value of all the partnership
assets - but they did not allege a specific amount. They did, however, estimate the partnership's total
assets to be worth Thirty Million Pesos (P30,000,000.00), in a letter21 addressed to petitioner.
Respondents cannot now say that they are unable to make an estimate, for the said letter and the
admissions therein form part of the records of this case. They cannot avoid paying the initial docket fees
by conveniently omitting the said amount in their amended complaint. This estimate can be made the
basis for the initial docket fees that respondents should pay. Even if it were later established tha t the
amount proved was less or more than the amount alleged or estimated, Rule 141, Section 5(a) of the
Rules of Court specifically provides that the court may refund the 'excess or exact additional fees should
the initial payment be insufficient. It is clear that it is only the difference between the amount finally
awarded and the fees paid upon filing of this complaint that is subject to adjustment and which may be
subjected to alien.

In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion,22 this Court held that
when the specific claim "has been left for the determination by the court, the additional filing fee therefor
shall constitute a lien on the judgment and it shall be the responsibility of the Clerk of Court or his duly
authorized deputy to enforce said lien and assess and collect the additional fee." Clearly, the rules and
jurisprudence contemplate the initial payment of filing and docket fees based on the estimated claims of
the plaintiff, and it is only when there is a deficiency that a lien may be constituted on the judgment
award until such additional fee is collected.

Based on the foregoing, the trial court erred in not dismissing the complaint outright despite their failure
to pay the proper docket fees. Nevertheless, as in other procedural rules, it may be liberally construed in
certain cases if only to secure a just and speedy disposition of an action. While the rule is that the
payment of the docket fee in the proper amount should be adhered to, there are certain exceptions which
must be strictly construed. 23

In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine, allowing the
plaintiff to pay the proper docket fees within a reasonable time before the expiration of the applicable
prescriptive or reglementary period. 24

In the recent case of National Steel Corp. v. Court of Appeals, 25 this Court held that:

The court acquires jurisdiction over the action if the filing of the initiatory pleading is accompanied
by the payment of the requisite fees, or, if the fees are not paid at the time of the filing of the
pleading, as of the time of full payment of the fees within such reasonable time as the court may
grant, unless, of course, prescription has set in the meantime.

It does not follow, however, that the trial court should have dismissed the complaint for failure of
private respondent to pay the correct amount of docket fees. Although the payment of the proper
docket fees is a jurisdictional requirement, the trial court may allow the plaintiff in an action to pay
the same within a reasonable time before the expiration of the applicable prescriptive or
reglementary period. If the plaintiff fails to comply within this requirement, the defendant should
timely raise the issue of jurisdiction or else he would be considered in estoppel. In the latter case,
the balance between the appropriate docket fees and the amount actually paid by the plaintiff will
be considered a lien or any award he may obtain in his favor. (Underscoring ours)

Accordingly, the trial court in the case at bar should determine the proper docket fee based on the
estimated amount that respondents seek to collect from petitioner, and direct them to pay the same
within a reasonable time, provided the applicable prescriptive or reglementary period has not yet expired,
Failure to comply therewith, and upon motion by petitioner, the immediate dismissal of the complaint shall
issue on jurisdictional grounds.

On the matter of improper venue, we find no error on the part of the trial court and the Court of Appeals
in holding that the case below is a personal action which, under the Rules, may be commenced and tried
where the defendant resides or may be found, or where the plaintiffs reside, at the election of the latter. 26

Petitioner, however, insists that venue was improperly laid since the action is a real action involving a
parcel of land that is located outside the territorial jurisdiction of the court a quo. This contention is not
well-taken. The records indubitably show that respondents are asking that the assets of the partnership be
accounted for, sold and distributed according to the agreement of the partners. The fact that two of the
assets of the partnership are parcels of land does not materially change the nature of the action. It is an
action in personam because it is an action against a person, namely, petitioner, on the basis of his
personal liability. It is not an action in rem where the action is against the thing itself instead of against
the person.27 Furthermore, there is no showing that the parcels of land involved in this case are being
disputed. In fact, it is only incidental that part of the assets of the partnership under liquidation happen to
be parcels of land.

The time-tested case of Claridades v. Mercader, et al.,28 settled this issue thus:

The fact that plaintiff prays for the sale of the assets of the partnership, including the fishpond in
question, did not change the nature or character of the action, such sale being merely a necessary
incident of the liquidation of the partnership, which should precede and/or is part of its process of
dissolution.

The action filed by respondents not only seeks redress against petitioner. It also seeks the enforcement
of, and petitioner's compliance with, the contract that the partners executed to formalize the partnership's
dissolution, as well as to implement the liquidation and partition of the partnership's assets. Clearly, it is a
personal action that, in effect, claims a debt from petitioner and seeks the performance of a personal duty
on his part.29 In fine, respondents' complaint seeking the liquidation and partition of the assets of the
partnership with damages is a personal action which may be filed in the proper court where any of the
parties reside. 30 Besides, venue has nothing to do with jurisdiction for venue touches more upon the
substance or merits of the case.31 As it is, venue in this case was properly laid and the trial court correctly
ruled so.

On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal capacity to
sue since she was never appointed as administratrix or executrix of his estate. Petitioner's objection in this
regard is misplaced. The surviving spouse does not need to be appointed as executrix or administratrix of
the estate before she can file the action. She and her children are complainants in their own right as
successors of Vicente Tabanao. From the very moment of Vicente Tabanao' s death, his rights insofar as
the partnership was concerned were transmitted to his heirs, for rights to the succession are transmitted
from the moment of death of the decedent.32

Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were transmitted
to respondents by operation of law, more particularly by succession, which is a mode of acquisition by
virtue of which the property, rights and obligations to the extent of the value of the inheritance of a
person are transmitted.33 Moreover, respondents became owners of their respective hereditary shares
from the moment Vicente Tabanao died.34

A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix or
administratrix, is not necessary for any of the heirs to acquire legal capacity to sue. As successors who
stepped into the shoes of their decedent upon his death, they can commence any action originally
pertaining to the decedent. 35 From the moment of his death, his rights as a partner and to demand
fulfillment of petitioner's obligations as outlined in their dissolution agreement were transmitted to
respondents. They, therefore, had the capacity to sue and seek the court's intervention to compel
petitioner to fulfill his obligations.

Finally, petitioner contends that the trial court should have dismissed the complaint on the ground of
prescription, arguing that respondents' action prescribed four (4) years after it accrued in 1986. The trial
court and the Court of Appeals gave scant consideration to petitioner's hollow arguments, and rightly so.

The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3) termination. 36 The
partnership, although dissolved, continues to exist and its legal personality is retained, at which time it
completes the winding up of its affairs, including the partitioning and distribution of the net partnership
assets to the partners. 37 For as long as the partnership exists, any of the partners may demand an
accounting of the partnership's business. Prescription of the said right starts to run only upon the
dissolution of the partnership when the final accounting is done. 38
Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the
partnership accrued in 1986, prescribing four (4) years thereafter, prescription had not even begun to run
in the absence of a final accounting. Article 1842 of the Civil Code provides:

The right to an account of his interest shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing
the business, at the date of dissolution, in the absence of any agreement to the contrary.

Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the above -cited
provision states that the right to demand an accounting accrues at the date of dissolution in the absence
of any agreement to the contrary. When a final accounting is made, it is only then that prescription begins
to run. In the case at bar, no final accounting has been made, and that is precisely what respondents are
seeking in their action before the trial court, since petitioner has failed or refused to render an accounting
of the partnership's business and assets. Hence, the said action is not barred by prescription.

In fine, the trial court neither erred nor abused its discretion when it denied petitioner's motions to
dismiss. Likewise, the Court of Appeals did not commit reversible error in upholding the trial court's
orders. Precious time has been lost just to settle this preliminary issue, with petitioner resurrecting the
very same arguments from the trial court all the way up to the Supreme Court. The litigation of the merits
and substantial issues of this controversy is now long overdue and must proceed without further delay.

WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the case
is REMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to determine the
proper docket fee based on the estimated amount that plaintiffs therein seek to collect, and direct said
plaintiffs to pay the same within a reasonable time, provided the applicable prescriptive or reglementary
period has not yet expired. Thereafter, the trial court is ORDERED to conduct the appropriate proceedings
in Civil Case No. 416-C. Costs against petitioner. SO ORDERED.

G.R. No. 5840 September 17, 1910

THE UNITED STATES, plaintiff-appellee, vs. EUSEBIO CLARIN, defendant-appellant.

ARELLANO, C.J.:

Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in company with Eusebio Clarin and
Carlos de Guzman, might buy and sell mangoes, and, believing that he could make some money in this
business, the said Larin made an agreement with the three men by which the profits were to be divided
equally between him and them.

Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in mangoes and obtained P203 from
the business, but did not comply with the terms of the contract by delivering to Larin his half of the
profits; neither did they render him any account of the capital.

Larin charged them with the crime of estafa, but the provincial fiscal filed an information only against
Eusebio Clarin in which he accused him of appropriating to himself not only the P172 but also the share of
the profits that belonged to Larin, amounting to P15.50.

Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and assumed that the facts
presented concerned the defendant and themselves together.

The trial court, that of First Instance of Pampanga, sentenced the defendant, Eusebio Clarin, to six
months' arresto mayor, to suffer the accessory penalties, and to return to Pedro Larin P172, besides
P30.50 as his share of the profits, or to subsidiary imprisonment in case of insolvency, and to pay the
costs. The defendant appealed, and in deciding his appeal we arrive at the following conclusions:
When 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, a contract is formed which is called
partnership. (Art. 1665, Civil Code.)

When Larin put the P172 into the partnership which he formed with Tarug, Clarin, and Guzman, he
invested his capital in the risks or benefits of the business of the purchase and sale of mangoes, and, even
though he had reserved the capital and conveyed only the usufruct of his money, it would not devolve
upon of his three partners to return his capital to him, but upon the partnership of which he himself
formed part, or if it were to be done by one of the three specifically, it would be Tarug, who, according to
the evidence, was the person who received the money directly from Larin.

The P172 having been received by the partnership, the business commenced and profits accrued, the
action that lies with the partner who furnished the capital for the recovery of his money is not a criminal
action for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership
and a levy on its assets if there should be any.

No. 5 of article 535 of the Penal Code, according to which those are guilty of estafa "who, to the prejudice
of another, shall appropriate or misapply any money, goods, or any kind of personal property which they
may have received as a deposit on commission for administration or in any other character producing the
obligation to deliver or return the same," (as, for example, in commodatum, precarium, and other
unilateral contracts which require the return of the same thing received) does not include money received
for a partnership; otherwise the result would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the
ownership of the money brought in by him, it would have to answer to the charge of estafa, for which it
would be sufficient to argue that the partnership had received the money under obligation to return it.

We therefore freely acquit Eusebio Clarin, with the costs de oficio. The complaint for estafa is dismissed
without prejudice to the institution of a civil action.

G.R. No. L-3745 October 26, 1907

JUAN AGUSTIN, ET AL., plaintiffs; VICTOR DEL ROSARIO, appellant, vs. BARTOLOME
INOCENCIO, defendant-appellee.

TRACEY, J.:

The parties to this controversy, who had been conducting a partnership as industrial partners without
capital, contributed from its profits the sum of P807.28 as a fund toward the construction of a casco for
use in their business, to which they added P3,500, borrowed from Maria del Rosario, the wife of the
defendant, Bartolome Inocencio, he being the managing partner. It is admitted that this total, a little over
P4,300, was the estimated cost of the casco, but in the progress of the work the defendant found that it
called for additional funds, which he advanced to the amount of P2,024.49. It is satisfactorily appears
from the evidence that this amount is necessary in order to complete the work undertaken. Although it
would seem that he failed to notify his partners of the various items from time to time going to make up
this sum, it is shown that the books were at all times open to their inspection, and that, being asked to
examine them, they omitted to do so, and that the plaintiff Juan Agustin, representing all the partners,
was also present at the construction of the casco, in charge of the practical work and cognizant of its
needs and its progress.

The work done in the casco having been within the scope of the association and necessary to carry out its
express object, the borrowing of the money required to carry it on, with the acquiescence if not with the
affirmative consent of his associates, was not outside the powers of the managing partner and constitutes
a debt for which all the associates are liable.

The note passed into the hands of the defendant by reason of the successive deaths of his wife and of
their only child, each without debts, and for the amount thereof he became a creditor, subject, however,
to the deduction therefrom of his proportionate part of the indebtedness.
The trial court treated his claim on this note, as well as the sum of P2,024.49 furnished by him, as an
addition to his capital in the firm, rather than as a loan, and this constitutes one of the grounds of error
stated by the appellant. We do not deem it necessary to pass upon this objection, for the reason that,
considered as a loan, this sum would place the defendant as a creditor in a stronger position as against his
associates than if regarded as a mere contribution to capital. The error, if it be an error, is not, therefore,
prejudicial to the plaintiff, but is rather beneficial to him. The respondent did not except to it. lawphil.net

Various small sums have been paid out of the profits to some of the partners and these were properly
allowed him in the judgment.

On the theory on which the action was disposed of, the trial court committed no error in the computation
of the various shares.

Of the four parties plaintiff, but one, Victor del Rosario, is interested in this appeal, which has been
dismissed as to the others, and as to him the judgment of the trial court must be affirmed, with costs of
this instance. So ordered.

G.R. No. L-5236 January 10, 1910

PEDRO MARTINEZ, plaintiff-appellee, vs. ONG PONG CO and ONG LAY, defendants. ONG PONG
CO., appellant.

ARELLANO, C.J.:

On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants who, in a private
document, acknowledged that they had received the same with the agreement, as stated by them, "that
we are to invest the amount in a store, the profits or losses of which we are to divide with the former, in
equal shares."

The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to render him an
accounting of the partnership as agreed to, or else to refund him the P1,500 that he had given them for
the said purpose. Ong Pong Co alone appeared to answer the complaint; he admitted the fact of the
agreement and the delivery to him and to Ong Lay of the P1,500 for the purpose aforesaid, but he alleged
that Ong Lay, who was then deceased, was the one who had managed the business, and that nothing had
resulted therefrom save the loss of the capital of P1,500, to which loss the plaintiff agreed.

The judge of the Court of First Instance of the city of Manila who tried the case ordered Ong Pong Co to
return to the plaintiff one-half of the said capital of P1,500 which, together with Ong Lay, he had received
from the plaintiff, to wit, P750, plus P90 as one-half of the profits, calculated at the rate of 12 per cent per
annum for the six months that the store was supposed to have been open, both sums in Philippine
currency, making a total of P840, with legal interest thereon at the rate of 6 per cent per annum, from the
12th of June, 1901, when the business terminated and on which date he ought to have returned the said
amount to the plaintiff, until the full payment thereof with costs.

From this judgment Ong Pong Co appealed to this court, and assigned the following errors:

1. For not having taken into consideration the fact that the reason for the closing of the store was
the ejectment from the premises occupied by it.

2. For not having considered the fact that there were losses.

3. For holding that there should have been profits.

4. For having applied article 1138 of the Civil Code.

 5. and 6. For holding that the capital ought to have yielded profits, and that the latter should be
calculated 12 per cent per annum; and

7. The findings of the ejectment.

As to the first assignment of error, the fact that the store was closed by virtue of ejectment proceedings is
of no importance for the effects of the suit. The whole action is based upon the fact that the defendants
received certain capital from the plaintiff for the purpose of organizing a company; they, according to the
agreement, were to handle the said money and invest it in a store which was the object of the
association; they, in the absence of a special agreement vesting in one sole person the management of
the business, were the actual administrators thereof; as such administrators they were the agent of the
company and incurred the liabilities peculiar to every agent, among which is that of rendering account to
the principal of their transactions, and paying him everything they may have received by virtue of
the mandatum. (Arts. 1695 and 1720, Civil Code.) Neither of them has rendered such account nor proven
the losses referred to by Ong Pong Co; they are therefore obliged to refund the money that they received
for the purpose of establishing the said store — the object of the association. This was the principal
pronouncement of the judgment.

With regard to the second and third assignments of error, this court, like the court below, finds no
evidence that the entire capital or any part thereof was lost. It is no evidence of such loss to aver, without
proof, that the effects of the store were ejected. Even though this were proven, it could not be inferred
therefrom that the ejectment was due to the fact that no rents were paid, and that the rent was not paid
on account of the loss of the capital belonging to the enterprise.

With regard to the possible profits, the finding of the court below are based on the statements of the
defendant Ong Pong Co, to the effect that "there were some profits, but not large ones." This court,
however, does not find that the amount thereof has been proven, nor deem it possible to estimate them
to be a certain sum, and for a given period of time; hence, it can not admit the estimate, made in the
judgment, of 12 per cent per annum for the period of six months.

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a
partner who acted as agent in receiving money for a given purpose, for which he has rendered no
accounting, such agent is responsible only for the losses which, by a violation of the provisions of the law,
he incurred. This being an obligation to pay in cash, there are no other losses than the legal interest,
which interest is not due except from the time of the judicial demand, or, in the present case, from the
filing of the complaint. (Arts. 1108 and 1100, Civil Code.) We do not consider that article 1688 is
applicable in this case, in so far as it provides "that the partnership is liable to every partner for the
amounts he may have disbursed on account of the same and for the proper interest," for the reason that
no other money than that contributed as is involved.

As in the partnership there were two administrators or agents liable for the above-named amount, article
1138 of the Civil Code has been invoked; this latter deals with debts of a partnership where the obligation
is not a joint one, as is likewise provided by article 1723 of said code with respect to the liability of two or
more agents with respect to the return of the money that they received from their principal. Therefore,
the other errors assigned have not been committed.

In view of the foregoing judgment appealed from is hereby affirmed, provided, however, that the
defendant Ong Pong Co shall only pay the plaintiff the sum of P750 with the legal interest thereon at the
rate of 6 per cent per annum from the time of the filing of the complaint, and the costs, without special
ruling as to the costs of this instance. So ordered.
Note: Kung naulit lang yung case, kahit copy paste na lang yung facts. But include the pertinent
portion na related sa issue.

V. Partner's obligation to personal and partnership creditors; 3rd parties

Litton v Hill
Teologo

SYLLABUS: RIGHT OF THIRD PERSON TO PRESUME THAT PARTNER WITH WHOM HE CONTRACTS
HAS CONSENT OF COPARTNER​.— The stipulation in the articles of partnership that any of the two
managing partners may contract and sign in the name of the partnership with the consent of the other,
undoubtedly creates an obligation between the two partners, which consists in asking the other's consent
before contracting for the partnership. This obligation of course is not imposed upon a third person who
contracts with the partnership. Neither is it necessary for the third person to ascertain if the managing partner'
with – whom contracts has previously obtained the consent of the other, A third person may' and has a right to
presume that the partner with whom he contracts has, in the ordinary and natural course of business, the
consent of his copartner; for otherwise he would not enter into the contract. The third person would naturally
not presume that the partner with whom he enters into the transaction is violating the articles of partnership
but, on the contrary, is acting in accordance therewith. And this finds support in the legal presumption that the
ordinary course of business has been followed (No. 18, section 334, Code of Civil Procedure), and that the law
has been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which have the
force of law between the parties. Unless the contrary is shown, namely, that one of the partners did not
consent to his copartner entering into a contract with a third person, and that the latter with knowledge thereof
entered into said contract, the aforesaid presumption with all its force and legal effects should be taken into
account. There is nothing in the case at bar which destroys this presumption.
FACTS:

On February 14, 1934, George Litton, the plaintiff, sold and delivered to Carlos Ceron, one of the
managing partners of Hill & Ceron, a certain number of mining claims. Then, defendant Carlos Ceron delivered
to Litton a document evidencing the fact that Ceron of Hill & Ceron company received from Litton 17,000
shares of Big Wedge Mining Company, sold at P0.11 per share or total of P1,870.

Ceron paid to Litton P1,150, leaving an unpaid balance of P720. Unable to collect this sum from both Hill
& Ceron and its surety, Visayan Surety & Insurance Corporation, Litton filed a complaint in the Court of First
Instance of Manila against the said defendants for the recovery of the said balance.

The Court ordered Ceron personally to pay the amount and absolved the partnership Hill & Ceron,
Robert Hill and the Visayan Surety & Insurance Corporation. CA affirmed RTC, ruling that Ceron did not intend
to represent and did not act for the firm Hill & Ceron in the transaction involved in this litigation.

ISSUE: ​W/N Ceron represented the firm Hill & Ceron in buying some mining claims from Litton, therefore,
ordering him to pay the plaintiff the unpaid balance.

RULING:
YES​. The Court ruled that the transaction made by Ceron with Litton should be understood as effected
by Hill & Ceron and binding upon it.

Primarily, Robert Hill admitted when he testified at the trial the following: a) that he and Ceron, during
the partnership, had the same power to buy and sell; b) that in said partnership Hill as well as Ceron made the
transaction as partners in equal parts; c) that on the date of the transaction, the partnership between Hill and
Ceron was in existence.

In its decision, the CA said that the 6​th paragraph of the articles of copartnership of Hill & Ceron
provides that the management of the business affairs of the copartnership shall be entrusted to both
copartners, who shall jointly administer the business affairs of the copartnership. A written contract of the firm
can only be signed by one of the partners if the other partner consented. Now, assuming that Ceron attempted
to represent the firm in this contract with the Litton, the latter has failed to prove that Hill had consented to such
contract.

It follows from the sixth paragraph of the articles of partnership of Hill & Ceron that the management of
the business of the partnership has been entrusted to both partners thereof, but ​the Supreme Court
dissented from the view of the CA that for one of the partners to bind the partnership, the consent of
the other is necessary. ​Third persons, like the plaintiff, are not bound in entering into a contract with
any of the two partners, to ascertain whether or not this partner with whom the transaction is made has
the consent of the other partner. The public need not make inquires as to the agreements had between the
partners. ​Its knowledge is enough that it is contracting with the partnership, which is represented by
one of the managing partners. There is a general presumption that each individual partner is an
authorized agent for the firm and that he has authority to bind the firm in carrying on the partnership
transactions.

Furthermore, 2​nd paragraph of the articles of partnership of Hill & Ceron provides that the purpose or
object of the copartnership is to engage in the business of brokerage in general. With that, none of the two
partners, under article 130 of the Code of Commerce, may legally engage in the business of brokerage in
general as stock brokers, security brokers and other activities pertaining to the business of the partnership.
Ceron, therefore, could not have entered into the contract of sale of shares with Litton as a private
individual, but only as a managing partner of Hill & Ceron.

The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointly
and severally, the sum of P720, with legal interest.

OTHERS:

Goquiolay v Sycip - ​GR NO. L-11840

Adlawan

SYLLABUS:
PARTNERSHIP; MANAGEMENT, RIGHT OF EXCLUSIVE; PERSONAL RIGHT; TERMINATION UPON
MANAGER-PARTNER'S DEATH.—The right of exclusive management conferred upon Tan Sin An, being
premised upon trust and confidence, was a mere personal right that terminated upon Tan's demise.
ID.; ARTICLES OF CO-PARTNERSHIP; RIGHT OF HEIRS TO REPRESENT DECEASED PARTNER;
MANAGERIAL RIGHT; PROPRIETARY INTEREST.—The provision in the Articles of Co-partnership stating
that "in the event of death of any one of the partners within the 10-year term of the partnership, the deceased
partner shall be represented by his heirs", could not have referred to the managerial right given to Tan Sin An;
more appropriately, it relates to the succession in the proprietary interest of each partner.

ID.; ID.; EFFECT OF HEIRS' FAILURE TO REPUDIATE; HEIRS BECOME INDIVIDUAL PARTNERS;
MINORITY OF HEIRS.—Consonant with the articles of co-partnership providing for the continuation of the firm
notwithstanding the death of one of the partners, the heirs of the deceased, by never repudiating or refusing to
be bound under said provision, became individual partners with Antonio Goquiolay upon Tan's demise.
Minority of the heirs is not a bar to the application of that clause in the articles of co-partnership. Heirs liability
in the partnership being limited to the value of their importance, they become no more than limited partners,
when they manifest their intent to be bound as general partners.

ID.; SALE OF PARTNERSHIP PROPERTIES; CONSENT OF ALL PARTNERS UNNECESSARY;

STRANGERS DEALING WITH PARTNERSHIPS; POWER TO BIND PARTNERSHIP.—As to whether or not
the consent of the other partners was necessary to perfect the sale of the partnership properties, the Court
believes that it is not. Strangers dealing with a partnership have the right to assume, in the absence of
restrictive clauses in the copartnership agreement, that every general partner has power to bind the
partnership.

ID.; SALE OF PARTNERSHIP PROPERTIES; CONSENT OF ALL PARTNERS UNNECESSARY;

STRANGERS DEALING WITH PARTNERSHIPS; POWER TO BIND PARTNERSHIP.—As to whether or not
the consent of the other partners was necessary to perfect the sale of the partnership properties, the Court
believes that it is not. Strangers dealing with a partnership have the right to assume, in the absence of
restrictive clauses in the copartnership agreement, that every general partner has power to bind the
partnership. BAR.—Appellant's claim that the price was inadequate, relies on the testimony of a realtor, who in
1955, six years after the sale in question, asserted that the land was by then worth double the price for which it
was sold. But taking into account the continued rise of real estate values since liberation, and the f act that the
sale in question was practically a forced sale because the partnership had no other means to pay its legitimate
debts, this evidence certainly does not show such "gross inadequacy" as to justify the rescission of the sale.
FACTS:
Tan Sin An and Goquiolay entered into a general commercial partnership under the partnership name “Tan Sin
An and Antonio Goquiolay” for the purpose of dealing in real estate. The agreement lodged upon Tan Sin An
the sole management of the partnership affairs. The lifetime of the partnership was fixed at ten years and the
Articles of Co-partnership stipulated that in the event of death of any of the partners before the expiration of the
term, the partnership will not be dissolved but will be continued by the heirs or assigns of the deceased
partner. But the partnership could be dissolved upon mutual agreement in writing of the partners. Goquiolay
executed a GPA in favor of Tan Sin An. The plaintiff partnership purchased 3 parcels of land which was
mortgaged to “La Urbana” as payment of P25,000. Another 46 parcels of land were purchased by Tan Sin An
in his individual capacity which he assumed payment of a mortgage debt for P35K. A downpayment and the
amortization were advanced by Yutivo and Co. The two obligations were consolidated in an instrument
executed by the partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of “Banco
Hipotecario” Tan Sin An died leaving his widow, Kong Chai Pin and four minor children. The widow
subsequently became the administratrix of the estate. Repeated demands were made by Banco Hipotecario on
the partnership and on Tan Sin An. Defendant Sing Yee, upon request of defendant Yutivo Sons , paid the
remaining balance of the mortgage debt, the mortgage was cancelled Yutivo Sons and Sing Yee filed their
claim in the intestate proceedings of Tan Sin An for advances, interest and taxes paid in amortizing and
discharging their obligations to “La Urbana” and “Banco Hipotecario.” Kong Chai Pin filed a petition with the
probate court for authority to sell all the 49 parcels of land. She then sold it to Sycip and Lee in consideration of
P37K and of the vendees assuming payment of the claims filed by Yutivo Sons and Sing Yee. Later, Sycip and
Lee executed in favor of Insular Development a deed of transfer covering the 49 parcels of land.When
Goquiolay learned about the sale to Sycip and Lee, he filed a petition in the intestate proceedings to set aside
the order of the probate court approving the sale in so far as his interest over the parcels of land sold was
concerned. Probate court annulled the sale executed by the administratrix w/ respect to the 60% interest of
Goquiolay over the properties Administratrix appealed.The decision of probate court was set aside for failure to
include the indispensable parties. New pleadings were filed. The second amended complaint prays for the
annulment of the sale in favor of Sycip and Lee and their subsequent conveyance to Insular Development. The
complaint was dismissed by the lower court hence this appeal.

ISSUE:
Whether or not a widow or substitute become also a general partner or only a limited partner. Whether or not
the lower court err in holding that the widow succeeded her husband Tan Sin An in the sole management of
the partnership upon Tan’s death Whether or not the consent of the other partners was necessary to perfect
the sale of the partnership properties to Sycip and Lee?

RULING:
Kong Chai Pin became a mere general partner. By seeking authority to manage partnership property, Tan Sin
An’s widow showed that she desired to be considered a general partner. By authorizing the widow to manage
partnership property (which a limited partner could not be authorized to do), Goqulay recognized her as such
partner, and is now in estoppel to deny her position as a general partner, with authority to administer and
alienate partnership property. The articles did not provide that the heirs of the deceased would be merely
limited partners; on the contrary, they expressly stipulated that in case of death of either partner, “the co
partnership will have to be continued” with the heirs or assignees. It certainly could not be continued if it were
to be converted from a general partnership into a limited partnership since the difference between the two
kinds of associations is fundamental, and specially because the conversion into a limited association would
leave the heirs of the deceased partner without a share in the management. Hence, the contractual stipulation
actually contemplated that the heirs would become general partners rather than limited ones.
OTHERS:

Co-Pitco v Yulo
ALAS

SYLLABUS:

1.REVIEW; EVIDENCE; CERTIFICATE.—In order that this court may consider the evidence upon review, it
must be accompanied by a certificate of the clerk or the stenographer to the effect that it is the evidence which
was taken in the case.

2.CIVIL PARTNERSHIP.—Each member of a civil partnership is not bound to pay all the debts of the concern,
but simply his pro rata, share.

3.ID.—A partnership formed to operate a sugar plantation is a civil and not a mercantile partnership. Co-Pitco
vs. Yulo., 8 Phil. 544, No. 3146 September 14, 1907

FACTS:

Before February, 1903, Florencio Yulo and Jaime Palacios were partners in the operation of a sugar
estate in Negros, and had commercial dealings with a Chinaman named Dy-Sianco, who furnished them with
money and goods, and used to buy their crop of sugar. In February, 1903, the defendant, Pedro Yulo, father of
the said Florencio, took charge of the latter's interest in the above-mentioned partnership, and he became a
general partner with the said Jaime Palacios in the same business, and he continued as such partner until
about the end of 1904, dealing with Dy-Sianco in the same manner as the old partnership had dealt with the
latter. He then finds that the balance due from the firm Pedro Yulo and Jaime Palacios was 1,638.40 pesos
and orders judgment against the defendant, Pedro Yulo, for the entire amount, with interest.

ISSUE:

W/N Yulo is liable for the entire balance.

RULING:

NO. The partnership of Yulo and Palacios was engaged in the operation of a sugar estate in Negros. It was,
therefore a civil partnership, as distinguished from a mercantile partnership. Being a civil partnership, by the
express provisions of articles 1698 and 1137 of the Civil Code, the partners are not liable each for the whole
debt of the partnership. The liability is pro rata and in this case Pedro Yulo is responsible to plaintiff for only
one-half of the debt. The fact that the other partner, Jaime Palacios, had left the country can not increase the
liability of Pedro Yulo.

Bachrach v La Protectora
Calansingin

SYLLABUS:
1. PARTNERSHIP; LIABILITY OF MEMBERS FOR DEBTS OF CIVIL PARTNERSHIP ​— While a member of
a civil partnership is not liable in solidum (solidariamente) with his fellows for its entire indebtedness, he is
liable with them for his aliquot part thereof (mancomunadamente). (Arts. 1698, 1137, Civ. Code.)
2. ID; AUTHORITY OF MEMBER TO CONTRACT IN BEHALF OF FIRM. — ​Several members of a civil
partnership executed a document authorizing one of the members to buy two automobile trucks in the name
and representation of the firm. The partner holding this authority effected the purchase and signed the name of
the partnership to the purchase money notes and added his own name as an individual, thereby assuming, as
to himself, joint and several liability with the firm. ​Held: ​That the partners who emitted the authority were not
liable on the note, as the document in question contained no authority to bind them personally and in fact the
notes did not purport to do so; but they were liable in their capacity as partners.

FACTS: ​In 1903 La Protectora et al formed a civil partnership (La Protectora) for the business of transporting
passengers and freight at Laoag, Ilocos Norte.

Defendants Segundo, Adiarte, Flores, and Serrano, ​executed a document declaring their membership in La
Protectora and granting to its president full authority to contract for the purchase of two automobiles. By virtue
of such, Marcelo Barba, their president/manager, went to manila to purchase 2 trucks from plaintiff Bachrach.
He paid 3,000 in cash and executed a promisory note for the balance; intending to bind both the partnership
and himself.

An action to foreclose the mortgage retained on the trucks was then instituted by Bachrach to recover the
balance due of P7,037 against "La Protectora" and the five individuals Marcelo Barba, Nicolas Segundo,
Antonio Adiarte, Ignacio Flores, and Modesto Serrano.

CFI​: ​Judgment was rendered against all of the defendants.

The defendants appealed the decision contending that they are not liable on the note, as the document in
question contained no authority to bind them personally.

ISSUE: ​WON the four other individuals are liable for the firm debts and if so to what extent

RULING:
ARE THE OTHERS LIABLE? YES.
The business conducted under the name of "La Protectora" was evidently that of a civil partnership. The
authority of Marcelo Barba to bind the partnership, in the purchase of the trucks, is fully established by the
document executed by the four appellants upon June 12, 1913. The transaction by which Barba secured these
trucks was ​in conformity with the tenor of this document​. The promissory notes constitute the obligation
exclusively of "La Protectora" and of Marcelo Barba; and they do not in any sense constitute an obligation
directly binding on the four appellants. ​Their liability is based on the fact that they are members of the civil
partnership and as such are liable for its debts​. ​It is true that article 1698 of the Civil Code declares that
a member of a civil partnership is not liable in solidum (solidariamente) with his fellows for its entire
indebtedness; but it results from this article, in connection with article 1137 of the Civil Code, that each
is liable with the others (mancomunadamente) for his aliquot part of such indebtedness.

We think that the document referred to was intended merely as an authority to enable Barba to bind the
partnership and that the parties to that instrument did not intend thereby to confer upon Barba an authority to
bind them personally. It is obvious that the contract which Barba in fact executed in pursuance of that authority
did not by its terms profess to bind the appellants personally at all, but only the partnership and himself. It
follows that the four appellants cannot be held to have been personally obligated by that instrument; ​but, as
we have already seen, their liability rests upon the general principles underlying partnership liability.

UP TO WHAT EXTENT?
Their liability upon this account is no less obvious than upon the debt incurred by the purchase of the
trucks​; and such liability is derived from the fact that the debt was lawfully incurred in the prosecution of the
partnership enterprise. Under these circumstances it is declared in article 1695 of the Civil Code that all the
partners are considered agents of the partnership. Barba therefore must be held to have had authority to incur
these expenses. But in addition to this he is shown to have been in fact the president or manager, and there
can be no doubt that he had actual authority to incur this obligation. ​From what has been said it results that
the appellants are severally liable for their respective shares of the entire indebtedness found to be
due.

Island Sales Inc. v United Pioneers Gen. Construction Co.

Fernandez

SYLLABUS:
OBLIGATIONS AND CONTRACTS; LIABILITY OF GENERAL PARTNERS, PRO-RATA; CONDONATION OF
INDIVIDUAL LIABILITY DOES NOT AFFECT THE OTHER'S SHARE IN THE OBLIGATION. — Where there
was five general partners when the promissory note in question executed for and in behalf of the partnership,
and the complaint against one of them was dismissed upon motion of the plaintiff, the general partner's share
in the obligation remains limited to only 1/5 of the amount due and demandable, their liability being pro-rata.

FACTS:

The defendant company, United Pioneers Gen. Construction Co, a general partnership, purchased from the
plaintiff a motor vehicle on an installment basis and for this purpose executed a promissory note payable in
twelve (12) equal monthly installments ​(every 22nd of the month)​. The same was with a condition that failure to
pay any of said installments as they fall due would render the whole unpaid balance immediately due and
demandable (​acceleration clause)​.

Having failed to receive the installment due on July 22, 1961, the plaintiff sued the defendant company for the
unpaid balance including its general partners as co-defendants (Benjamin C. Daco, Daniel A. Guizona, Noel C.
Sim, Romulo B. Lumauig, and Augusto Palisoc)

Guizona failed to file an answer and was consequently declared in default. ​Subsequently, on motion of the
plaintiff, the complaint was dismissed insofar as the defendant Lumauig is concerned.

When the case was called for hearing, the defendants and their counsels failed to appear notwithstanding the
notices sent to them. Consequently, the trial court authorized the plaintiff to present its evidence ex-parte.

TC: ​Sentenced the plaintiff to pay in this case with the understanding that the judgment against these
individual defendants shall be enforced ​only if the defendant company has no more leviable properties
with which to satisfy the judgment against it.​)
MR: Defendants Daco and Sim claimed that since there are five (5) general partners, the joint and
subsidiary liability of each partner should not exceed one-fifth (1/5) of the obligations of the defendant
company; denied
Hence, this appeal.

Issue: W/N the dismissal of the complaint to favor one of the general partners of a partnership
increases the joint and subsidiary liability of each of the remaining partners for the obligations of the
partnership. - NO

The Court held in the negative (​applying Art. 1816 and the ruling in the case of Co-Pitco v. Yutco​). In the
instant case, there were five (5) general partners when the promissory note in question was executed for and
in behalf of the partnership. Since the liability of the partners is pro rata, the liability of the appellant Benjamin
C. Daco shall be limited to only one-fifth (1/5) of the obligations of the defendant company. The fact that the
complaint against the defendant Romulo B. Lumauig was dismissed, upon motion of the plaintiff, does not
unmake the said Lumauig as a general partner in the defendant company. In so moving to dismiss the
complaint, the plaintiff merely condoned Lumauig's individual liability to the plaintiff.

Article 1816 of the Civil Code provides:

"Art. 1816. All partners including industrial ones, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts which may be entered into in the name and for the
account of the partnership. under its signature and by a person authorized to act for the partnership. However,
any partner may enter into a separate obligation to perform a partnership contract."

WHEREFORE, the appealed decision as thus clarified is hereby AFFIRMED, without pronouncement as
to costs.

SO ORDERED.

OTHERS:

"The partnership of Yulo and Palacios was engaged in the operation of a sugar estate in Negros. It was,
therefore, a civil partnership as distinguished from a mercantile partnership. Being a civil partnership, by the
express provisions of articles 1698 and 1137 of the Civil Code, the partners are not liable each for the whole
debt of the partnership. The liability is pro rata and in this case Pedro Yulo is responsible to plaintiff for only
one-half of the debt. The fact that the other partner, Jaime Palacios, had left the country cannot increase the
liability of Pedro Yulo." ​Co-Pitco vs. Yulo (8 Phil. 544) [REFERRED CASE]

Lim Tong Lim v Philippine Shipping Fishing Gear Inc.

Te

(kinuha ko sa net yung digest - Tala)

Facts:

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

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.

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.

Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay.

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.

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

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.

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.

Issues:

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.

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.

THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIM'S
GOODS.
key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

Ruling:

The Petition is devoid of merit.

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."

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 petitioner's brother.

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.

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.

Corporation by Estoppel

Section 21 of the Corporation Code of the Philippines provides:

"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.

"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 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."... 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.

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.

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.

Principles:

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.

Munasque v CA
Teologo

SYLLABUS: ​Partnership; Fact that there was a misunderstanding between the partners does not
convert the partnership into a sham organization​.— There ​is nothing in the ​records to indicate that the
partnership organized by the two men ​was not a genuine one. If there was a falling out or ​misunderstanding
between the partners, such does not convert​ ​the partnership into a sham organization.

Same; Same; Payments made to the partnership, valid where the recipient made it appear that he and
another were true partners in the partnership.— ​ Likewise, when Muñasque received ​the first payment of
Tropical in the amount of P7,000.00 with a ​check made out in his name, he indorsed the check in favor of
Galan. Respondent Tropical therefore, had every right to presume ​that the petitioner and Galan were true
partners. If they were not ​partners as petitioner claims, then he has only himself to blame for making the
relationship appear otherwise, not only to Tropical but to their other creditors as well. The payments made to
the partnership were, therefore, valid payments.

Same; Same; Liability of partners to third persons who extended credit to the partnership​.— No ​error
was committed by the appellate court in holding that the payment made by Tropical to Galan was a good
payment which binds both Galan and the petitioner. Since the two were partners when the debts were
incurred, they are also both liable to third persons who extended credit to their partnership.

FACTS:
Petitioner Elmo Muñasque in behalf of the partnership of “Galan and Muñasque as contractor entered into a
written contract with respondent Tropical for remodeling the latter’s building in Cebu. A total amount of P25,000
was to be paid under the contract for the entire services of the contractor. Under the terms of payment, 30% of
the whole amount is to be paid upon the signing of the contract and the balance thereof divided into three
equal installments at P6,000 every 15 working days.

Tropical made the first payment by check for P7,000 in favor of Munasque. Munasque indorsed the check in
favor of Galan to enable the latter to deposit it in the bank and pay for the materials and labor used in the
project. However, petitioner alleged that Galan allegedly spent P6, 183.37 out of the P7,000 for his personal
use. When the second check came, Munasque refused to indorse it again to Galan.

Galan informed Tropical of the misunderstanding between him and Munasque as partners. Hence upon
second payment, Tropical changed the name of the payee on the second check from Munasque to “Galan and
Associates” which enabled Galan to encash the second check. Meanwhile, the construction was continued
through Munasque’s sole efforts by incurring debts from various suppliers. The construction work was finished
ahead of schedule with the total expenditure reaching P 34, 000.

Munasque filed a complaint for payment of sum of money and damages against Galan, Tropical, and Tropical’s
Cebu branch manager Pons. Both Trial Court and Court of Appeals not only absolved respondents Tropical
and its Cebu manager, Pons, from any liability but they also held the petitioner together with Galan, liable to
the intervenors Cebu Southern Hardware Company and Blue Diamond Glass Palace for the credit which the
intervenors extended to the partnership of petitioner and Galan.

ISSUE:

Whether the contention of Muñasque that the amounts payable to the intervenors should be shouldered
exclusively by Galan.

RULING:

The Court said that the petitioner is not solely burdened by the obligations of their ill-starred partnership. The
records show that there is an existing judgment against respondent Galan, holding him liable for the total
amount of P7,000.00 in favor of Eden Hardware which extended credit to the partnership aside from the P2,
000. 00 he already paid to Universal Lumber.

We, however, take exception to the ruling of the appellate court that the trial court's ordering petitioner and
Galan to pay the credits of Blue Diamond and Cebu Southern Hardware "jointly and severally" is plain error
since the liability of partners under the law to third persons for contracts executed in connection with
partnership business is only pro rata under Art. 1816, of the Civil Code.

While it is true that under Article 1816 of the Civil Code, "All partners, including industrial ones, shall be liable
pro-rate with all their property and after all the partnership assets have been exhausted, for the contracts which
may be entered into the name and from the account cd the partnership, under its signature and by a person
authorized to act for the partner-ship. ...". this provision should be construed together with Article 1824 which
provides that: "All partners are liable solidarily with the partnership for everything chargeable to the partnership
under Articles 1822 and 1823." In short, while the liability of the partners are merely joint in transactions
entered into by the partnership, a third person who transacted with said partnership can hold the partners
solidarily liable for the whole obligation if the case of the third person falls under Articles 1822 or 1823.

Articles 1822 and 1823 of the Civil Code provide:

Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partner-ship or with the authority of his co-partners, loss or injury is caused
to any person, not being a partner in the partnership or any penalty is incurred, the partnership
is liable therefor to the same extent as the partner so acting or omitting to act.

Art. 1823. The partnership is bound to make good:

(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a third
person and the money or property so received is misapplied by any partner while it is in the
custody of the partnership.

The obligation is solidary, because the law protects him, who in good faith relied upon the authority of a
partner, whether such authority is real or apparent. That is why under Article 1824 of the Civil Code all
partners, whether innocent or guilty, as well as the legal entity which is the partnership, are solidarily liable.

In the case at bar the respondent Tropical had every reason to believe that a partnership existed between the
petitioner and Galan and no fault or error can be imputed against it for making payments to "Galan and
Associates" and delivering the same to Galan because as far as it was concerned, Galan was a true partner
with real authority to transact on behalf of the partnership with which it was dealing. This is even more true in
the cases of Cebu Southern Hardware and Blue Diamond Glass Palace who supplied materials on credit to the
partnership. Thus, it is but fair that the consequences of any wrongful act committed by any of the partners
therein should be answered solidarily by all the partners and the partnership as a whole

However, as between the partners Muñasque and Galan, justice also dictates that Muñasque be reimbursed
by Galan for the payments made by the former representing the liability of their partnership to herein
intervenors, as it was satisfactorily established that Galan acted in bad faith in his dealings with Muñasque as a
partner.

OTHERS:

MacDonald v National City Bank

Adlawan

SYLLABUS:
PARTNERSHIP; UNREGISTERED PARTNERSHIP; PERSONS COMPOSING IT ARE PARTNERS;
ASSOCIATION is PARTNERSHIP.—While an unregistered commercial partnership has no juridical
personality, nevertheless, where two or more persons, attempt to create a partnership failing to comply with all
the legal formalities, the law considers them as partners and the association is a partnership in so far as it is
favorable to third persons, by reason of the equitable principle of estoppel.
FACTS:
Stasikinocey is a partnership formed by da Costa, Gorcey, Kusik and Gavino. It was denied registration by the
SEC due to a confusion between the partnership and Cardinal Rattan. Cardinal Rattan is the business name or
style used by Stasikinocey. Da Costa and Gorcey are the general partners of Cardinal Rattan. Moreover, Da
Costa is the managing partner of Cardinal Rattan. Stasikinocey had an overdraft account with National City
Bank, which was later converted into an ordinary loan due the partnership’s failure in paying its obligation. The
ordinary loan was secured by a chattel mortgage over 3 vehicles. During the subsistence of the loan, the
vehicles were sold to MacDonald and later on, MacDonald sold 2 of the 3 vehicles to Gonzales. The bank
brought an action for recovery of its credit and foreclosure of the chattel mortgage upon learning of these
transactions. Held: While an unregistered commercial partnership has no juridical personality, nevertheless,
where two or more persons attempt to create a partnership failing to comply with all the legal formalities, the
law considers them as partners and the association is a partnership in so far as it is a favorable to third
persons, by reason of the equitable principle of estoppel. Where a partnership not duly organized has been
recognized as such in its dealings with certain persons, it shall be considered as “partnership by estoppel” and
the persons dealing with it are estopped from denying its partnership existence.

ISSUE:
WON the partnership, Stasikinocey is estopped from asserting that it does not have juridical
personality since it is an unregistered commercial partnership

RULING:
[YES] While an unregistered commercial partnership has no juridical personality, nevertheless, where two or
more persons attempt to create a partnership failing to comply with all the legal formalities, the law considers
them as partners and the association is a partnership in so far as it is a favorable to third persons, by reason of
the equitable principle of estoppel. Da Costa and Gorcey cannot deny that they are partners of the partnership
Stasikinocey, because in all their transactions with the National City Bank they represented themselves as
such. McDonald cannot disclaim knowledge of the partnership Stasikinocey because he dealt with said entity
in purchasing two of the vehicles in question through Gorcey and Da Costa. The sale of the vehicles to
MacDonald being void, the sale to Gonzales is also void since a buyer cannot have a better right than the
seller. As was held in Behn Meyer & Co. vs. Rosatzin, where a partnership not duly organized has been
recognized as such in its dealings with certain persons, it shall be considered as “partnership by estoppel” and
the persons dealing with it are estopped from denying its partnership existence. If the law recognizes a
defectively organized partnership as de facto as far as third persons are concerned, for purposes of its de facto
existence it should have such attribute of a partnership as domicile.

OTHERS:

Magdusa v Albaran
Alas

SYLLABUS:
Partnership; Dissolution and Liquidation; When a partner's share may be returned.—A partner's share can not
be returned without first dissolving and liquidating the partnership (Po Yeng Cheo vs.Lim Ka Yam, 44 Phil.
177), for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those
of the partners; and it is self-evident that all members of the partnership are interested in its assets and
business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of its property.
Same; Same; Same; Preference of creditors over partnership assets.—Unless a proper accounting and
liquidation of the partnership affairs is first had, the capital shares of the retiring partners can not be repaid, for
the firm's outside creditors have preference over the assets of the enterprise (Civil Code, Art. 1839), and the
firm's property can not be diminished to their prejudice.

Same; Same; Same; Remaining partner not personally liable for partner's shares.—Aremaining partner can not
be held liable in his personal capacity for the payment of partners shares, for he does not hold them except as
manager of, or trusteefor, the partnership. It is the latter who must refund their shares to the retiring partners.

FACTS:

Magdusa and Albaran, together with various other persons, had verbally formed a partnership ​de facto​,
for the sale of general merchandise in Surigao, to which appellant contributed P2,000 as capital, and the
others contributed their labor, under the condition that out of the net profits of the business 25% would be
added to the original capital, and the remaining 75% would be divided among the members in proportion to the
length of service of each. Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from
the partnership, and appellant thereupon made a computation to determine the value of the partners' shares to
that date – which was drawn in the handwriting of appellant. Appellees thereafter made demands upon
appellant for payment, but appellant having refused, they filed the initial complaint. Magdusa defended by
denying any partnership with appellees, whom he claimed to be mere employees of his.

CFI of Bohol – dismissed; ground: the other were indispensable parties but hid not been impleaded

CA – reversed; ordered appellant Magdusa to pay to appellees, by way of refund of their shares as partners

ISSUE:

W/N Magdusa should pay the refund of the shares of other partners.

RULING: NO​.

A partner's share cannot be returned without first dissolving and liquidating the partnership (Po Yeng Cheo vs.
Lim Ka Yam, 44 Phil. 177), for the return is dependent on the discharge of the creditors, whose claims enjoy
preference over those of the partners; and it is self-evident that all members of the partnership are interested in
his assets and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution
of its property. The liquidation is not signed by the other members of the partnership besides appellees and
appellant; it does not appear that they have approved, authorized, or ratified the same, and, therefore, it is not
binding upon them. At the very least, they are entitled to be heard upon its correctness.

Unless a proper accounting and liquidation of the partnership affairs is first had, the capital shares of the
appellees, as retiring partners, can’t be repaid, for the firm's outside creditors have preference over the assets
of the enterprise (Art. 1839), and the firm's property can’t be diminished to their prejudice can’t be held liable in
his personal capacity for the payment of partners' shares for he does not hold them except as manager of, or
trustee for, the partnership. It is the latter that must refund their shares to the retiring partners. Since not all the
members of the partnership have been impleaded, no judgment for refund can be rendered, and the action
should have been dismissed.
CA’s decision is reversed. ​The action ordered dismissed, without prejudice to a proper proceeding for the
dissolution and liquidation of the common enterprise.

Dan Fue Leung v IAC

Calansingin

SYLLABUS:
1. CIVIL LAW; SPECIAL CONTRACTS; PARTNERSHIP; REQUISITES. — The requisites of a partnership
which are — 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 (Article 1767, Civil
Code; Yulo v. Yang Chiao Cheng, 106 Phil. 110)

2. ID.; ID.; ID.; OBLIGATIONS OF PARTNERS; RIGHT TO DEMAND AN ACCOUNTING EXISTS AS LONG
AS PARTNERSHIP EXISTS; PRESCRIPTION BEGINS TO RUN ONLY UPON DISSOLUTION OF
PARTNERSHIP WHEN FINAL ACCOUNTING IS DONE. — Regarding the prescriptive period within which the
private respondent may demand an accounting, Articles 1806, 1807, and 1809 show that the right to demand
an accounting exists as long as the partnership exists. Prescription begins to run only upon the dissolution of
the partnership when the final accounting is done.

3. ID.; ID.; ID.; DISSOLUTION AND WINDING UP; LIQUIDATION AND WINDING UP OF PARTNERSHIP
AFFAIRS, RETURN OF CAPITAL AND OTHER INCIDENTS OF DISSOLUTION PROPER BECAUSE
CONTINUATION OF PARTNERSHIP HAS BECOME INEQUITABLE. — There shall be a liquidation and
winding up of partnership affairs, return of capital, and other incidents of dissolution because the continuation
of the partnership has become inequitable.

FACTS:
Respondent Leung Yiu filed an action for the recovery of the 22% of the annual profits of Sun Wah Panciteria
(restaurant) from petitioner Dan Fue Leung.

Leung Yiu claims being a partner who contributed P4,000 to the restaurant, evidenced by a receipt signed by
Dan Fue and some witnesses. Furthermore, he received from the petitioner the amount of P12,000.00 from the
profits of the year 1974.

Dan Fue denied the claims of Leung Yiu and said that he was the sole owner.

CFI of Manila: Declared private respondent Leung Yiu a partner of petitioner Dan Fue Leung in the business of
Sun Wah Panciteria and ordering the petitioner to pay to the private respondent his share in the annual profits
of the said restaurant

IAC: AFFIRMED the decision of CFI

Petitioner asks for the reversal.

ISSUE:
1. WON the private respondent is a partner of the petitioner in the establishment of Sun Wah Panciteria, and
thus entitled to the share

2. WON the payment of a share of profits shall continue into the future with no fixed ending date.

RULING:
1. YES.

The requisites of a partnership which are — 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 -have been established. As stated by the respondent, a partner shares not only in profits but also
in the losses of the firm.

The private respondent's cause of action is premised upon the failure of the petitioner to give him the agreed
profits in the operation of Sun Wah Panciteria. In effect the private respondent was asking for an accounting of
his interests in the partnership.

It is Article 1842 of the Civil Code in conjunction with Articles 1144 and 1155 which is applicable. Article 1842
states:
The right to an account of his interest shall accrue to any partner, or his legal representative as against the
winding up partners or the surviving partners or the person or partnership continuing the business, at the date
of dissolution, in the absence or any agreement to the contrary.

Regarding the prescriptive period within which the private respondent may demand an accounting, Articles
1806, 1807, and 1809 show that the right to demand an accounting exists as long as the partnership exists.
Prescription begins to run only upon the dissolution of the partnership when the final accounting is done.

2. NO.
There is more than substantial evidence to support the factual findings of the trial court and the appellate court.

Considering the facts of this case, the Court may decree a dissolution of the partnership under Article 1831 of
the Civil Code which, in part, provides:
Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:
xxx xxx xxx
(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
(4) A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts
himself in matters relating to the partnership business that it is not reasonably practicable to carry on the
business in partnership with him;
xxx xxx xxx
(6) Other circumstances render a dissolution equitable.
There shall be a liquidation and winding up of partnership affairs, return of capital, and other incidents of
dissolution because the continuation of the partnership has become inequitable.

OTHERS:
Emnace v CA
Fernandez

SYLLABUS:
CIVIL LAW; PRESCRIPTION OF ACTIONS; A PARTNERSHIP CONTINUES TO EXIST UNTIL IT
COMPLETES ITS WINDING UP PROCESS INCLUDING THE PARTITIONING AND DISTRIBUTION OF THE
NET PARTNERSHIP ASSETS TO THE PARTNERS; PRESCRIPTION STARTS TO RUN ONLY UPON
DISSOLUTION OF THE PARTNERSHIP WHEN THE FINAL ACCOUNTING IS DONE. — ​Petitioner contends
that the trial court should have dismissed the complaint on the ground of prescription, arguing that
respondents' action prescribed four (4) years after it accrued in 1986. The trial court and the Court of Appeals
gave scant consideration to petitioner's hollow arguments, and rightly so. The three (3) final stages of a
partnership are: (1) dissolution; (2) winding-up; and (3) termination. The partnership, although dissolved,
continues to exist and its legal personality is retained, at which time it completes the winding up of its affairs,
including the partitioning and distribution of the net partnership assets to the partners. For as long as the
partnership exists, any of the partners may demand an accounting of the partnership's business. Prescription
of the said right starts to run only upon the dissolution of the partnership when the final accounting is done​. C

ID.; ID.; ID.; CASE AT BAR; ACTION IS NOT BARRED BY PRESCRIPTION SINCE NO ACCOUNTING HAS
YET BEEN MADE ON THE PARTNERSHIP'S BUSINESS AND ASSETS. ​Contrary to petitioner's
protestations that respondents' right to inquire into the business affairs of the partnership accrued in 1986,
prescribing four (4) years thereafter, prescription had not even begun to run in the absence of a final
accounting. Article 1842 of the Civil Code provides: The right to an account of his interest shall accrue to any
partner, or his legal representative as against the winding up partners or the surviving partners or the person or
partnership continuing the business, at the date of dissolution, in the absence of any agreement to the
contrary. Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the
above-cited provision states that the right to demand an accounting accrues at the date of dissolution in the
absence of any agreement to the contrary. When a final accounting is made, it is only then that prescription
begins to run. In the case at bar, no final accounting has been made, and that is precisely what respondents
are seeking in their action before the trial court, since petitioner has failed or refused to render an accounting of
the partnership's business and assets. Hence, the said action is not barred by prescription.

FACTS:
Petitioner Emnace, Tabanao Jacinto Divinagracia were partners in a business concern known as Ma. Nelma
Fishing Industry. Sometime in January of 1986, they decided to dissolve their partnership and executed an
agreement of partition and distribution of the partnership properties among them, consequent to Jacinto
Divinagracia's withdrawal from the partnership. Among the assets to be distributed were:
● fishing boats,
● 6 vehicles
● 2 parcels of land located at Sto. Niño and Talisay, Negros Occidental
● cash deposits in the local branches of the Bank of the Philippine Islands and Prudential Bank.

Throughout the existence of the partnership, and even after Tabanao's untimely demise, petitioner failed to
submit to his heirs any statement of assets and liabilities of the partnership, and to render an accounting of the
partnership's finances. Petitioner also reneged on his promise to turn over to Tabanao's heirs the deceased's
1/3 share in the total assets of the partnership, despite formal demand for payment thereof.
As such, Tabanao’s heirs, respondents filed against petitioner an action for accounting, payment of shares,
division of assets and damages. ​Petition filed a motion to dismiss (​improper venue, lack of jurisdiction over
the nature of the action or suit, and lack of capacity of the estate of Tabanao to sue)

TC:​ denied MTD

Respondent filed an amended complaint to which the petitioner filed a manifestation and MTD, raising
prescription as an additional ground warranting the outright dismissal of the complaint.

TC: denied MTD; ​grounds raised therein were basically the same as the earlier motion to dismiss which has
been denied. ​As to prescription, it begins to run only upon the dissolution of the partnership when the
final accounting is done. Hence, prescription has not set in the absence of a final accounting.

CA: ​dismissed the petition for ​certiorari​; no GAD

Hence, this petition for review in the SC.

ISSUE: W/N respondent Tabano’s Heirs’ right to demand an accounting of the partnerhip’s business
has already barred by prescription?

RULING: NO. The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3)
termination. 36 The partnership, although dissolved, continues to exist and its legal personality is retained, at
which time it completes the winding up of its affairs, including the partitioning and distribution of the net
partnership assets to the partners. For as long as the partnership exists, any of the partners may demand
an accounting of the partnership's business. Prescription of the said right starts to run only upon the
dissolution of the partnership when the final accounting is done.

Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the
partnership accrued in 1986, prescribing four (4) years thereafter, prescription had not even begun to
run in the absence of a final accounting.

Article 1842 of the Civil Code provides:

The right to an account of his interest shall accrue to any partner, or his legal representative as against
the winding up partners or the surviving partners or the person or partnership continuing the business,
at the date of dissolution, in the absence of any agreement to the contrary.

Applied in relation to Articles 1807 and 1809​, which also deal with the duty to account, the above-cited
provision states that the right to demand an accounting accrues at the date of dissolution in the absence of any
agreement to the contrary. ​When a final accounting is made, it is only then that prescription begins to
run.

In the case at bar, no final accounting has been made, and that is precisely what respondents are
seeking in their action before the trial court, since petitioner has failed or refused to render an
accounting of the partnership's business and assets. Hence, the said action is not barred by
prescription.

WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the case is
REMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to determine the proper
docket fee based on the estimated amount that plaintiffs therein seek to collect, and direct said plaintiffs to pay
the same within a reasonable time, provided the applicable prescriptive or reglementary period has not yet
expired. Thereafter, the trial court is ORDERED to conduct the appropriate proceedings in Civil Case No.
416-C.

OTHERS:
Venue was properly laid because, while realties were involved, the action was directed against a
particular person on the basis of his personal liability; hence, the action is not only a personal action but also
an action ​in personam​.
As regards petitioner's argument of lack of jurisdiction over the action because the prescribed docket
fee was not paid considering the huge amount involved in the claim, the trial court noted that a request for
accounting was made in order that the exact value of the partnership may be ascertained and, thus, the correct
docket fee may be paid.
The heirs of Tabanao had a right to sue in their own names​, in view of the provision of Article 777
of the Civil Code, which states that the rights to the ​succession are transmitted from the moment of the death
of the decedent.

US vs Clarin
Te

(pinaste ko na lang full text kasi magpprint na ko) - Tala

Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in company with Eusebio Clarin and Carlos
de Guzman, might buy and sell mangoes, and, believing that he could make some money in this business, the
said Larin made an agreement with the three men by which the profits were to be divided equally between him
and them.

Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in mangoes and obtained P203 from the
business, but did not comply with the terms of the contract by delivering to Larin his half of the profits; neither
did they render him any account of the capital.

Larin charged them with the crime of ​estafa​, but the provincial fiscal filed an information only against Eusebio
Clarin in which he accused him of appropriating to himself not only the P172 but also the share of the profits
that belonged to Larin, amounting to P15.50.

Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and assumed that the facts presented
concerned the defendant and themselves together.

The trial court, that of First Instance of Pampanga, sentenced the defendant, Eusebio Clarin, to six months'
arresto mayor​, to suffer the accessory penalties, and to return to Pedro Larin P172, besides P30.50 as his
share of the profits, or to subsidiary imprisonment in case of insolvency, and to pay the costs. The defendant
appealed, and in deciding his appeal we arrive at the following conclusions:

When 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, a contract is formed which is called partnership. (Art.
1665, Civil Code.)
When Larin put the P172 into the partnership which he formed with Tarug, Clarin, and Guzman, he invested
his capital in the risks or benefits of the business of the purchase and sale of mangoes, and, even though he
had reserved the capital and conveyed only the usufruct of his money, it would not devolve upon of his three
partners to return his capital to him, but upon the partnership of which he himself formed part, or if it were to be
done by one of the three specifically, it would be Tarug, who, according to the evidence, was the person who
received the money directly from Larin.

The P172 having been received by the partnership, the business commenced and profits accrued, the action
that lies with the partner who furnished the capital for the recovery of his money is not a criminal action for
estafa​, but a civil one arising from the partnership contract for a liquidation of the partnership and a levy on its
assets if there should be any.

No. 5 of article 535 of the Penal Code, according to which those are guilty of ​estafa ​"who, to the prejudice of
another, shall appropriate or misapply any money, goods, or any kind of personal property which they may
have received as a deposit on commission for administration or in any other character producing the obligation
to deliver or return the same," (as, for example, in ​commodatum​, precarium​, and other unilateral contracts
which require the return of the same thing received) does not include money received for a partnership;
otherwise the result would be that, if the partnership, instead of obtaining profits, suffered losses, as it could
not be held liable civilly for the share of the capitalist partner who reserved the ownership of the money brought
in by him, it would have to answer to the charge of ​estafa​, for which it would be sufficient to argue that the
partnership had received the money ​under obligation to return it​.

We therefore freely acquit Eusebio Clarin, with the costs ​de oficio​. The complaint for ​estafa ​is dismissed
without prejudice to the institution of a civil action.

*Agustin v Inocencio
Teologo

SYLLABUS: ​PARTNERSHIP; ADVANCES ALLOWED MANAGING PARTNER​.— On the adjustment of the

accounts of a partnership, the managing partner may be allowed funds borrowed or advanced and necessary
to the completion of the work, within the scope of the business and expressly provided for by agreement
among the partners.

FACTS:

The parties to this controversy, who had been conducting a partnership as industrial partners without capital,
contributed from its profits the sum of P807.28 as a fund toward the construction of a casco for use in their
business, to which they added P3,500, borrowed from Maria del Rosario, the wife of the defendant. Bartolome
Inocencio, he being the managing partner. It is admitted that this total, a little over P4,300, was the estimated
cost of the casco, but in the progress of the work the defendant found that it called for additional funds, which
he advanced to the amount of P2,024.49. It satisfactorily appears from the evidence that this amount was
necessary in order to complete the work undertaken. Although it would seem that he failed to notify his
partners of the various items from time to time going to make up this sum, it is shown that the books were at all
times open to their inspection, and that, being asked to examine them, they omitted to do so, and that the
plaintiff Juan Agustin, representing all the partners, was also present at the construction of the casco, in charge
of the practical work and cognizant of its needs and its progress.
ISSUE:
Whether or not the acts of the defendant’s acts were outside the powers of a managing partners?

RULING:

The work done in the casco having been within the scope of the association and necessary to carry out its
express object, the borrowing of the money required to carry it on, with the acquiescence if not with the
affirmative consent of his associates, was not outside the powers of the managing partner and constitutes a
debt for which all the associates are liable.

The note passed into the hands of the defendant by reason of the successive deaths of his wife and of their
only child, each without debts, and for the amount thereof he became a creditor, subject, however, to the
deduction therefrom of his proportionate part of the indebtedness.

The trial court treated his claim on this note, as well as the sum of P2,024.49 furnished by him, as an addition
to his capital in the firm, rather than as a loan, and this constitutes one of the grounds of error stated by the
appellant. We do not deem it necessary to pass upon this objection, for the reason that, considered as a loan,
this sum would place the defendant as a creditor in a stronger position as against his associates than if
regarded as a mere contribution to capital. The error, if it be an error, is not, therefore, prejudicial to the
plaintiff, but is rather beneficial to him. The respondent did not except to it. ​lawphil.net

Various small sums have been paid out of the profits to some of the partners and these were properly allowed
him in the judgment. On the theory on which the action was disposed of, the trial court committed no error in
the computation of the various shares. Of the four parties plaintiff, but one, Victor del Rosario, is interested in
this appeal, which has been dismissed as to the others, and as to him the judgment of the trial court must be
affirmed, with costs of this instance.

OTHERS:

*Martinez v Ong Pong Co

Adlawan

SYLLABUS:
PARTNERSHIP; LIABILITY OF MANAGING PARTNERS.—Where two persons receive from another a sum of
money for the establishment of a business, and agree to share with the latter the profits or losses that may
result therefrom, the said two persons, as the apparent administrators of the partnership, acted as agents for
the capitalist partner under the provisions of article 1695, rule 1, of the Civil Code, and by virtue thereof are
bound to fulfill the contract which implies the management of the business.

FACTS:
Pedro Martinez (plaintiff) delivered Php.1,500.00 to Ong Pong Co and Ong Lay (defendants).Said amount was
reflected in a private instrument where the plaintiff and defendants agreed that“they are to invest the amount in
a store, the profits or losses of which we are to divide with theformer, in equal shares.” The store business was
a failure and the plaintiff demanded from thedefendants either to render an accounting of the partnership as
agreed to, or to refund him thePhp.1,500.00. Ong Pong Co alleged in his defense that his co-defendant Ong
Lay, now deceased,was the one who managed the business. He also alleged that nothing had resulted from
the businessventure save the loss of the capital of Php.1,500.00, to which the plaintiff agreed.
ISSUE:
Up to what extent are partners liable?

RULING:
The partners are liable jointly. The defendants acted as administrators and as such, they wereobliged to render
an accounting of the business. Since both failed in this aspect, they are obliged toreturn the capital. Article
1688 of the Civil Code (Article 1796 of the New Civil Code) which provides“that the partnership is liable to
every partner for the amounts he may have disbursed on account ofthe same and for the proper interest” does
not apply to the case at bar since no other money than theone contributed by the plaintiff was involved. The
court ruled that Ong Pong Co should pay PedroMartinez the sum of Php.750.00 with the legal interest thereon,
being liable joint.

OTHERS: