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A.

Definitions/Elements/Existence

G.R. No. 142293. February 27, 2003]

VICENTE SY, TRINIDAD PAULINO, 6BS TRUCKING CORPORATION, and


SBT TRUCKING CORPORATION, petitioners, vs. HON. COURT OF
APPEALS and JAIME SAHOT, respondents.
[1]

DECISION
QUISUMBING, J.:

This petition for review seeks the reversal of the decision of the Court of Appeals
dated February 29, 2000, in CA-G.R. SP No. 52671, affirming with modification the
decision of the National Labor Relations Commission promulgated on June 20, 1996 in
NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the
decision of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-94.
[2]

[3]

[4]

Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot started working as a truck helper
for petitioners family-owned trucking business named Vicente Sy Trucking. In 1965, he
became a truck driver of the same family business, renamed T. Paulino Trucking Service,
later 6Bs Trucking Corporation in 1985, and thereafter known as SBT Trucking
Corporation since 1994. Throughout all these changes in names and for 36 years, private
respondent continuously served the trucking business of petitioners.
[5]

In April 1994, Sahot was already 59 years old. He had been incurring absences as he
was suffering from various ailments. Particularly causing him pain was his left thigh, which
greatly affected the performance of his task as a driver. He inquired about his medical and
retirement benefits with the Social Security System (SSS) on April 25, 1994, but
discovered that his premium payments had not been remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May 27 , he was
medically examined and treated for EOR, presleyopia, hypertensive retinopathy G II
(Annexes G-5 and G-3, pp. 48, 104, respectively), HPM, UTI, Osteoarthritis (Annex G-4,
p. 105), and heart enlargement (Annex G, p. 107). On said grounds, Belen Paulino of
the SBT Trucking Service management told him to file a formal request for extension of
his leave. At the end of his week-long absence, Sahot applied for extension of his leave
for the whole month of June, 1994. It was at this time when petitioners allegedly
threatened to terminate his employment should he refuse to go back to work.
th

[6]

[7]

[8]

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused
to work, But he could not retire on pension because petitioners never paid his correct SSS
premiums. The fact remained he could no longer work as his left thigh hurt abominably.
Petitioners ended his dilemma. They carried out their threat and dismissed him from work,
effective June 30, 1994. He ended up sick, jobless and penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a
complaint for illegal dismissal, docketed as NLRC NCR Case No. 00-09-06717-94. He
prayed for the recovery of separation pay and attorneys fees against Vicente Sy and
Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service, 6Bs
Trucking and SBT Trucking, herein petitioners.
For their part, petitioners admitted they had a trucking business in the 1950s but
denied employing helpers and drivers. They contend that private respondent was not
illegally dismissed as a driver because he was in fact petitioners industrial partner. They
add that it was not until the year 1994, when SBT Trucking Corporation was established,
and only then did respondent Sahot become an employee of the company, with a monthly
salary that reached P4,160.00 at the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave
and was not able to report for work for almost seven days. On June 1, 1994, Sahot asked
permission to extend his leave of absence until June 30, 1994. It appeared that from the
expiration of his leave, private respondent never reported back to work nor did he file an
extension of his leave. Instead, he filed the complaint for illegal dismissal against the
trucking company and its owners.
Petitioners add that due to Sahots refusal to work after the expiration of his authorized
leave of absence, he should be deemed to have voluntarily resigned from his work.They
contended that Sahot had all the time to extend his leave or at least inform petitioners of
his health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitledManuelito
Jimenez et al. vs. T. Paulino Trucking Service, as a defense in view of the alleged
similarity in the factual milieu and issues of said case to that of Sahots, hence they are
in pari material and Sahots complaint ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled
that there was no illegal dismissal in Sahots case. Private respondent had failed to report
to work. Moreover, said the Labor Arbiter, petitioners and private respondent were
industrial partners before January 1994. The Labor Arbiter concluded by ordering
petitioners to pay financial assistance of P15,000 to Sahot for having served the company
as a regular employee since January 1994 only.

On appeal, the National Labor Relations Commission modified the judgment of the
Labor Arbiter. It declared that private respondent was an employee, not an industrial
partner, since the start. Private respondent Sahot did not abandon his job but his
employment was terminated on account of his illness, pursuant to Article 284 of the Labor
Code. Accordingly, the NLRC ordered petitioners to pay private respondent separation pay
in the amount of P60,320.00, at the rate of P2,080.00 per year for 29 years of service.
[9]

Petitioners assailed the decision of the NLRC before the Court of Appeals. In its
decision dated February 29, 2000, the appellate court affirmed with modification the
judgment of the NLRC. It held that private respondent was indeed an employee of
petitioners since 1958. It also increased the amount of separation pay awarded to private
respondent to P74,880, computed at the rate of P2,080 per year for 36 years of service
from 1958 to 1994. It decreed:
WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking
Corporation is hereby directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR
THOUSAND EIGHT HUNDRED EIGHTY (P74,880.00) PESOS as and for his separation pay.
[10]

Hence, the instant petition anchored on the following contentions:


I

RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION


AFFIRMING WITH MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS
COMMISSION DECIDED NOT IN ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE
402 OF THE CIVIL CODE.
[11]

II

RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE


NATIONAL LABOR RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS
OF THE LABOR ARBITER AS THE LATTER WAS IN A BETTER POSITION TO OBSERVE
THE DEMEANOR AND DEPORTMENT OF THE WITNESSES IN THE CASE OF
ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS NATIONAL
CAPITAL REGION (305 SCRA 233).
[12]

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING


CORPORATION.
[13]

Three issues are to be resolved: (1) Whether or not an employer-employee


relationship existed between petitioners and respondent Sahot; (2) Whether or not there
was valid dismissal; and (3) Whether or not respondent Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first issue. Before a
case for illegal dismissal can prosper, an employer-employee relationship must first be
established.
[14]

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found
that respondent Sahot was not an employee but was in fact, petitioners industrial partner.
It is contended that it was the Labor Arbiter who heard the case and had the opportunity
to observe the demeanor and deportment of the parties. The same conclusion, aver
petitioners, is supported by substantial evidence. Moreover, it is argued that the findings
of fact of the Labor Arbiter was wrongly overturned by the NLRC when the latter made the
following pronouncement:
[15]

[16]

We agree with complainant that there was error committed by the Labor Arbiter when he concluded
that complainant was an industrial partner prior to 1994. A computation of the age of complainant
shows that he was only twenty-three (23) years when he started working with respondent as truck
helper. How can we entertain in our mind that a twenty-three (23) year old man, working as a truck
helper, be considered an industrial partner. Hence we rule that complainant was only an employee,
not a partner of respondents from the time complainant started working for respondent.
[17]

Because the Court of Appeals also found that an employer-employee relationship


existed, petitioners aver that the appellate courts decision gives an imprimatur to the
illegal finding and conclusion of the NLRC.
Private respondent, for his part, denies that he was ever an industrial partner of
petitioners. There was no written agreement, no proof that he received a share in
petitioners profits, nor was there anything to show he had any participation with respect to
the running of the business.
[18]

The elements to determine the existence of an employment relationship are: (a) the
selection and engagement of the employee; (b) the payment of wages; (c) the power of
dismissal; and (d) the employers power to control the employees conduct. The most
important element is the employers control of the employees conduct, not only as to the
result of the work to be done, but also as to the means and methods to accomplish it.
[19]

As found by the appellate court, petitioners owned and operated a trucking business
since the 1950s and by their own allegations, they determined private respondents wages
and rest day. Records of the case show that private respondent actually engaged in work
[20]

as an employee. During the entire course of his employment he did not have the freedom
to determine where he would go, what he would do, and how he would do it. He merely
followed instructions of petitioners and was content to do so, as long as he was paid his
wages. Indeed, said the CA, private respondent had worked as a truck helper and driver
of petitioners not for his own pleasure but under the latters control.
Article 1767 of the Civil Code states that in 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. Not one of these circumstances is
present in this case. No written agreement exists to prove the partnership between the
parties. Private respondent did not contribute money, property or industry for the purpose
of engaging in the supposed business. There is no proof that he was receiving a share in
the profits as a matter of course, during the period when the trucking business was under
operation. Neither is there any proof that he had actively participated in the management,
administration and adoption of policies of the business. Thus, the NLRC and the CA did
not err in reversing the finding of the Labor Arbiter that private respondent was an
industrial partner from 1958 to 1994.
[21]

[22]

On this point, we affirm the findings of the appellate court and the NLRC. Private
respondent Jaime Sahot was not an industrial partner but an employee of petitioners from
1958 to 1994. The existence of an employer-employee relationship is ultimately a question
of fact and the findings thereon by the NLRC, as affirmed by the Court of Appeals,
deserve not only respect but finality when supported by substantial evidence. Substantial
evidence is such amount of relevant evidence which a reasonable mind might accept as
adequate to justify a conclusion.
[23]

[24]

Time and again this Court has said that if doubt exists between the evidence
presented by the employer and the employee, the scales of justice must be tilted in favor
of the latter. Here, we entertain no doubt. Private respondent since the beginning was an
employee of, not an industrial partner in, the trucking business.
[25]

Coming now to the second issue, was private respondent validly dismissed by
petitioners?
Petitioners contend that it was private respondent who refused to go back to work. The
decision of the Labor Arbiter pointed out that during the conciliation proceedings,
petitioners requested respondent Sahot to report back for work. However, in the same
proceedings, Sahot stated that he was no longer fit to continue working, and instead he
demanded separation pay. Petitioners then retorted that if Sahot did not like to work as a
driver anymore, then he could be given a job that was less strenuous, such as working as
a checker. However, Sahot declined that suggestion. Based on the foregoing recitals,

petitioners assert that it is clear that Sahot was not dismissed but it was of his own volition
that he did not report for work anymore.
In his decision, the Labor Arbiter concluded that:
While it may be true that respondents insisted that complainant continue working with respondents
despite his alleged illness, there is no direct evidence that will prove that complainants illness
prevents or incapacitates him from performing the function of a driver. The fact remains that
complainant suddenly stopped working due to boredom or otherwise when he refused to work as a
checker which certainly is a much less strenuous job than a driver.
[26]

But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the
Court of Appeals, held that:
While it was very obvious that complainant did not have any intention to report back to work due to
his illness which incapacitated him to perform his job, such intention cannot be construed to be an
abandonment. Instead, the same should have been considered as one of those falling under the just
causes of terminating an employment. The insistence of respondent in making complainant work
did not change the scenario.
It is worthy to note that respondent is engaged in the trucking business where physical strength is of
utmost requirement (sic). Complainant started working with respondent as truck helper at age
twenty-three (23), then as truck driver since 1965. Complainant was already fifty-nine (59) when
the complaint was filed and suffering from various illness triggered by his work and age.
xxx

[27]

In termination cases, the burden is upon the employer to show by substantial evidence
that the termination was for lawful cause and validly made. Article 277(b) of the Labor
Code puts the burden of proving that the dismissal of an employee was for a valid or
authorized cause on the employer, without distinction whether the employer admits or
does not admit the dismissal. For an employees dismissal to be valid, (a) the dismissal
must be for a valid cause and (b) the employee must be afforded due process.
[28]

[29]

[30]

Article 284 of the Labor Code authorizes an employer to terminate an employee on the
ground of disease, viz:
Art. 284. Disease as a ground for termination- An employer may terminate the services of an
employee who has been found to be suffering from any disease and whose continued employment
is prohibited by law or prejudicial to his health as well as the health of his co-employees: xxx

However, in order to validly terminate employment on this ground, Book VI, Rule I,
Section 8 of the Omnibus Implementing Rules of the Labor Code requires:
Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his
continued employment is prohibited by law or prejudicial to his health or to the health of his coemployees, the employer shall not terminate his employment unless there is a certification by
competent public health authority that the disease is of such nature or at such a stage that it cannot
be cured within a period of six (6) months even with proper medical treatment. If the disease or
ailment can be cured within the period, the employer shall not terminate the employee but shall ask
the employee to take a leave. The employer shall reinstate such employee to his former position
immediately upon the restoration of his normal health. (Italics supplied).
As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC, the
requirement for a medical certificate under Article 284 of the Labor Code cannot be
dispensed with; otherwise, it would sanction the unilateral and arbitrary determination by
the employer of the gravity or extent of the employees illness and thus defeat the public
policy in the protection of labor.
[31]

In the case at bar, the employer clearly did not comply with the medical certificate
requirement before Sahots dismissal was effected. In the same case of Sevillana vs. I.T.
(International) Corp., we ruled:
Since the burden of proving the validity of the dismissal of the employee rests on the employer, the
latter should likewise bear the burden of showing that the requisites for a valid dismissal due to a
disease have been complied with. In the absence of the required certification by a competent public
health authority, this Court has ruled against the validity of the employees dismissal. It is therefore
incumbent upon the private respondents to prove by the quantum of evidence required by law that
petitioner was not dismissed, or if dismissed, that the dismissal was not illegal; otherwise, the
dismissal would be unjustified. This Court will not sanction a dismissal premised on mere
conjectures and suspicions, the evidence must be substantial and not arbitrary and must be founded
on clearly established facts sufficient to warrant his separation from work.
[32]

In addition, we must likewise determine if the procedural aspect of due process had
been complied with by the employer.
From the records, it clearly appears that procedural due process was not observed in
the separation of private respondent by the management of the trucking company. The
employer is required to furnish an employee with two written notices before the latter is
dismissed: (1) the notice to apprise the employee of the particular acts or omissions for
which his dismissal is sought, which is the equivalent of a charge; and (2) the notice
informing the employee of his dismissal, to be issued after the employee has been given

reasonable opportunity to answer and to be heard on his defense. These, the petitioners
failed to do, even only for record purposes. What management did was to threaten the
employee with dismissal, then actually implement the threat when the occasion presented
itself because of private respondents painful left thigh.
[33]

All told, both the substantive and procedural aspects of due process were violated.
Clearly, therefore, Sahots dismissal is tainted with invalidity.
On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled
to separation pay. The law is clear on the matter. An employee who is terminated because
of disease is entitled to separation pay equivalent to at least one month salary or to onehalf month salary for every year of service, whichever is greater xxx. Following the
formula set in Art. 284 of the Labor Code, his separation pay was computed by the
appellate court at P2,080 times 36 years (1958 to 1994) or P74,880. We agree with the
computation, after noting that his last monthly salary was P4,160.00 so that one-half
thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the part
of appellate court, we are constrained to sustain its decision. To avoid further delay in the
payment due the separated worker, whose claim was filed way back in 1994, this decision
is immediately executory. Otherwise, six percent (6%) interest per annum should be
charged thereon, for any delay, pursuant to provisions of the Civil Code.
[34]

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated
February 29, 2000 is AFFIRMED. Petitioners must pay private respondent Jaime Sahot
his separation pay for 36 years of service at the rate of one-half monthly pay for every
year of service, amounting to P74,880.00, with interest of six per centum (6%) per annum
from finality of this decision until fully paid.
Costs against petitioners.
SO ORDERED.
[G.R. No. 144214. July 14, 2003]

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO


JOSE, petitioners, vs. DONALDO EFREN C. RAMIREZ and Spouses CESAR
G. RAMIREZ JR. and CARMELITA C. RAMIREZ, respondents.
DECISION
PANGANIBAN, J.:

A share in a partnership can be returned only after the completion of the latters
dissolution, liquidation and winding up of the business.
The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000
Decision and the July 26, 2000 Resolution of the Court of Appeals (CA) in CA-GR CV
No. 41026. The assailed Decision disposed as follows:
[1]

[2]

[3]

WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu
thereof a new decision is rendered ordering the [petitioners] jointly and severally to pay and
reimburse to [respondents] the amount of P253,114.00. No pronouncement as to costs.
[4]

Reconsideration was denied in the impugned Resolution.


The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a
partnership with a capital of P750,000 for the operation of a restaurant and catering
business under the name Aquarius Food House and Catering Services. Villareal was
appointed general manager and Carmelito Jose, operations manager.
[5]

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on


September 5, 1984. His capital contribution of P250,000 was paid by his parents,
Respondents Cesar and Carmelita Ramirez.
[6]

After Jesus Jose withdrew from the partnership in January 1987, his capital
contribution of P250,000 was refunded to him in cash by agreement of the partners.
[7]

In the same month, without prior knowledge of respondents, petitioners closed down
the restaurant, allegedly because of increased rental. The restaurant furniture and
equipment were deposited in the respondents house for storage.
[8]

On March 1, 1987, respondent spouses wrote petitioners, saying that they were no
longer interested in continuing their partnership or in reopening the restaurant, and that
they were accepting the latters offer to return their capital contribution.
[9]

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of
the deterioration of the restaurant furniture and equipment stored in their house. She also
reiterated the request for the return of their one-third share in the equity of the
partnership. The repeated oral and written requests were, however, left unheeded.
[10]

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently
filed a Complaint dated November 10, 1987, for the collection of a sum of money from
petitioners.
[11]

In their Answer, petitioners contended that respondents had expressed a desire to


withdraw from the partnership and had called for its dissolution under Articles 1830 and
1831 of the Civil Code; that respondents had been paid, upon the turnover to them of
furniture and equipment worth over P400,000; and that the latter had no right to demand a
return of their equity because their share, together with the rest of the capital of the
partnership, had been spent as a result of irreversible business losses.
[12]

In their Reply, respondents alleged that they did not know of any loan encumbrance on
the restaurant. According to them, if such allegation were true, then the loans incurred by
petitioners should be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business. Respondents also
alleged that they expected the equipment and the furniture stored in their house to be
removed by petitioners as soon as the latter found a better location for the restaurant.
[13]

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of


Restaurant Furniture and Equipment on July 8, 1988. The furniture and the equipment
stored in their house were inventoried and appraised at P29,000. The display freezer
was sold for P5,000 and the proceeds were paid to them.
[14]

[15]

[16]

After trial, the RTC ruled that the parties had voluntarily entered into a partnership,
which could be dissolved at any time. Petitioners clearly intended to dissolve it when they
stopped operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held
them liable as follows:
[17]

[18]

WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the [petitioners]
ordering the [petitioners] to pay jointly and severally the following:
(a) Actual damages in the amount of P250,000.00
(b) Attorneys fee in the amount of P30,000.00
(c) Costs of suit.
The CA Ruling
The CA held that, although respondents had no right to demand the return of their
capital contribution, the partnership was nonetheless dissolved when petitioners lost

interest in continuing the restaurant business with them. Because petitioners never gave a
proper accounting of the partnership accounts for liquidation purposes, and because no
sufficient evidence was presented to show financial losses, the CA computed their liability
as follows:
Consequently, since what has been proven is only the outstanding obligation of the partnership in
the amount of P240,658.00, although contracted by the partnership before [respondents] have
joined the partnership but in accordance with Article 1826 of the New Civil Code, they are liable
which must have to be deducted from the remaining capitalization of the said partnership which is
in the amount of P1,000,000.00 resulting in the amount of P759,342.00, and in order to get the
share of [respondents], this amount of P759,342.00 must be divided into three (3) shares or in the
amount of P253,114.00 for each share and which is the only amount which [petitioner] will return
to [respondents] representing the contribution to the partnership minus the outstanding debt thereof.
[19]

Hence, this Petition.

[20]

Issues
In their Memorandum, petitioners submit the following issues for our consideration:
[21]

9.1. Whether the Honorable Court of Appeals decision ordering the distribution of the capital
contribution, instead of the net capital after the dissolution and liquidation of a partnership, thereby
treating the capital contribution like a loan, is in accordance with law and jurisprudence;
9.2. Whether the Honorable Court of Appeals decision ordering the petitioners to jointly and
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on record;
and
9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to
costs.
[22]

On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to
respondents for the latters share in the partnership; (2) whether the CAs computation
ofP253,114 as respondents share is correct; and (3) whether the CA was likewise correct
in not assessing costs.
This Courts Ruling
The Petition has merit.
First Issue:

Share in Partnership
Both the trial and the appellate courts found that a partnership had indeed existed, and
that it was dissolved on March 1, 1987. They found that the dissolution took place when
respondents informed petitioners of the intention to discontinue it because of the formers
dissatisfaction with, and loss of trust in, the latters management of the partnership
affairs. These findings were amply supported by the evidence on record. Respondents
consequently demanded from petitioners the return of their one-third equity in the
partnership.
We hold that respondents have no right to demand from petitioners the return of their
equity share. Except as managers of the partnership, petitioners did not personally hold its
equity or assets. The partnership has a juridical personality separate and distinct from that
of each of the partners. Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring partners.
[23]

[24]

Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund the
shares of the partners, the amount to be refunded is necessarily limited to its total
resources. In other words, it can only pay out what it has in its coffers, which consists of all
its assets. However, before the partners can be paid their shares, the creditors of the
partnership must first be compensated. After all the creditors have been paid, whatever
is left of the partnership assets becomes available for the payment of the partners shares.
[25]

Evidently, in the present case, the exact amount of refund equivalent to respondents
one-third share in the partnership cannot be determined until all the partnership assets will
have been liquidated -- in other words, sold and converted to cash -- and all partnership
creditors, if any, paid. The CAs computation of the amount to be refunded to respondents
as their share was thus erroneous.
First, it seems that the appellate court was under the misapprehension that the total
capital contribution was equivalent to the gross assets to be distributed to the partners at
the time of the dissolution of the partnership. We cannot sustain the underlying idea that
the capital contribution at the beginning of the partnership remains intact, unimpaired and
available for distribution or return to the partners. Such idea is speculative, conjectural and
totally without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by
profits earned or decreased by losses sustained. It does not remain static and unaffected

by the changing fortunes of the business. In the present case, the financial statements
presented before the trial court showed that the business had made meager profits.
However, notable therefrom is the omission of any provision for the depreciation of the
furniture and the equipment. The amortization of the goodwill (initially valued
atP500,000) is not reflected either. Properly taking these non-cash items into account will
show that the partnership was actually sustaining substantial losses, which consequently
decreased the capital of the partnership. Both the trial and the appellate courts in fact
recognized the decrease of the partnership assets to almost nil, but the latter failed to
recognize the consequent corresponding decrease of the capital.
[26]

[27]

[28]

Second, the CAs finding that the partnership had an outstanding obligation in the
amount of P240,658 was not supported by evidence. We sustain the contrary finding of
the RTC, which had rejected the contention that the obligation belonged to the partnership
for the following reason:
x x x [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh. 4) does not reveal the total loan. The Agreement (Exh. A) par. 6
shows an outstanding obligation of P240,055.00 which the partnership owes to different creditors,
while the Certification issued by Mercator Finance (Exh. 8) shows that it was Sps. Diogenes P.
Villareal and Luzviminda J. Villareal, the former being the nominal party defendant in the instant
case, who obtained a loan of P355,000.00 on Oct. 1983, when the original partnership was not yet
formed.
Third, the CA failed to reduce the capitalization by P250,000, which was the amount
paid by the partnership to Jesus Jose when he withdrew from the partnership.
Because of the above-mentioned transactions, the partnership capital was actually
reduced. When petitioners and respondents ventured into business together, they should
have prepared for the fact that their investment would either grow or shrink. In the present
case, the investment of respondents substantially dwindled. The original amount
ofP250,000 which they had invested could no longer be returned to them, because one
third of the partnership properties at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required
formalities and with full awareness of what they were doing. Courts have no power to
relieve them from obligations they have voluntarily assumed, simply because their
contracts turn out to be disastrous deals or unwise investments.
[29]

Petitioners further argue that respondents acted negligently by permitting the


partnership assets in their custody to deteriorate to the point of being almost

worthless.Supposedly, the latter should have liquidated these sole tangible assets of the
partnership and considered the proceeds as payment of their net capital. Hence,
petitioners argue that the turnover of the remaining partnership assets to respondents was
precisely the manner of liquidating the partnership and fully settling the latters share in the
partnership.
We disagree. The delivery of the store furniture and equipment to private respondents
was for the purpose of storage. They were unaware that the restaurant would no longer be
reopened by petitioners. Hence, the former cannot be faulted for not disposing of the
stored items to recover their capital investment.
Third Issue:
Costs
Section 1, Rule 142, provides:
SECTION 1. Costs ordinarily follow results of suit. Unless otherwise provided in these rules, costs
shall be allowed to the prevailing party as a matter of course, but the court shall have power, for
special reasons, to adjudge that either party shall pay the costs of an action, or that the same be
divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines
unless otherwise provided by law.
Although, as a rule, costs are adjudged against the losing party, courts have discretion,
for special reasons, to decree otherwise. When a lower court is reversed, the higher court
normally does not award costs, because the losing party relied on the lower courts
judgment which is presumed to have been issued in good faith, even if found later on to
be erroneous. Unless shown to be patently capricious, the award shall not be disturbed by
a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and
Resolution SET ASIDE. This disposition is without prejudice to proper proceedings for the
accounting, the liquidation and the distribution of the remaining partnership assets, if
any. No pronouncement as to costs.
SO ORDERED.
[G.R. No. 135813. October 25, 2001]

FERNANDO
SANTOS, petitioner, vs. Spouses
REYES, respondents.

ARSENIO

and

NIEVES

DECISION
PANGANIBAN, J.:

As a general rule, the factual findings of the Court of Appeals affirming those of the trial court are binding
on the Supreme Court. However, there are several exceptions to this principle. In the present case, we find
occasion to apply both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision, as well as the
August 17, 1998 and the October 9, 1998 Resolutions, issued by the Court of Appeals (CA) in CA-GR CV No.
34742. The Assailed Decision disposed as follows:
[1]

[2]

WHEREFORE, the decision appealed from is AFFIRMED save as for the counterclaim which is
hereby DISMISSED. Costs against [petitioner].
[3]

Resolving respondents Motion for Reconsideration, the August 17, 1998 Resolution ruled as follows:

WHEREFORE, [respondents] motion for reconsideration is GRANTED. Accordingly, the courts


decision dated November 28, 1997 is hereby MODIFIED in that the decision appealed from is
AFFIRMED in toto, with costs against [petitioner].
[4]

The October 9, 1998 Resolution denied for lack of merit petitioners Motion for Reconsideration of the
August 17, 1998 Resolution.
[5]

The Facts
The events that led to this case are summarized by the CA as follows:

Sometime in June, 1986, [Petitioner] Fernando Santos and [Respondent] Nieves Reyes were
introduced to each other by one Meliton Zabat regarding a lending business venture proposed by
Nieves. It was verbally agreed that [petitioner would] act as financier while [Nieves] and Zabat
[would] take charge of solicitation of members and collection of loan payments. The venture was
launched on June 13, 1986, with the understanding that [petitioner] would receive 70% of the
profits while x x x Nieves and Zabat would earn 15% each.
In July, 1986, x x x Nieves introduced Cesar Gragera to [petitioner]. Gragera, as chairman of the
Monte Maria Development Corporation (Monte Maria, for brevity), sought short-term loans for
members of the corporation. [Petitioner] and Gragera executed an agreement providing funds for
Monte Marias members. Under the agreement, Monte Maria, represented by Gragera, was entitled
to P1.31 commission per thousand paid daily to [petitioner] (Exh. A). x x x Nieves kept the books
as representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as credit
investigator.
[6]

On August 6, 1986, [petitioner], x x x [Nieves] and Zabat executed the Article of Agreement which
formalized their earlier verbal arrangement.
[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same lending
business in competition with their partnership[.] Zabat was thereby expelled from the
partnership.The operations with Monte Maria continued.
On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and
damages. [Petitioner] charged [respondents], allegedly in their capacities as employees of
[petitioner], with having misappropriated funds intended for Gragera for the period July 8, 1986 up
to March 31, 1987. Upon Grageras complaint that his commissions were inadequately remitted,
[petitioner] entrusted P200,000.00 to x x x Nieves to be given to Gragera. x x x Nieves allegedly
failed to account for the amount. [Petitioner] asserted that after examination of the records, he
found that of the total amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was
remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.
In their answer, [respondents] asserted that they were partners and not mere employees of
[petitioner]. The complaint, they alleged, was filed to preempt and prevent them from claiming
their rightful share to the profits of the partnership.
x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat after [petitioner]
learned of Zabats activities. Arsenio resigned from his job at the Asian Development Bank to join
the partnership.
For her part, x x x Nieves claimed that she participated in the business as a partner, as the lending
activity with Monte Maria originated from her initiative. Except for the limited period of July 8,
1986 through August 20, 1986, she did not handle sums intended for Gragera. Collections were
turned over to Gragera because he guaranteed 100% payment of all sums loaned by Monte
Maria.Entries she made on worksheets were based on this assumptive 100% collection of all
loans. The loan releases were made less Grageras agreed commission. Because of this arrangement,
she neither received payments from borrowers nor remitted any amount to Gragera. Her job was
merely to make worksheets (Exhs. 15 to 15-DDDDDDDDDD) to convey to [petitioner] how much
he would earn if all the sums guaranteed by Gragera were collected.
[Petitioner] on the other hand insisted that [respondents] were his mere employees and not partners
with respect to the agreement with Gragera. He claimed that after he discovered Zabats activities,
he ceased infusing funds, thereby causing the extinguishment of the partnership. The agreement
with Gragera was a distinct partnership [from] that of [respondent] and Zabat.[Petitioner] asserted
that [respondents] were hired as salaried employees with respect to the partnership between
[petitioner] and Gragera.

[Petitioner] further asserted that in Nieves capacity as bookkeeper, she received all payments from
which Nieves deducted Grageras commission. The commission would then be remitted to
Gragera. She likewise determined loan releases.
During the pre-trial, the parties narrowed the issues to the following points: whether [respondents]
were employees or partners of [petitioner], whether [petitioner] entrusted money to [respondents]
for delivery to Gragera, whether the P1,555,068.70 claimed under the complaint was actually
remitted to Gragera and whether [respondents] were entitled to their counterclaim for share in the
profits.
[7]

Ruling of the Trial Court


In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere employees, of
petitioner. It further ruled that Gragera was only a commission agent of petitioner, not his partner. Petitioner
moreover failed to prove that he had entrusted any money to Nieves. Thus, respondents counterclaim for their
share in the partnership and for damages was granted. The trial court disposed as follows:
39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S. REYES, the
following:
39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S. REYES in the
profits of her joint venture with the [petitioner].
39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987 until
the P3,064,428.00 is fully paid.
39.2.3. P50,000.00 - As moral damages
39.2.4. P10,000.00 - As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO REYES, the
following:
39.3.1. P2,899,739.50 - The balance of the 15 percent share of the [respondent] ARSENIO
REYES in the profits of his joint venture with the
[petitioner].
39.3.2. Six (6) percent of - As damages from P2,899,739.50 August 3, 1987 until
the P2,899,739.50 is fully paid.
39.3.3. P25,000.00 - As moral damages
39.3.4. P10,000.00 - As exemplary damages

39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:


39.4.1. P50,000.00 - As attorneys fees; and
39.4.2 The cost of the suit.[8]

Ruling of the Court of Appeals


On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents was
dismissed. Upon the latters Motion for Reconsideration, however, the trial courts Decision was reinstated in
toto. Subsequently, petitioners own Motion for Reconsideration was denied in the CA Resolution of October 9,
1998.
The CA ruled that the following circumstances indicated the existence of a partnership among the parties:
(1) it was Nieves who broached to petitioner the idea of starting a money-lending business and introduced him
to Gragera; (2) Arsenio received dividends or profit-shares covering the period July 15 to August 7, 1986 (Exh.
6); and (3) the partnership contract was executed after the Agreement with Gragera and petitioner and thus
showed the parties intention to consider it as a transaction of the partnership. In their common venture,
petitioner invested capital while respondents contributed industry or services, with the intention of sharing in
the profits of the business.
The CA disbelieved petitioners claim that Nieves had misappropriated a total of P200,000 which was
supposed to be delivered to Gragera to cover unpaid commissions. It was his task to collect the amounts due,
while hers was merely to prepare the daily cash flow reports (Exhs. 15-15DDDDDDDDDD) to keep track of his
collections.
Hence, this Petition.

[9]

Issue
Petitioner asks this Court to rule on the following issues:

[10]

Whether or not Respondent Court of Appeals acted with grave abuse of discretion tantamount to
excess or lack of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees of Santos in connection
with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase Received by on documents signed by Nieves Reyes
signified receipt of copies of the documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit E was a forgery;
4. Finding that Exhibit H [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery to Gragera;
5. Affirming the dismissal of Santos [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents counterclaim;

7. Denying Santos motion for reconsideration dated September 11, 1998.

Succinctly put, the following were the issues raised by petitioner: (1) whether the parties relationship was
one of partnership or of employer-employee; (2) whether Nieves misappropriated the sums of money allegedly
entrusted to her for delivery to Gragera as his commissions; and (3) whether respondents were entitled to the
partnership profits as determined by the trial court.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-lending venture
with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That Nieves introduced Gragera to
Santos did not make her a partner. She was only a witness to the Agreement between the two. Separate from the
partnership between petitioner and Gragera was that which existed among petitioner, Nieves and Zabat, a
partnership that was dissolved when Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioners contentions and ruled that the
business relationship was one of partnership. We quote from the CA Decision, as follows:

[Respondents] were industrial partners of [petitioner]. x x x Nieves herself provided the initiative in
the lending activities with Monte Maria. In consonance with the agreement between appellant,
Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common
fund with the intention of sharing in the profits of the partnership. [Respondents] provided services
without which the partnership would not have [had] the wherewithal to carry on the purpose for
which it was organized and as such [were] considered industrial partners (Evangelista v. Abad
Santos, 51 SCRA 416 [1973]).
While concededly, the partnership between [petitioner,] Nieves and Zabat was technically dissolved
by the expulsion of Zabat therefrom, the remaining partners simply continued the business of the
partnership without undergoing the procedure relative to dissolution. Instead, they invited Arsenio
to participate as a partner in their operations. There was therefore, no intent to dissolve the earlier
partnership. The partnership between [petitioner,] Nieves and Arsenio simply took over and
continued the business of the former partnership with Zabat, one of the incidents of which was the
lending operations with Monte Maria.
xxxxxxxxx
Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte Maria was
done in pursuit of the business for which the partnership between [petitioner], Nieves and Zabat (later Arsenio)
was organized. Gragera who represented Monte Maria was merely paid commissions in exchange for the

collection of loans. The commissions were fixed on gross returns, regardless of the expenses incurred in the
operation of the business. The sharing of gross returns does not in itself establish a partnership.
[11]

We agree with both courts on this point. 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. The Articles of Agreement stipulated that the signatories shall share the profits of
the business in a 70-15-15 manner, with petitioner getting the lions share. This stipulation clearly proved the
establishment of a partnership.
[12]

[13]

We find no cogent reason to disagree with the lower courts that the partnership continued lending money to
the members of the Monte Maria Community Development Group, Inc., which later on changed its business
name to Private Association for Community Development, Inc. (PACDI). Nieves was not merely petitioners
employee. She discharged her bookkeeping duties in accordance with paragraphs 2 and 3 of the Agreement,
which states as follows:

2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and screening of
prospective borrowers, and shall x x x each be responsible in handling the collection of the loan
payments of the borrowers that they each solicited.
3. That the bookkeeping and daily balancing of account of the business operation shall be handled
by the SECOND PARTY.
[14]

The Second Party named in the Agreement was none other than Nieves Reyes. On the other hand, Arsenios
duties as credit investigator are subsumed under the phrase screening of prospective borrowers. Because of this
Agreement and the disbursement of monthly allowances and profit shares or dividends (Exh. 6) to Arsenio, we
uphold the factual finding of both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the fact that it was
formalized only after the Memorandum of Agreement had been signed by petitioner and Gragera. Contrary to
petitioners contention, there is no evidence to show that a different business venture is referred to in this
Agreement, which was executed on August 6, 1986, or about a month after the Memorandum had been signed
by petitioner and Gragera on July 14, 1986. The Agreement itself attests to this fact:

WHEREAS, the parties have decided to formalize the terms of their business relationship in order
that their respective interests may be properly defined and established for their mutual benefit and
understanding.
[15]

Second Issue:
No Proof of Misappropriation of Grageras Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate money intended for Grageras
commission. According to him, Gragera remitted his daily collection to Nieves. This is shown by Exhibit B (the
Schedule of Daily Payments), which bears her signature under the words received by. For the period July 1986
to March 1987, Gragera should have earned a total commission of P4,282,429.30. However, only P3,068,133.20

was received by him. Thus, petitioner infers that she misappropriated the difference of P1,214,296.10, which
represented the unpaid commissions. Exhibit H is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by Nieves.
[16]

On this point, the CA ruled that Exhibits B, F, E and H did not show that Nieves received for delivery to
Gragera any amount from which the P1,214,296.10 unpaid commission was supposed to come, and that such
exhibits were insufficient proof that she had embezzled P200,000. Said the CA:

The presentation of Exhibit D vaguely denominated as members ledger does not clearly establish
that Nieves received amounts from Monte Marias members. The document does not clearly state
what amounts the entries thereon represent. More importantly, Nieves made the entries for the
limited period of January 11, 1987 to February 17, 1987 only while the rest were made by Grageras
own staff.
Neither can we give probative value to Exhibit E which allegedly shows acknowledgment of the
remittance of commissions to Verona Gonzales. The document is a private one and its due
execution and authenticity have not been duly proved as required in [S]ection 20, Rule 132 of the
Rules of Court which states:
Sec. 20. Proof of Private Document Before any private document offered as authentic is received in
evidence, its due execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
The court a quo even ruled that the signature thereon was a forgery, as it found that:
x x x. But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a forgery. The initial
stroke of Exh. E-1 starts from up and goes downward. The initial stroke of the genuine signatures
of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below and goes upward. This
difference in the start of the initial stroke of the signatures Exhs. E-1 and of the genuine signatures
lends credence to Nieves claim that the signature Exh. E-1 is a forgery.
xxxxxxxxx

Nieves testimony that the schedules of daily payment (Exhs. B and F) were based on the
predetermined 100% collection as guaranteed by Gragera is credible and clearly in accord with the
evidence. A perusal of Exhs. B and F as well as Exhs. 15 to 15-DDDDDDDDDD reveal that the
entries were indeed based on the 100% assumptive collection guaranteed by Gragera. Thus, the

total amount recorded on Exh. B is exactly the number of borrowers multiplied by the projected
collection of P150.00 per borrower. This holds true for Exh. F.
Corollarily, Nieves explanation that the documents were pro forma and that she signed them not to
signify that she collected the amounts but that she received the documents themselves is more
believable than [petitioners] assertion that she actually handled the amounts.
Contrary to [petitioners] assertion, Exhibit H does not unequivocally establish that x x x Nieves
received P200,000.00 as commission for Gragera. As correctly stated by the court a quo, the
document showed a liquidation of P240,000.00 and not P200,000.00.
Accordingly, we find Nieves testimony that after August 20, 1986, all collections were made by
Gragera believable and worthy of credence. Since Gragera guaranteed a daily 100% payment of the
loans, he took charge of the collections. As [petitioners] representative, Nieves merely prepared the
daily cash flow reports (Exh. 15 to 15 DDDDDDDDDD) to enable [petitioner] to keep track of
Grageras operations. Gragera on the other hand devised the schedule of daily payment (Exhs. B and
F) to record the projected gross daily collections.
As aptly observed by the court a quo:
26.1. As between the versions of SANTOS and NIEVES on how the commissions of GRAGERA
[were] paid to him[,] that of NIEVES is more logical and practical and therefore, more
believable. SANTOS version would have given rise to this improbable situation: GRAGERA
would collect the daily amortizations and then give them to NIEVES; NIEVES would get
GRAGERAs commissions from the amortizations and then give such commission to GRAGERA.

[17]

These findings are in harmony with the trial courts ruling, which we quote below:

21. Exh. H does not prove that SANTOS gave to NIEVES and the latter received P200,000.00 for
delivery to GRAGERA. Exh. H shows under its sixth column ADDITIONAL CASH that the
additional cash was P240,000.00. If Exh. H were the liquidation of the P200,000.00 as alleged by
SANTOS, then his claim is not true. This is so because it is a liquidation of the sum ofP240,000.00.
21.1. SANTOS claimed that he learned of NIEVES failure to give the P200,000.00 to GRAGERA
when he received the latters letter complaining of its delayed release. Assuming as true SANTOS
claim that he gave P200,000.00 to GRAGERA, there is no competent evidence that NIEVES did
not give it to GRAGERA. The only proof that NIEVES did not give it is the letter. But SANTOS
did not even present the letter in evidence. He did not explain why he did not.
21.2. The evidence shows that all money transactions of the money-lending business of SANTOS
were covered by petty cash vouchers. It is therefore strange why SANTOS did not present any
voucher or receipt covering the P200,000.00.
[18]

In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from the
partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his commissions before
remitting his collections. Exhibits B and F are merely computations of what Gragera should collect for the day;
they do not show that Nieves received the amounts stated therein. Neither is there sufficient proof that she
misappropriated P200,000, because Exhibit H does not indicate that such amount was received by her; in fact, it
shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is warranted. Wellentrenched is the basic rule that factual findings of the Court of Appeals affirming those of the trial court are
binding and conclusive on the Supreme Court. Although there are exceptions to this rule, petitioner has not
satisfactorily shown that any of them is applicable to this issue.
[19]

Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents claims on the profits of the partnership. He maintains that
both business propositions were flops, as his investments were consumed and eaten up by the commissions
orchestrated to be due Gragera a situation that could not have been rendered possible without complicity
between Nieves and Gragera.
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to avoid
payment of the demands of Nieves, because sometime in March 1987, she signified to petitioner that it was
about time to get her share of the profits which had already accumulated to some P3 million. Respondents add
that while the partnership has not declared dividends or liquidated its earnings, the profits are already reflected
on paper. To prove the counterclaim of Nieves, the spouses show that from June 13, 1986 up to April 19, 1987,
the profit totaledP20,429,520 (Exhs. 10 et seq. and 15 et seq.). Based on that income, her 15 percent share under
the joint venture amounts to P3,064,428 (Exh. 10-I-3); and Arsenios, P2,026,000 minus theP30,000 which was
already advanced to him (Petty Cash Vouchers, Exhs. 6, 6-A to 6-B).
The CA originally held that respondents counterclaim was premature, pending an accounting of the
partnership. However, in its assailed Resolution of August 17, 1998, it turned volte face.Affirming the trial
courts ruling on the counterclaim, it held as follows:

We earlier ruled that there is still need for an accounting of the profits and losses of the partnership
before we can rule with certainty as to the respective shares of the partners. Upon a further review
of the records of this case, however, there appears to be sufficient basis to determine the amount of
shares of the parties and damages incurred by [respondents]. The fact is that the court a quo already
made such a determination [in its] decision dated August 13, 1991 on the basis of the facts on
record.
[20]

The trial courts ruling alluded to above is quoted below:

27. The defendants counterclaim for the payment of their share in the profits of their joint venture
with SANTOS is supported by the evidence.

27.1. NIEVES testified that: Her claim to a share in the profits is based on the agreement (Exhs. 5,
5-A and 5-B). The profits are shown in the working papers (Exhs. 10 to 10-I, inclusive) which she
prepared. Exhs. 10 to 10-I (inclusive) were based on the daily cash flow reports of which Exh. 3 is
a sample. The originals of the daily cash flow reports (Exhs. 3 and 15 to 15-D (10) were given to
SANTOS. The joint venture had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations
from June 13, 1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3)
and ARSENIO, about P2,926,000.00, in the profits.
27.1.1 SANTOS never denied NIEVES testimony that the money-lending business he was engaged
in netted a profit and that the originals of the daily case flow reports were furnished to
him.SANTOS however alleged that the money-lending operation of his joint venture with NIEVES
and ZABAT resulted in a loss of about half a million pesos to him. But such loss, even if true, does
not negate NIEVES claim that overall, the joint venture among them SANTOS, NIEVES and
ARSENIO netted a profit. There is no reason for the Court to doubt the veracity of [the testimony
of] NIEVES.
27.2 The P26,260.50 which ARSENIO received as part of his share in the profits (Exhs. 6, 6-A and
6-B) should be deducted from his total share.
[21]

After a close examination of respondents exhibits, we find reason to disagree with the CA. Exhibit 10I shows that the partnership earned a total income of P20,429,520 for the period June 13, 1986 until April 19,
1987. This entry is derived from the sum of the amounts under the following column headings: 2-Day Advance
Collection, Service Fee, Notarial Fee, Application Fee, Net Interest Income and Interest Income on Investment.
Such entries represent the collections of the money-lending business or its gross income.
[22]

The total income shown on Exhibit 10-I did not consider the expenses sustained by the partnership. For
instance, it did not factor in the gross loan releases representing the money loaned to clients. Since the business
is money-lending, such releases are comparable with the inventory or supplies in other business enterprises.
Noticeably missing from the computation of the total income is the deduction of the weekly allowance
disbursed to respondents. Exhibits I et seq. and J et seq. show that Arsenio received allowances from July 19,
1986 to March 27, 1987 in the aggregate amount of P25,500; and Nieves, from July 12, 1986 to March 27, 1987
in the total amount of P25,600. These allowances are different from the profit already received by
Arsenio. They represent expenses that should have been deducted from the business profits. The point is that all
expenses incurred by the money-lending enterprise of the parties must first be deducted from the total income in
order to arrive at the net profit of the partnership. The share of each one of them should be based on this net
profit and not from the gross income or total income reflected in Exhibit 10-I, which the two courts invariably
referred to as cash flow sheets.
[23]

Similarly, Exhibits 15 et seq., which are the Daily Cashflow Reports, do not reflect the business expenses
incurred by the parties, because they show only the daily cash collections.Contrary to the rulings of both the
trial and the appellate courts, respondents exhibits do not reflect the complete financial condition of the moneylending business. The lower courts obviously labored over a mistaken notion that Exhibit 10-I-1 represented the
net profits earned by the partnership.
[24]

For the purpose of determining the profit that should go to an industrial partner (who shares in the profits
but is not liable for the losses), the gross income from all the transactions carried on by the firm must be added
together, and from this sum must be subtracted the expenses or the losses sustained in the business. Only in the
difference representing the net profits does the industrial partner share. But if, on the contrary, the losses exceed
the income, the industrial partner does not share in the losses.
[25]

When the judgment of the CA is premised on a misapprehension of facts or a failure to notice certain
relevant facts that would otherwise justify a different conclusion, as in this particular issue, a review of its
factual findings may be conducted, as an exception to the general rule applied to the first two issues.
[26]

The trial court has the advantage of observing the witnesses while they are testifying, an opportunity not
available to appellate courts. Thus, its assessment of the credibility of witnesses and their testimonies are
accorded great weight, even finality, when supported by substantial evidence; more so when such assessment is
affirmed by the CA. But when the issue involves the evaluation of exhibits or documents that are attached to the
case records, as in the third issue, the rule may be relaxed. Under that situation, this Court has a similar
opportunity to inspect, examine and evaluate those records, independently of the lower courts. Hence, we deem
the award of the partnership share, as computed by the trial court and adopted by the CA, to be incomplete and
not binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision
is AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9, 1998
areREVERSED and SET ASIDE. No costs.
SO ORDERED.

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

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs. COURT OF APPEALS


and NENITA A. ANAY, respondents.
DECISION
YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No.
41616,[1] affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil
Case No. 88-509.[2]
Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private
respondent Nenita A. Anay met petitioner William T. Belo, then the vice-president for
operations of Ultra Clean Water Purifier, through her former employer in Bangkok. Belo
introduced Anay to petitioner Marjorie Tocao, who conveyed her desire to enter into a joint
venture with her for the importation and local distribution of kitchen cookwares. Belo
volunteered to finance the joint venture and assigned to Anay the job of marketing the
product considering her experience and established relationship with West Bend

Company, a manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture,
Belo acted as capitalist, Tocao as president and general manager, and Anay as head of
the marketing department and later, vice-president for sales. Anay organized the
administrative staff and sales force while Tocao hired and fired employees, determined
commissions and/or salaries of the employees, and assigned them to different branches.
The parties agreed that Belos name should not appear in any documents relating to their
transactions with West Bend Company. Instead, they agreed to use Anays name in
securing distributorship of cookware from that company. The parties agreed further that
Anay would be entitled to: (1) ten percent (10%) of the annual net profits of the business;
(2) overriding commission of six percent (6%) of the overall weekly production; (3) thirty
percent (30%) of the sales she would make; and (4) two percent (2%) for her
demonstration services. The agreement was not reduced to writing on the strength of
Belos assurances that he was sincere, dependable and honest when it came to financial
commitments.
Anay having secured the distributorship of cookware products from the West Bend
Company and organized the administrative staff and the sales force, the cookware
business took off successfully. They operated under the name of Geminesse Enterprise, a
sole proprietorship registered in Marjorie Tocaos name, with office at 712 Rufino Building,
Ayala Avenue, Makati City. Belo made good his monetary commitments to Anay.
Thereafter, Roger Muencheberg of West Bend Company invited Anay to the
distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July 19 to 21, 1987 and
to the southwestern regional convention in Pismo Beach, California, U.S.A., from July 2526, 1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as
president and general manager of Geminesse Enterprise, even wrote a letter to the Visa
Section of the U.S. Embassy in Manila on July 13, 1987. A portion of the letter reads:
Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20)
years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the
Vice President Sales Marketing and a business partner of our company, will attend in response to
the invitation. (Italics supplied.)[3]
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task
of saving the business on account of the unsatisfactory sales record in the Makati and
Cubao offices. On August 31, 1987, she received a plaque of appreciation from the
administrative and sales people through Marjorie Tocao [4] for her excellent job
performance. On October 7, 1987, in the presence of Anay, Belo signed a memo[5] entitling
her to a thirty-seven percent (37%) commission for her personal sales "up Dec 31/87. Belo
explained to her that said commission was apart from her ten percent (10%) share in the
profits. On October 9, 1987, Anay learned that Marjorie Tocao had signed a
letter[6] addressed to the Cubao sales office to the effect that she was no longer the vice-

president of Geminesse Enterprise. The following day, October 10, she received a note
from Lina T. Cruz, marketing manager, that Marjorie Tocao had barred her from holding
office and conducting demonstrations in both Makati and Cubao offices.[7] Anay attempted
to contact Belo. She wrote him twice to demand her overriding commission for the period
of January 8, 1988 to February 5, 1988 and the audit of the company to determine her
share in the net profits. When her letters were not answered, Anay consulted her lawyer,
who, in turn, wrote Belo a letter. Still, that letter was not answered.
Anay still received her five percent (5%) overriding commission up to December
1987. The following year, 1988, she did not receive the same commission although the
company netted a gross sales of P13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of
money with damages[8] against Marjorie D. Tocao and William Belo before the Regional
Trial Court of Makati, Branch 140.
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and
severally, the following: (1) P32,00.00 as unpaid overriding commission from January 8,
1988 to February 5, 1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as
exemplary damages. The plaintiff also prayed for an audit of the finances of Geminesse
Enterprise from the inception of its business operation until she was illegally dismissed to
determine her ten percent (10%) share in the net profits. She further prayed that she be
paid the five percent (5%) overriding commission on the remaining 150 West Bend
cookware sets before her dismissal.
In their answer,[9] Marjorie Tocao and Belo asserted that the alleged agreement with
Anay that was neither reduced in writing, nor ratified, was either unenforceable or void or
inexistent. As far as Belo was concerned, his only role was to introduce Anay to Marjorie
Tocao. There could not have been a partnership because, as Anay herself admitted,
Geminesse Enterprise was the sole proprietorship of Marjorie Tocao. Because Anay
merely acted as marketing demonstrator of Geminesse Enterprise for an agreed
remuneration, and her complaint referred to either her compensation or dismissal, such
complaint should have been lodged with the Department of Labor and not with the regular
court.
Petitioners (defendants therein) further alleged that Anay filed the complaint on
account of ill-will and resentment because Marjorie Tocao did not allow her to lord it over
in the Geminesse Enterprise. Anay had acted like she owned the enterprise because of
her experience and expertise. Hence, petitioners were the ones who suffered actual
damages including unreturned and unaccounted stocks of Geminesse Enterprise, and
serious anxiety, besmirched reputation in the business world, and various damages not

less than P500,000.00. They also alleged that, to vindicate their names, they had to hire
counsel for a fee of P23,000.00.
At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff
was an employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties
are entitled to damages.[10]
In their defense, Belo denied that Anay was supposed to receive a share in the profit
of the business. He, however, admitted that the two had agreed that Anay would receive a
three to four percent (3-4%) share in the gross sales of the cookware. He denied
contributing capital to the business or receiving a share in its profits as he merely served
as a guarantor of Marjorie Tocao, who was new in the business. He attended and/or
presided over business meetings of the venture in his capacity as a guarantor but he
never participated in decision-making. He claimed that he wrote the memo granting the
plaintiff thirty-seven percent (37%) commission upon her dismissal from the business
venture at the request of Tocao, because Anay had no other income.
For her part, Marjorie Tocao denied having entered into an oral partnership agreement
with Anay. However, she admitted that Anay was an expert in the cookware business and
hence, they agreed to grant her the following commissions: thirty-seven percent (37%) on
personal sales; five percent (5%) on gross sales; two percent (2%) on product
demonstrations, and two percent (2%) for recruitment of personnel. Marjorie denied that
they agreed on a ten percent (10%) commission on the net profits. Marjorie claimed that
she got the capital for the business out of the sale of the sewing machines used in her
garments business and from Peter Lo, a Singaporean friend-financier who loaned her the
funds with interest. Because she treated Anay as her co-equal, Marjorie received the
same amounts of commissions as her. However, Anay failed to account for stocks valued
at P200,000.00.
On April 22, 1993, the trial court rendered a decision the dispositive part of which is as
follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the
years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent
(10%) share of plaintiff in the net profits of the cookware business;
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and fifty
(150) cookware sets available for disposition when plaintiff was wrongfully excluded from the
partnership by defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total production which for the
period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary
damages, and
5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as costs of suit.

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

Petitioners appeal to the Court of Appeals[11] was dismissed, but the amount of
damages awarded by the trial court were reduced to P50,000.00 for moral damages and
P50,000.00 as exemplary damages. Their Motion for Reconsideration was denied by the
Court of Appeals for lack of merit.[12] Petitioners Belo and Marjorie Tocao are now before
this Court on a petition for review on certiorari, asserting that there was no business
partnership between them and herein private respondent Nenita A. Anay who is, therefore,
not entitled to the damages awarded to her by the Court of Appeals.
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a
partnership existed between them and private respondent Anay because Geminesse
Enterprise came into being exactly a year before the alleged partnership was formed, and
that it was very unlikely that petitioner Belo would invest the sum of P2,500,000.00 with
petitioner Tocao contributing nothing, without any memorandum whatsoever regarding the
alleged partnership.[13]
The issue of whether or not a partnership exists is a factual matter which are within the
exclusive domain of both the trial and appellate courts. This Court cannot set aside factual
findings of such courts absent any showing that there is no evidence to support the
conclusion drawn by the court a quo.[14] In this case, both the trial court and the Court of
Appeals are one in ruling that petitioners and private respondent established a business
partnership. This Court finds no reason to rule otherwise.
To be considered a juridical personality, a partnership must fulfill these requisites: (1)
two or more persons bind themselves to contribute money, property or industry to a
common fund; and (2) intention on the part of the partners to divide the profits among
themselves.[15] It may be constituted in any form; a public instrument is necessary only
where immovable property or real rights are contributed thereto. [16] This implies that since a
contract of partnership is consensual, an oral contract of partnership is as good as a
written one. Where no immovable property or real rights are involved, what matters is that
the parties have complied with the requisites of a partnership. The fact that there appears
to be no record in the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the Civil Code[17]did not
cause the nullification of the partnership. The pertinent provision of the Civil Code on the
matter states:
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the
partners, even in case of failure to comply with the requirements of article 1772, first paragraph.
Petitioners admit that private respondent had the expertise to engage in the business
of distributorship of cookware. Private respondent contributed such expertise to the
partnership and hence, under the law, she was the industrial or managing partner. It was

through her reputation with the West Bend Company that the partnership was able to
open the business of distributorship of that companys cookware products; it was through
the same efforts that the business was propelled to financial success. Petitioner Tocao
herself admitted private respondents indispensable role in putting up the business when,
upon being asked if private respondent held the positions of marketing manager and vicepresident for sales, she testified thus:
A: No, sir at the start she was the marketing manager because there were no one to sell yet, its only
me there then her and then two (2) people, so about four (4). Now, after that when she recruited
already Oscar Abella and Lina Torda-Cruz these two (2) people were given the designation of
marketing managers of which definitely Nita as superior to them would be the Vice President.[18]

By the set-up of the business, third persons were made to believe that a partnership had
indeed been forged between petitioners and private respondents. Thus, the
communication dated June 4, 1986 of Missy Jagler of West Bend Company to Roger
Muencheberg of the same company states:
Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge
does not have cookware experience. Nita Anay has started to gather former managers, Lina Torda
and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa Lamela,
Menchu Javier. They will continue to gather other key people and build up the organization. All
they need is the finance and the products to sell. [19]
On the other hand, petitioner Belos denial that he financed the partnership rings hollow
in the face of the established fact that he presided over meetings regarding matters
affecting the operation of the business. Moreover, his having authorized in writing on
October 7, 1987, on a stationery of his own business firm, Wilcon Builders Supply, that
private respondent should receive thirty-seven (37%) of the proceeds of her personal
sales, could not be interpreted otherwise than that he had a proprietary interest in the
business. His claim that he was merely a guarantor is belied by that personal act of
proprietorship in the business. Moreover, if he was indeed a guarantor of future debts of
petitioner Tocao under Article 2053 of the Civil Code, [20] he should have presented
documentary evidence therefor. While Article 2055 of the Civil Code simply provides that
guaranty must be express, Article 1403, the Statute of Frauds, requires that a special
promise to answer for the debt, default or miscarriage of another be in writing.[21]
Petitioner Tocao, a former ramp model,[22] was also a capitalist in the partnership. She
claimed that she herself financed the business. Her and petitioner Belos roles as both
capitalists to the partnership with private respondent are buttressed by petitioner Tocaos
admissions that petitioner Belo was her boyfriend and that the partnership was not their
only business venture together. They also established a firm that they called Wiji, the
combination of petitioner Belos first name, William, and her nickname, Jiji.[23] The special

relationship between them dovetails with petitioner Belos claim that he was acting in
behalf of petitioner Tocao. Significantly, in the early stage of the business operation,
petitioners requested West Bend Company to allow them to utilize their banking and
trading facilities in Singapore in the matter of importation and payment of the cookware
products.[24] The inevitable conclusion, therefore, was that petitioners merged their
respective capital and infused the amount into the partnership of distributing cookware
with private respondent as the managing partner.
The business venture operated under Geminesse Enterprise did not result in an
employer-employee relationship between petitioners and private respondent. While it is
true that the receipt of a percentage of net profits constitutes only prima
facie evidence that the recipient is a partner in the business, [25] the evidence in the case at
bar controverts an employer-employee relationship between the parties. In the first place,
private respondent had a voice in the management of the affairs of the cookware
distributorship,[26]including selection of people who would constitute the administrative staff
and the sales force. Secondly, petitioner Tocaos admissions militate against an employeremployee relationship. She admitted that, like her who owned Geminesse Enterprise,
[27]
private respondent received only commissions and transportation and representation
allowances[28] and not a fixed salary.[29] Petitioner Tocao testified:
Q: Of course. Now, I am showing to you certain documents already marked as Exhs. X and Y. Please go
over this. Exh. Y is denominated `Cubao overrides 8-21-87 with ending August 21, 1987, will you
please go over this and tell the Honorable Court whether you ever came across this document and
know of your own knowledge the amount --A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you earlier a certain percentage
for promotions, advertising, incentive.
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote:
Overrides Marjorie Ann Tocao P21,410.50 this means that you have received this amount?
A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing commission,
representation, advertising and promotion?
A: Yes, sir.
Q: I see. Below your name is the words and figure and I quote Nita D. Anay P21,410.50, what is this?
A: Thats her overriding commission.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the same
P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a sense
because of her expertise in the business she is vital to my business. So, as part of the incentive I offer
her the same thing.
Q: So, in short you are saying that this you have shared together, I mean having gotten from the company
P21,140.50 is your way of indicating that you were treating her as an equal?
A: As an equal.
Q: As an equal, I see. You were treating her as an equal?
A: Yes, sir.
Q: I am calling again your attention to Exh. Y Overrides Makati the other one is --A: That is the same thing, sir.
Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao P15,314.25 the amount there
you will acknowledge you have received that?
A: Yes, sir.
Q: Again in concept of commission, representation, promotion, etc.?
A: Yes, sir.
Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she received
the same amount?
A: Yes, sir.
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?
A: No, sir.
Q: It is again in concept of you treating Miss Anay as your equal?
A: Yes, sir. (Italics supplied.)[30]

If indeed petitioner Tocao was private respondents employer, it is difficult to believe


that they shall receive the same income in the business. In a partnership, each partner
must share in the profits and losses of the venture, except that the industrial partner shall
not be liable for the losses.[31] As an industrial partner, private respondent had the right to
demand for a formal accounting of the business and to receive her share in the net profit.
[32]

The fact that the cookware distributorship was operated under the name of Geminesse
Enterprise, a sole proprietorship, is of no moment. What was registered with the Bureau of

Domestic Trade on August 19, 1987 was merely the name of that enterprise. [33] While it is
true that in her undated application for renewal of registration of that firm name, petitioner
Tocao indicated that it would be engaged in retail of kitchenwares, cookwares, utensils,
skillet,[34] she also admitted that the enterprise was only 60% to 70% for the cookware
business, while 20% to 30% of its business activity was devoted to the sale of water
sterilizer or purifier.[35] Indubitably then, the business name Geminesse Enterprise was
used only for practical reasons - it was utilized as the common name for petitioner Tocaos
various business activities, which included the distributorship of cookware.
Petitioners underscore the fact that the Court of Appeals did not return the
unaccounted and unremitted stocks of Geminesse Enterprise amounting to P208,250.00.
[36]
Obviously a ploy to offset the damages awarded to private respondent, that claim, more
than anything else, proves the existence of a partnership between them. In Idos v. Court
of Appeals, this Court said:
The best evidence of the existence of the partnership, which was not yet terminated (though in the
winding up stage), were the unsold goods and uncollected receivables, which were presented to the
trial court. Since the partnership has not been terminated, the petitioner and private complainant
remained as co-partners. x x x.[37]
It is not surprising then that, even after private respondent had been unceremoniously
booted out of the partnership in October 1987, she still received her overriding
commission until December 1987.
Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the
partnership to reap for herself and/or for petitioner Belo financial gains resulting from
private respondents efforts to make the business venture a success. Thus, as petitioner
Tocao became adept in the business operation, she started to assert herself to the extent
that she would even shout at private respondent in front of other people. [38] Her instruction
to Lina Torda Cruz, marketing manager, not to allow private respondent to hold office in
both the Makati and Cubao sales offices concretely spoke of her perception that private
respondent was no longer necessary in the business operation, [39] and resulted in a falling
out between the two. However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization. [40] The partnership exists until
dissolved under the law. Since the partnership created by petitioners and private
respondent has no fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a partner. Thus:
x x x. The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partners capability to give it, and the absence of cause for

dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
liability for damages.[41]
An unjustified dissolution by a partner can subject him to action for damages because by
the mutual agency that arises in a partnership, the doctrine of delectus personaeallows
the partners to have the power, although not necessarily the right to dissolve the
partnership.[42]
In this case, petitioner Tocaos unilateral exclusion of private respondent from the
partnership is shown by her memo to the Cubao office plainly stating that private
respondent was, as of October 9, 1987, no longer the vice-president for sales of
Geminesse Enterprise.[43] By that memo, petitioner Tocao effected her own withdrawal from
the partnership and considered herself as having ceased to be associated with the
partnership in the carrying on of the business. Nevertheless, the partnership was not
terminated thereby; it continues until the winding up of the business.[44]
The winding up of partnership affairs has not yet been undertaken by the
partnership. This is manifest in petitioners claim for stocks that had been entrusted to
private respondent in the pursuit of the partnership business.
The determination of the amount of damages commensurate with the factual findings
upon which it is based is primarily the task of the trial court. [45] The Court of Appeals may
modify that amount only when its factual findings are diametrically opposed to that of the
lower court,[46] or the award is palpably or scandalously and unreasonably excessive.
[47]
However, exemplary damages that are awarded by way of example or correction for the
public good,[48] should be reduced to P50,000.00, the amount correctly awarded by the
Court of Appeals. Concomitantly, the award of moral damages of P100,000.00 was
excessive and should be likewise reduced to P50,000.00. Similarly, attorneys fees that
should be granted on account of the award of exemplary damages and petitioners evident
bad faith in refusing to satisfy private respondents plainly valid, just and demandable
claims,[49] appear to have been excessively granted by the trial court and should therefore
be reduced to P25,000.00.
WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership
among petitioners and private respondent is ordered dissolved, and the parties are
ordered to effect the winding up and liquidation of the partnership pursuant to the pertinent
provisions of the Civil Code. This case is remanded to the Regional Trial Court for proper
proceedings relative to said dissolution. The appealed decisions of the Regional Trial
Court and the Court of Appeals are AFFIRMED with MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership
affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to
determine private respondents ten percent (10%) share in the net profits of the partnership;
2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
overriding commission for the one hundred and fifty (150) cookware sets available for disposition
since the time private respondent was wrongfully excluded from the partnership by petitioners;
3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission
on the total production which, for the period covering January 8, 1988 to February 5, 1988,
amounted to P32,000.00;
4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorneys fees in the
amount of P25,000.00.
SO ORDERED.
[G.R. No. 143340. August 15, 2001.]
LILIBETH SUNGA-CHAN and CECILIA SUNGA, Petitioners, v. LAMBERTO T. CHUA,Respondent.
DECISION

GONZAGA-REYES, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision 1 of the Court of Appeals dated January 31, 2000 in the case entitled "Lamberto
T. Chua v. Lilibeth Sunga Chan and Cecilia Sunga" and of the Resolution dated May 23, 2000 denying the motion for reconsideration of herein petitioners Lilibeth Sunga Chan and
Cecilia Sunga (hereafter collectively referred to as petitioners).
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The pertinent facts of this case are as follows:

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On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner
Cecilia), daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for "Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of
Shares and Damages with Writ of Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business
convenience, respondent and Jacinto allegedly agreed to register the business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name
of Jacinto as a sole proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to Jacinto while the latter in turn produced P100,000.00 as his
counterpart contribution, with the intention that the profits would be equally divided between them. The partnership allegedly had Jacinto as manager, assisted by Josephine Sy
(hereafter Josephine), a sister of the wife of respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or remuneration of 10% of the gross profit and
Josephine would receive 10% of the net profits, in addition to her wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite well and was profitable. Respondent claimed that he could attest to
the success of their business because of the volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto
furnished respondent with the merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent however suspected that the amount indicated in
these documents were understated and undervalued by Jacinto and Josephine for their own selfish reasons and for tax avoidance.
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Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his daughter, petitioner Lilibeth, took over the operations, control, custody,
disposition and management of Shellite without respondents consent. Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal, winding up
and restitution of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of Shellite, converting to her own use and
advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons to evade respondents demands, she disbursed out of the partnership funds the
amount of P200,000.00 and partially paid the same to Respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented partial payment of the
latters share in the partnership, with a promise that the former would make the complete inventory and winding up of the properties of the business establishment. Despite such
commitment, petitioners allegedly failed to comply with their duty to account, and continued to benefit from the assets and income of Shellite to the damage and prejudice
of Respondent.
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On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange Commission (SEC) in Manila, not the Regional Trial Court in
Zamboanga del Norte had jurisdiction over the action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending that they are not liable for partnership shares, unreceived income/profits,
interests, damages and attorneys fees, that respondent does not have a cause of action against them, and that the trial court has no jurisdiction over the nature of the action,
the SEC being the agency that has original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for winding up of partnership affairs, accounting and recovery of shares in
partnership affairs, accounting and recovery of shares in partnership assets/properties should be dismissed and prosecuted against the estate of deceased Jacinto in a probate or
intestate proceeding.

On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.

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On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the
denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as petitioners failed to show that a reversible error was committed by the
appellate court." 2
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the trial court on April 26, 1995.

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On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case on January 17, 1996. Respondent presented his evidence while
petitioners were considered to have waived their right to present evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for Respondent. The dispositive portion of the Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:

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(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and standards of the properties, assets, income and profits of the Shellite Gas
Appliance Center since the time of death of Jacinto L. Sunga, from whom they continued the business operations including all businesses derived from the Shellite Gas Appliance
Center; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to the Court and to plaintiff for approval or disapproval;
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(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income and profits they misapplied and converted to their own use and advantage
that legally pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the partnership of the listed properties, assets and good will (sic) in schedules A,
B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of
the store the sum of P35,000.00 per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities pursuant to law, after delivering to the plaintiff all the interest, shares,
participation and equity in the partnership, or the value thereof in money or moneys worth, if the properties are not physically divisible;
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(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary
damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and P25,00.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED." 3
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision reads:

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"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects." 4
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:

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"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters
invitation and offer and that upon his death the partnership assets and business were taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible evidence to warrant the finding of a partnership, and assuming arguendo that
indeed there was a partnership, the finding of highly exaggerated amounts or values in the partnership assets and profits." 5
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a partnership existed between respondent and Jacinto from 1977 until Jacintos
death. In the absence of any written document to show such partnership between respondent and Jacinto, petitioners argue that these courts were proscribed from hearing the
testimonies of respondent and his witness, Josephine, to prove the alleged partnership three years after Jacintos death. To support this argument, petitioners invoke the "Dead
Mans Statute" or "Survivorship Rule" under Section 23, Rule 130 of the Rules of Court that provides:
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"SECTION 23. Disqualification by reason of death or insanity of adverse party. Parties or assignors of parties to a case, or persons in whose behalf a case is prosecuted,
against an executor or administrator or other representative of a deceased person, or against a person of unsound mind, upon a claim or demand against the estate of such
deceased person, or against such person of unsound mind, cannot testify as to any matter of fact occurring before the death of such deceased person or before such person
became of unsound mind."
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Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should not have been admitted to prove certain claims against a
deceased person (Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. 6
Hence, based on the intention of the parties, as gathered from the facts and ascertained from their language and conduct, a verbal contract of partnership may arise. 7 The
essential points that must be proven to show that a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest in the profits. 8
Understandably so, in view of the absence of a written contract of partnership between respondent and Jacinto, respondent resorted to the introduction of documentary and
testimonial evidence to prove said partnership. The crucial issue to settle then is whether or not the "Dead Mans Statute" applies to this case so as to render inadmissible
respondents testimony and that of his witness, Josephine.
The "Dead Mans Statute" provides that if one party to the alleged transaction is precluded from testifying by death, insanity, or other mental disabilities, the surviving party is
not entitled to the undue advantage of giving his own uncontradicted and unexplained account of the transaction. 9 But before this rule can be successfully invoked to bar the
introduction of testimonial evidence, it is necessary that:
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"1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is prosecuted.

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2. The action is against an executor or administrator or other representative of a deceased person or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased person or against person of unsound mind;

4. His testimony refers to any matter of fact which occurred before the death of such deceased person or before such person became of unsound mind." 10
Two reasons forestall the application of the "Dead Mans Statute" to this case.
First, petitioners filed a compulsory counterclaim 11 against respondent in their answer before the trial court, and with the filing of their counterclaim, petitioners themselves
effectively removed this case from the ambit of the "Dead Mans Statute." 12 Well entrenched is the rule that when it is the executor or administrator or representatives of the
estate that sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim. 13 Moreover, as
defendant in the counterclaim, respondent is not disqualified from testifying as to matters of fact occurring before the death of the deceased, said action not having been brought
against but by the estate or representatives of the deceased. 14
Second, the testimony of Josephine is not covered by the "Dead Mans Statute" for the simple reason that she is not "a party or assignor of a party to a case or persons in whose
behalf a case is prosecuted." Records show that respondent offered the testimony of Josephine to establish the existence of the partnership between respondent and Jacinto.
Petitioners insistence that Josephine is the alter ego of respondent does not make her an assignor because the term "assignor" of a party means "assignor of a cause of action
which has arisen, and not the assignor of a right assigned before any cause of action has arisen." 15 Plainly then, Josephine is merely a witness of respondent, the latter being
the party plaintiff.
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We are not convinced by petitioners allegation that Josephines testimony lacks probative value because she was allegedly coerced by respondent, her brother-in-law, to testify
in his favor. Josephine merely declared in court that she was requested by respondent to testify and that if she were not requested to do so she would not have testified. We fail
to see how we can conclude from this candid admission that Josephines testimony is involuntary when she did not in any way categorically say that she was forced to be a
witness of Respondent. Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her testimony since relationship per se, without more,
does not affect the credibility of witnesses. 16
Petitioners reliance alone on the "Dead Mans Statute" to defeat respondents claim cannot prevail over the factual findings of the trial court and the Court of Appeals that a
partnership was established between respondent and Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the trial court and the Court of
Appeals considered the evidence for respondent as sufficient to prove the formation of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial precedents, a factual matter like the finding of the existence of a partnership
between respondent and Jacinto cannot be inquired into by this Court on review. 17 This Court can no longer be tasked to go over the proofs presented by the parties and
analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the
other. 18 It must be also pointed out that petitioners failed to attend the presentation of evidence of Respondent. Petitioners cannot now turn to this Court to question the
admissibility and authenticity of the documentary evidence of respondent when petitioners failed to object to the admissibility of the evidence at the time that such evidence was
offered. 19
With regard to petitioners insistence that laches and/or prescription should have extinguished respondents claim, we agree with the trial court and the Court of Appeals that the
action for accounting filed by respondent three (3) years after Jacintos death was well within the prescribed period. The Civil Code provides that an action to enforce an oral
contract prescribes in six (6) years 20 while the right to demand an accounting for a partners interest as against the person continuing the business accrues at the date of
dissolution, in the absence of any contrary agreement. 21 Considering that the death of a partner results in the dissolution of the partnership22 , in this case, it was after
Jacintos death that respondent as the surviving partner had the right to an account of his interest as against petitioners. It bears stressing that while Jacintos death dissolved
the partnership, the dissolution did not immediately terminate the partnership. The Civil Code 23 expressly provides that upon dissolution, the partnership continues and its legal
personality is retained until the complete winding up of its business, culminating in its termination. 24
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto, petitioners maintain that said partnership that had an initial capital of
P200,000.00 should have been registered with the Securities and Exchange Commission (SEC) since registration is mandated by the Civil Code. True, Article 1772 of the Civil
Code requires that partnerships with a capital of P3,000.00 or more must register with the SEC, however, this registration requirement is not mandatory. Article 1768 of the Civil
Code 25 explicitly provides that the partnership retains its juridical personality even if it fails to register. The failure to register the contract of partnership does not invalidate the
same as among the partners, so long as the contract has the essential requisites, because the main purpose of registration is to give notice to third parties, and it can be
assumed that the members themselves knew of the contents of their contract. 26 In the case at bar, non-compliance with this directory provision of the law will not invalidate the
partnership considering that the totality of the evidence proves that respondent and Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.

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SO ORDERED.

Republic of the Philippines


SUPREME COURT
SECOND DIVISION
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 Decision 1 dated March 13, 1996 of the former Fifth Division 2 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 Resolution 8 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. 7885778870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a private
individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment 9 dismissing the cases for
insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND
HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS
EVIDENCE; (C) THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E)
THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).
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).
V
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. Bolaos, 95
Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there is none. The alleged partnership, though,
was never formally organized. In addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was allegedly formed sometime
in 1945, although the contrary may well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took effect
on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by
petitioners falls short of the quantum of proof required to establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on the precise nature of the business
relationship between them. In the absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a
common fund for the purpose of establishing a partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should
be noted that it is not with the number of witnesses wherein preponderance lies; 24 the quality of their testimonies is to be considered. None of petitioners' witnesses
could suitably account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was related to Matilde
Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly
owned by both brothers.26Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his brother. 27 Tan Eng Lay
consistently testified that he had his business and his brother had his, that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as
it may, co-ownership or co-possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership. 28
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 his subordinates. So long, therefore, that an employee's position
is higher in rank, it is not unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order materials from suppliers for and in behalf of
Benguet Lumber. Furthermore, even a partner does not necessarily have to perform this particular task. It is, thus, not an indication that Tan Eng Kee
was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not accorded to other employees, the
undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay. Naturally, close personal relations existed between them. Whatever privileges
Tan Eng Lay gave his brother, and which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a blood
relative.
(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing of stocks, this does not adequately prove
the existence of a partnership relation between them. Even highly confidential employees and the owners of a company sometimes argue with respect
to certain matters which, in no way indicates that they are partners as to each other.35
In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be inadequate to prove the intent to form a
partnership, nevertheless, the collective effect of these circumstances may be such as to support a finding of the existence of the parties' intent. 36 Yet, in the case
at bench, even the aforesaid circumstances when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was
involved in the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he occupied a

niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber
Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may
even be that among his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to the conclusion
desired; these are not inconsistent with the powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is herebyAFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

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.

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.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim
Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000
were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private 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

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.
Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission.

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

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.
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6

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

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. The Compromise Agreement provided:
Agreement executed by the three

10

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
Hence, petitioner brought this recourse before this Court.

14

The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM
ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER 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

In assailing the factual


findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
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

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 acts as an agent without
authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts
entered into or for other acts performed as such agent. 17
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

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.
should be held jointly 18

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 agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
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.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

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:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine individuals. As long as AmericanStandard shall own at least 30% of the outstanding stock of the Corporation, three of the nine directors shall be designated by AmericanStandard, 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:
I
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 knowhow 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 determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be interpreted in isolation. This should be construed
in relation to section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the members of the board of directors. The petitioners in G.R. No. 75951 agreed to this procedure,
hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure cannot, however, be ignored. The validity of the
cumulative voting procedure is dependent on the directors thus elected being genuine members of the Filipino group, not voters whose interest is to increase the
ASI share in the management of Saniwares. The joint venture character of the enterprise must always be taken into account, so long as the company exists under

its original agreement. Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly. There
are substantial safeguards in the Agreement which are intended to preserve the majority status of the Filipino investors as well as to maintain the minority status of
the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The amended
decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983 annual
stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-49982 April 27, 1988
ELIGIO ESTANISLAO, JR., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, REMEDIOS ESTANISLAO, EMILIO and LEOCADIO
SANTIAGO,respondents.
Agustin O. Benitez for petitioner.
Benjamin C. Yatco for private respondents.

GANCAYCO, J.:
By this petition for certiorari the Court is asked to determine if a partnership exists between members of the same
family arising from their joint ownership of certain properties.
Petitioner and private respondents are brothers and sisters who are co-owners of certain lots at the corner of
Annapolis and Aurora Blvd., QuezonCity which were then being leased to the Shell Company of the Philippines
Limited (SHELL). They agreed to open and operate a gas station thereat to be known as Estanislao Shell Service
Station with an initial investment of P 15,000.00 to be taken from the advance rentals due to them from SHELL for
the occupancy of the said lots owned in common by them. A joint affidavit was executed by them on April 11, 1966
which was prepared byAtty. Democrito Angeles 1 They agreed to help their brother, petitioner herein, by allowing him to
operate and manage the gasoline service station of the family. They negotiated with SHELL. For practical purposes and in
order not to run counter to the company's policy of appointing only one dealer, it was agreed that petitioner would apply for
the dealership. Respondent Remedios helped in managing the bussiness with petitioner from May 3, 1966 up to February
16, 1967.
On May 26, 1966, the parties herein entered into an Additional Cash Pledge Agreement with SHELL wherein it was
reiterated that the P 15,000.00 advance rental shall be deposited with SHELL to cover advances of fuel to petitioner
as dealer with a proviso that said agreement "cancels and supersedes the Joint Affidavit dated 11 April 1966
executed by the co-owners." 2
For sometime, the petitioner submitted financial statements regarding the operation of the business to private
respondents, but therafter petitioner failed to render subsequent accounting. Hence through Atty. Angeles, a
demand was made on petitioner to render an accounting of the profits.

The financial report of December 31, 1968 shows that the business was able to make a profit of P 87,293.79 and
that by the year ending 1969, a profit of P 150,000.00 was realized. 3
Thus, on August 25, 1970 private respondents filed a complaint in the Court of First Instance of Rizal against
petitioner praying among others that the latter be ordered:
1. to execute a public document embodying all the provisions of the partnership agreement entered
into between plaintiffs and defendant as provided in Article 1771 of the New Civil Code;
2. to render a formal accounting of the business operation covering the period from May 6, 1966 up
to December 21, 1968 and from January 1, 1969 up to the time the order is issued and that the
same be subject to proper audit;
3. to pay the plaintiffs their lawful shares and participation in the net profits of the business in an
amount of no less than P l50,000.00 with interest at the rate of 1% per month from date of demand
until full payment thereof for the entire duration of the business; and
4. to pay the plaintiffs the amount of P 10,000.00 as attorney's fees and costs of the suit (pp. 13-14
Record on Appeal.)
After trial on the merits, on October 15, 1975, Hon. Lino Anover who was then the temporary presiding judge of
Branch IV of the trial court, rendered judgment dismissing the complaint and counterclaim and ordering private
respondents to pay petitioner P 3,000.00 attorney's fee and costs. Private respondent filed a motion for
reconsideration of the decision. On December 10, 1975, Hon. Ricardo Tensuan who was the newly appointed
presiding judge of the same branch, set aside the aforesaid derision and rendered another decision in favor of said
respondents.
The dispositive part thereof reads as follows:
WHEREFORE, the Decision of this Court dated October 14, 1975 is hereby reconsidered and a new
judgment is hereby rendered in favor of the plaintiffs and as against the defendant:
(1) Ordering the defendant to execute a public instrument embodying all the provisions of the
partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771,
Civil Code of the Philippines;
(2) Ordering the defendant to render a formal accounting of the business operation from April 1969
up to the time this order is issued, the same to be subject to examination and audit by the plaintiff,
(3) Ordering the defendant to pay plaintiffs their lawful shares and participation in the net profits of
the business in the amount of P 150,000.00, with interest thereon at the rate of One (1%) Per Cent
per month from date of demand until full payment thereof;
(4) Ordering the defendant to pay the plaintiffs the sum of P 5,000.00 by way of attorney's fees of
plaintiffs' counsel; as well as the costs of suit. (pp. 161-162. Record on Appeal).
Petitioner then interposed an appeal to the Court of Appeals enumerating seven (7) errors allegedly committed by
the trial court. In due course, a decision was rendered by the Court of Appeals on November 28,1978 affirming in
toto the decision of the lower court with costs against petitioner. *

A motion for reconsideration of said decision filed by petitioner was denied on January 30, 1979. Not satisfied
therewith, the petitioner now comes to this court by way of this petition for certiorari alleging that the respondent
court erred:
1. In interpreting the legal import of the Joint Affidavit (Exh. 'A') vis-a-vis the Additional Cash Pledge
Agreement (Exhs. "B-2","6", and "L"); and
2. In declaring that a partnership was established by and among the petitioner and the private
respondents as regards the ownership and or operation of the gasoline service station business.
Petitioner relies heavily on the provisions of the Joint Affidavit of April 11, 1966 (Exhibit A) and the Additional Cash
Pledge Agreement of May 20, 1966 (Exhibit 6) which are herein reproduced(a) The joint Affidavit of April 11, 1966, Exhibit A reads:
(1) That we are the Lessors of two parcels of land fully describe in Transfer Certificates of Title Nos.
45071 and 71244 of the Register of Deeds of Quezon City, in favor of the LESSEE - SHELL
COMPANY OF THE PHILIPPINES LIMITED a corporation duly licensed to do business in the
Philippines;
(2) That we have requested the said SHELL COMPANY OF THE PHILIPPINE LIMITED advanced
rentals in the total amount of FIFTEEN THOUSAND PESOS (P l5,000.00) Philippine Currency, so
that we can use the said amount to augment our capital investment in the operation of that gasoline
station constructed ,by the said company on our two lots aforesaid by virtue of an outstanding Lease
Agreement we have entered into with the said company;
(3) That the and SHELL COMPANY OF THE PHILIPPINE LIMITED out of its benevolence and
desire to help us in aumenting our capital investment in the operation of the said gasoline station,
has agreed to give us the said amount of P 15,000.00, which amount will partake the nature of
ADVANCED RENTALS;
(4) That we have freely and voluntarily agreed that upon receipt of the said amount of FIFTEEN
THOUSAND PESOS (P l6,000.00) from he SHELL COMPANY OF THE PHILIPPINES LIMITED, the
said sum as ADVANCED RENTALS to us be applied as monthly rentals for the sai two lots under our
Lease Agreement starting on the 25th of May, 1966 until such time that the said of P 15,000.00 be
applicable, which time to our estimate and one-half months from May 25, 1966 or until the 10th of
October, 1966 more or less;
(5) That we have likewise agreed among ourselves that the SHELL COMPANY OF THE
PHILIPPINES LIMITED execute an instrument for us to sign embodying our conformity that the said
amount that it will generously grant us as requested be applied as ADVANCED RENTALS; and
(6) FURTHER AFFIANTS SAYETH NOT.,
(b) The Additional Cash Pledge Agreement of May 20,1966, Exhibit 6, is as follows:
WHEREAS, under the lease Agreement dated 13th November, 1963 (identified as doc. Nos. 491 &
1407, Page Nos. 99 & 66, Book Nos. V & III, Series of 1963 in the Notarial Registers of Notaries
Public Rosauro Marquez, and R.D. Liwanag, respectively) executed in favour of SHELL by the
herein CO-OWNERS and another Lease Agreement dated 19th March 1964 . . . also executed in
favour of SHELL by CO-OWNERS Remedios and MARIA ESTANISLAO for the lease of adjoining

portions of two parcels of land at Aurora Blvd./ Annapolis, Quezon City, the CO OWNERS RECEIVE
a total monthly rental of PESOS THREE THOUSAND THREE HUNDRED EIGHTY TWO AND
29/100 (P 3,382.29), Philippine Currency;
WHEREAS, CO-OWNER Eligio Estanislao Jr. is the Dealer of the Shell Station constructed on the
leased land, and as Dealer under the Cash Pledge Agreement dated llth May 1966, he deposited to
SHELL in cash the amount of PESOS TEN THOUSAND (P 10,000), Philippine Currency, to secure
his purchase on credit of Shell petroleum products; . . .
WHEREAS, said DEALER, in his desire, to be granted an increased the limit up to P 25,000, has
secured the conformity of his CO-OWNERS to waive and assign to SHELL the total monthly rentals
due to all of them to accumulate the equivalent amount of P 15,000, commencing 24th May 1966,
this P 15,000 shall be treated as additional cash deposit to SHELL under the same terms and
conditions of the aforementioned Cash Pledge Agreement dated llth May 1966.
NOW, THEREFORE, for and in consideration of the foregoing premises,and the mutual covenants
among the CO-OWNERS herein and SHELL, said parties have agreed and hereby agree as follows:
l. The CO-OWNERS dohere by waive in favor of DEALER the monthly rentals due to all COOWNERS, collectively, under the above describe two Lease Agreements, one dated 13th November
1963 and the other dated 19th March 1964 to enable DEALER to increase his existing cash deposit
to SHELL, from P 10,000 to P 25,000, for such purpose, the SHELL CO-OWNERS and DEALER
hereby irrevocably assign to SHELL the monthly rental of P 3,382.29 payable to them respectively
as they fall due, monthly, commencing 24th May 1966, until such time that the monthly rentals
accumulated, shall be equal to P l5,000.
2. The above stated monthly rentals accumulated shall be treated as additional cash deposit by
DEALER to SHELL, thereby in increasing his credit limit from P 10,000 to P 25,000. This agreement,
therefore, cancels and supersedes the Joint affidavit dated 11 April 1966 executed by the COOWNERS.
3. Effective upon the signing of this agreement, SHELL agrees to allow DEALER to purchase from
SHELL petroleum products, on credit, up to the amount of P 25,000.
4. This increase in the credit shall also be subject to the same terms and conditions of the abovementioned Cash Pledge Agreement dated llth May 1966. (Exhs. "B-2," "L," and "6"; emphasis
supplied)
In the aforesaid Joint Affidavit of April 11, 1966 (Exhibit A), it is clearly stipulated by the parties that the P 15,000.00
advance rental due to them from SHELL shall augment their "capital investment" in the operation of the gasoline
station, which advance rentals shall be credited as rentals from May 25, 1966 up to four and one-half months or until
10 October 1966, more or less covering said P 15,000.00.
In the subsequent document entitled "Additional Cash Pledge Agreement" above reproduced (Exhibit 6), the private
respondents and petitioners assigned to SHELL the monthly rentals due them commencing the 24th of May 1966
until such time that the monthly rentals accumulated equal P 15,000.00 which private respondents agree to be a
cash deposit of petitioner in favor of SHELL to increase his credit limit as dealer. As above-stated it provided therein
that "This agreement, therefore, cancels and supersedes the Joint Affidavit dated 11 April 1966 executed by the COOWNERS."

Petitioner contends that because of the said stipulation cancelling and superseding that previous Joint Affidavit,
whatever partnership agreement there was in said previous agreement had thereby been abrogated. We find no
merit in this argument. Said cancelling provision was necessary for the Joint Affidavit speaks of P 15,000.00
advance rentals starting May 25, 1966 while the latter agreement also refers to advance rentals of the same amount
starting May 24, 1966. There is, therefore, a duplication of reference to the P 15,000.00 hence the need to provide
in the subsequent document that it "cancels and supersedes" the previous one. True it is that in the latter document,
it is silent as to the statement in the Joint Affidavit that the P 15,000.00 represents the "capital investment" of the
parties in the gasoline station business and it speaks of petitioner as the sole dealer, but this is as it should be for in
the latter document SHELL was a signatory and it would be against its policy if in the agreement it should be stated
that the business is a partnership with private respondents and not a sole proprietorship of petitioner.
Moreover other evidence in the record shows that there was in fact such partnership agreement between the
parties. This is attested by the testimonies of private respondent Remedies Estanislao and Atty. Angeles. Petitioner
submitted to private respondents periodic accounting of the business. 4 Petitioner gave a written authority to private
respondent Remedies Estanislao, his sister, to examine and audit the books of their "common business' aming
negosyo). 5 Respondent Remedios assisted in the running of the business. There is no doubt that the parties hereto
formed a partnership when they bound themselves to contribute money to a common fund with the intention of dividing
the profits among themselves. 6 The sole dealership by the petitioner and the issuance of all government permits and
licenses in the name of petitioner was in compliance with the afore-stated policy of SHELL and the understanding of the
parties of having only one dealer of the SHELL products.
Further, the findings of facts of the respondent court are conclusive in this proceeding, and its conclusion based on
the said facts are in accordancewith the applicable law.
WHEREFORE, the judgment appealed from is AFFIRMED in toto with costs against petitioner. This decision is
immediately executory and no motion for extension of time to file a motion for reconsideration shag beentertained.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-31684 June 28, 1973


EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.
Leonardo Abola for petitioners.
Baisas, Alberto & Associates for respondent.

MAKALINTAL, J.:
On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co." On June 7, 1955 the Articles of Co-partnership was amended as to
include herein respondent, Estrella Abad Santos, as industrial partner, with herein petitioners Domingo C. Evangelista, Jr., Leonardo Atienza Abad Santos and
Conchita P. Navarro, the original capitalist partners, remaining in that capacity, with a contribution of P17,500 each. The amended Articles provided, inter alia, that
"the contribution of Estrella Abad Santos consists of her industry being an industrial partner", and that the profits and losses "shall be divided and distributed
among the partners ... in the proportion of 70% for the first three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and Leonardo Atienza Abad Santos to
be divided among them equally; and 30% for the fourth partner Estrella Abad Santos."

On December 17, 1963 herein respondent filed suit against the three other partners in the Court of First Instance of Manila, alleging that the partnership, which
was also made a party-defendant, had been paying dividends to the partners except to her; and that notwithstanding her demands the defendants had refused and
continued to refuse and let her examine the partnership books or to give her information regarding the partnership affairs to pay her any share in the dividends
declared by the partnership. She therefore prayed that the defendants be ordered to render accounting to her of the partnership business and to pay her
corresponding share in the partnership profits after such accounting, plus attorney's fees and costs.
The defendants, in their answer, denied ever having declared dividends or distributed profits of the partnership; denied likewise that the plaintiff ever demanded
that she be allowed to examine the partnership books; and byway of affirmative defense alleged that the amended Articles of 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.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-59956 October 31, 1984
ISABELO MORAN, JR., petitioner,
vs.
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J.:

+.wph!1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered petitioner Isabelo Moran, Jr. to pay damages to
respondent Mariano E, Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate that:

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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:

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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:
t.hqw

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is hereby rendered, ordering defendantappellant 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:
I
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO
E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM.
II
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO
E. PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.
III
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO
E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE.
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE HONORABLE COURT OF APPEALS DID NOT EVEN
OFFSET PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN.
V
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES.
The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share in the unrealized profits of the partnership. The
petitioner contends that the award is highly speculative. The petitioner maintains that the respondent court did not take into account the great risks involved in the
business undertaking.
We agree with the petitioner that the award of speculative damages has no basis in fact and law.
There is no dispute over the nature of the agreement between the petitioner and the private respondent. It is a contract of partnership. The latter in his complaint
alleged that he was induced by the petitioner to enter into a partnership with him under the following terms and conditions:
t.hqw

1. That the partnership will print colored posters of the delegates to the Constitutional Convention;
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;
3. That they will print Ninety Five Thousand (95,000) copies of the said posters;
4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month starting April 15, 1971 up to December 15, 1971;
5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account pertaining to the distribution and printing
of the said 95,000 posters shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.
The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership for whatever he may have
promised to contribute (Art. 1786, Civil Code) and for interests and damages from the time he should have complied with his obligation (Art. 1788, Civil Code).
Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in
favor of the appellee because the appellant therein was remiss in his obligations as a partner and as prime contractor of the construction projects in question. This
case was decided on a particular set of facts. We awarded compensatory damages in the Uy case because there was a finding that the constructing business is a
profitable one and that the UP construction company derived some profits from its contractors in the construction of roads and bridges despite its deficient capital."
Besides, there was evidence to show that the partnership made some profits during the periods from July 2, 1956 to December 31, 1957 and from January 1, 1958
up to September 30, 1959. The profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no evidence

whatsoever that the partnership between the petitioner and the private respondent would have been a profitable venture. In fact, it was a failure doomed from the
start. There is therefore no basis for the award of speculative damages in favor of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more than what was expected of him. In this case, however,
there was mutual breach. Private respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner
likewise failed to give any of the amount expected of him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed
only 2,000 copies.
Article 1797 of the Civil Code provides:

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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:
t.hqw

xxx xxx xxx


... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not question the due execution of said note.
Must Moran therefore pay the amount of P20,000? The evidence indicates that the P20,000 was assigned by Moran to cover the following:

t.hqw

(a) 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-

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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:

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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.

t.hqw

(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

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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.

1wph1.

Republic of the Philippines


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

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 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 Tobeas 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 seala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad
perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho
Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have
a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint
venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as
an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the De Leon case. Thus, like the De
Leon heirs, the Longa heirs inherited the 'hacienda' in questionpro-indiviso from their deceased parents; they did not contribute or invest
additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had
been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the
'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the
'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas,
CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.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 Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the inheritance or the incomes
derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building, entrusted the
administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where
the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in
these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the
donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B. OA, LUZ B.
OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of
the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for
the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying petitioners'
motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila
for the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed
Oa, were still minors when the project of partition was approved, Lorenzo T. Oa, their father and
administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of
Manila for appointment as guardian of said minors. On November 14, 1949, the Court appointed him
guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided
one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses
with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War
Damage Commission. Later, they received from said Commission the amount of P50,000.00, more
or less. This amount was not divided among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were
acquired after the death of the decedent with money borrowed from the Philippine Trust Company in
the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with
the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was made
to divide the properties therein listed. Instead, the properties remained under the management of
Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceeds from the sales thereof in real properties and securities.
As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-end balances:

Y
e
a

Invest
ment

Lan
d

Buil
din

Accou
nt

Acc
oun
t

Acc
oun
t

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment
sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of
Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account
kept by Lorenzo T. Oa where the corresponding shares of the petitioners in the net income for the
year are also known. Every year, petitioners returned for income tax purposes their shares in the net
income derived from said properties and securities and/or from transactions involving them (Exhibit
3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T. Oa
who, as heretofore pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n.,
pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of
the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so
that the questioned assessment refers solely to the income tax proper for the years 1955 and 1956
and the "Compromise for non-filing," the latter item obviously referring to the compromise in lieu of
the criminal liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE COOWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS
RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF
TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY
TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of
Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased
Julia Buales and the profits derived from transactions involving the same, or, must they be deemed to have formed
an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2)
Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted to them upon
the security of the said properties, with the result that as far as their respective shares in the inheritance are
concerned, the total income thereof should be considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate
taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early
as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since
those dates admittedly under the administration or management of the head of the family, the widower and father
Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered
them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is
easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that
they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to
the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oa who
used said properties in business by leasing or selling them and investing the income derived therefrom and the
proceed from the sales thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building account"
in 1956. And all these became possible because, admittedly, petitioners never actually received any share of the
income or profits from Lorenzo T. Oa and instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said
properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the
purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance. In these

circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by
them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect,
they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax
Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners
rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the
partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such
status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding
said shares under the common management of the administrator or executor or of anyone chosen by them and
engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants
therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found
already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to
argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of
inherited properties is automatically converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the
heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making profit thereby in proportion to his share, there can
be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing
of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived," and, for that matter, on any other
provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion,
now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes,
among others, "joint accounts,(cuentas en participacion)" and "associations", none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general co-partnerships" which are

possessed of the aforementioned personality have been expressly excluded by law (sections 24
and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it includes
not only a partnership as known in common law but, as well, a syndicate, group,
pool, joint venture, or other unincorporated organization which carries on any
business, financial operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income
Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes
in question, of their inherited properties from those acquired by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must include not only the
income derived from the purchase and sale of other properties but also the income of the inherited
properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but
the moment their respective known shares are used as part of the common assets of the heirs to be used in making
profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently,
the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be taxed
as such, it might be recalled that the petitioners in their individual income tax returns

reported their shares of the profits of the unregistered partnership. We think it only
fair and equitable that the various amounts paid by the individual petitioners as
income tax on their respective shares of the unregistered partnership should be
deducted from the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support of Their
Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable to
the partners (petitioners herein) should be reduced by the amounts of income tax assessed against
the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been correctly
assessed. Since the individual income tax liabilities of petitioners are not in issue in this proceeding,
it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to
sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse,
considering the time that has lapsed since they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming
that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to
be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess income
taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make the proper
return and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-vis their tax
obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is
the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966,
they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners
in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda
Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the
amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said
years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required
to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by
respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by
petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of
this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income
tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF
OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT
AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID
DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13,
Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with full power
to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several
years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to
the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as
used in sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (companies collectives), a tax
upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number
of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was
not limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being
so let, for petitioners do not even suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or business enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to
offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances
are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said
article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners
or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;
From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their venture
into a partnership. Or the sharing of the gross returns does not of itself establish a partnership
whether or not the persons sharing therein have a joint or common right or interest in the property.
This only means that, aside from the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent to form a partnership, the existence of
a juridical personality different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the
Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital,
and no community of interest as principal proprietors in the business itself which the proceeds
derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are
only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding
as tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties,
whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233
Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose
of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of
a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the
whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held
liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual
taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55397 February 29, 1988
TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:
This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case
#367 1dismissing the complaint 2 for recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies
issued by herein respondent insurance company in favor of petitioner-intervenor.
The facts of the case as found by respondent Insurance Commission are as follows:
Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at
San Rafael Village, Davao City. Complainants assumed the mortgage of the building in favor of

S.S.S., which building was insured with respondent S.S.S. Accredited Group of Insurers for
P25,000.00.
On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of
P100,000.00. To secure the payment of the loan, a mortgage was executed over the land and the
building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio
Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers MultiIndemnity Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the contents
thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").
On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"),
covering the building for P50,000.00 with respondent Zenith Insurance Corporation. On July 16,
1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from respondent Philippine
British Assurance Company, covering the same building for P50,000.00 and the contents thereof for
P70,000.00.
On July 31, 1975, the building and the contents were totally razed by fire.
Adjustment Standard Corporation submitted a report as follow
xxx xxx xxx
... Thus the apportioned share of each company is as follows:

Poli
cy
No..

C
o
m
p
a
n
y

R
i
s
k

I
n
s
u
r
e
s

P
a
y
s

MI
RO

Z
e
n
i
t
h

B
u
i
l
d
i
n
g

P
5
0
,
0
0
0

P
1
7
,
6
1
0
.
9
3

F02
50
0

I
n
s
u
r
a
n
c
e

C
o
r
p
.

F84
59
0

P
h
i
l
.

H
o
u
s
e
h
o
l
d

7
0
,
0
0
0

2
4
,
6
5
5
.
3
1

F
F

5
0

3
9

B
r
i
t
i
s
h

A
s
s
c
o
.
C
o
.

I
n

c
.

,
0
0
0

,
1
8
6
.
1
0

R
i
s
k

I
n
s
u
r
e
s

P
a
y
s

B
u
i
l
d
i
n
g

P
2
5
,
0
0
0

P
8
,
8
0
5
.
4
7

&
F
5

Pol
icy
No
.

C
o
m
p
a
n
y

FI
C15
38
1

S
S
S
A
c
c
r
e

d
i
t
e
d
G
r
o
u
p

o
f
I
n
s
u
r
e
r
s

T
o
t
a
l
s

P
1
9
5
,
0
0
0

P
9
0
,
2
5
7
.
8
1

We are showing hereunder another apportionment of the loss which includes the Travellers MultiIndemnity policy for reference purposes.

Poli
cy
No.

C
o
m
p
a
n
y

MI
R
O/

Z
e
n
it
h

F02
50
0

I
n
s
u
r
a
n
c
e

C
o
r
p
.

R
i
s
k

I
n
j
u
r
e
s

P
a
y
s

B
u
i
l
d
i
n
g

P
5
0
,
0
0
0

P
1
1
,
8
7
7
.
1

F84
59
0

P
h
il
.

B
r
it
i
s
h

A
s
s
c
o
.
C
o
.

I
B
u
i
l
d
i
n
g

7
0
,
0
0
0

1
6
,
6
2
8
.
0
0

II
B
u
il
d
i
n
g

F
F
F
&
P
E

5
0
,
0
0
0

2
4
,
9
1
8
.
7
9

PV
C15
18
1

S
S
S

A
c
c
r
e
d
i
t
e
d

G
r
o
u
p
o
f

F59
9
DV

I
n
s
u
r
e
r
s

B
u
i
l
d
i
n
g

2
5
,
0
0
0

5
,
9
3
8
.
5
0

I
n
s
u
r
e
r
s

I
R
e
f

3
0
,
0
0
0

1
4
,
4
6
7
.
3
1

M
u
lt
i

I
I
B
u
i
l
d
i

7
0
,
0
0
0

1
6
,
6
2
8
.
0

n
g

T
o
t
a
l
s

P
2
9
5
.
0
0
0

P
9
0
,
2
5
7
.
8
1

Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents, Zenith
Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their corresponding
shares of the loss. Complainants were paid the following: P41,546.79 by Philippine British
Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S. Group of
Accredited Insurers (Par. 6. Amended Complaint). Demand was made from respondent Travellers
Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants demanded
from the other three (3) respondents the balance of each share in the loss based on the computation
of the Adjustment Standards Report excluding Travellers Multi-Indemnity in the amount of
P30,894.31 (P5,732.79-Zenith Insurance: P22,294.62, Phil. British: and P2,866.90, SSS Accredited)
but the same was refused, hence, this action.
In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the
material allegations in the complaint, but denied liability on the ground that the claim of the
complainants had already been waived, extinguished or paid. Both companies set up counterclaim in
the total amount of P 91,546.79.
Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter
of July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount
of P 5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22, 1975.
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its
special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the
furniture and building of complainants was secured by a certain Arsenio Chua, mortgage creditor, for
the purpose of protecting his mortgage credit against the complainants; that the said policy was
issued in the name of Azucena Palomo, only to indicate that she owns the insured premises; that the
policy contains an endorsement in favor of Arsenio Chua as his mortgage interest may appear to
indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire
policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of
the fire Insurance Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity.
Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not
entitled to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of
the insured premises and that the complainants, spouses Pedro and Azucena Palomo, had already
paid in full their mortgage indebtedness to the intervenor. 3
As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground that
the insurance policy subject of the complaint was taken out by Tai Tong Chuache & Company, petitioner herein, for

its own interest only as mortgagee of the insured property and thus complainant as mortgagors of the insured
property have no right of action against herein respondent. It likewise dismissed petitioner's complaint in intervention
in the following words:
We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenormortgagee. The complainant testified that she was still indebted to Intervenor in the amount of
P100,000.00. Such allegation has not however, been sufficiently proven by documentary evidence.
The certification (Exhibit 'E-e') issued by the Court of First Instance of Davao, Branch 11, indicate
that the complainant was Antonio Lopez Chua and not Tai Tong Chuache & Company. 4
From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise
denied hence, the present petition.
It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the
pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one entitled to the insurance
proceeds and not Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering
the manner it was written. 5 As correctly pointed out by respondent insurance commission in their comment, the decision
did not pronounce that it was Arsenio Lopez Chua who has insurable interest over the insured property. Perusal of the
decision reveals however that it readily absolved respondent insurance company from liability on the basis of the
commissioner's conclusion that at the time of the occurrence of the peril insured against petitioner as mortgagee had no
more insurable interest over the insured property. It was based on the inference that the credit secured by the mortgaged
property was already paid by the Palomos before the said property was gutted down by fire. The foregoing conclusion was
arrived at on the basis of the certification issued by the then Court of First Instance of Davao, Branch II that in a certain
civil action against the Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache &
Company.
We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted by
his own affirmative allegations. Under Section 1, Rule 131 6 each party must prove his own affirmative allegations by
the amount of evidence required by law which in civil cases as in the present case is preponderance of evidence. The
party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such
amount of evidence as required by law to obtain favorable judgment. 7 Thus, petitioner who is claiming a right over the
insurance must prove its case. Likewise, respondent insurance company to avoid liability under the policy by setting up an
affirmative defense of lack of insurable interest on the part of the petitioner must prove its own affirmative allegations.
It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out by
petitioner over the mortgaged property. Neither did it deny that the said property was totally razed by fire within the
period covered by the insurance. Respondent, as mentioned earlier advanced an affirmative defense of lack of
insurable interest on the part of the petitioner that before the occurrence of the peril insured against the Palomos
had already paid their credit due the petitioner. Respondent having admitted the material allegations in the
complaint, has the burden of proof to show that petitioner has no insurable interest over the insured property at the
time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted no
effort to present any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the
decision must be adverse to it.
However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from
liability on the basis of the certification issued by the then Court of First Instance of Davao, Branch II, that in a
certain civil action against the Palomos, Arsenio Lopez Chua stands as the complainant and not Tai Tong Chuache.
From said evidence respondent commission inferred that the credit extended by herein petitioner to the Palomos
secured by the insured property must have been paid. Such is a glaring error which this Court cannot sanction.
Respondent Commission's findings are based upon a mere inference.
The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as evidence
the contract of mortgage (Exh. 1) which has not been cancelled nor released. It has been held in a long line of
cases that when the creditor is in possession of the document of credit, he need not prove non-payment for it is
presumed. 8 The validity of the insurance policy taken b petitioner was not assailed by private respondent. Moreover,

petitioner's claim that the loan extended to the Palomos has not yet been paid was corroborated by Azucena Palomo who
testified that they are still indebted to herein petitioner. 9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo
by petitioner the same should have been brought by Tai Tong Chuache or by its representative in its own behalf.
From the above premise respondent concluded that the obligation secured by the insured property must have been
paid.
The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed out that the action must
be brought in the name of the real party in interest. We agree. However, it should be borne in mind that petitioner being a
partnership may sue and be sued in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is
the representative of petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing
partner of the partnership was corroborated by respondent insurance company. 11 Thus Chua as the managing partner of
the partnership may execute all acts of administration 12 including the right to sue debtors of the partnership in case of
their failure to pay their obligations when it became due and demandable. Or at the very least, Chua being a partner of
petitioner Tai Tong Chuache & Company is an agent of the partnership. Being an agent, it is understood that he acted for
and in behalf of the firm. 13 Public respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as
personal creditor of spouses Palomo has no basis.
The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal
force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to prove the allegation
of lack of insurable interest on the part of the petitioner, respondent insurance company is and must be held liable.
IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER judgment is
rendered order private respondent Travellers Multi-Indemnity Corporation to pay petitioner the face value of
Insurance Policy No. 599-DV in the amount of P100,000.00. Costs against said private respondent.
SO ORDERED.
B. Formal Requirements (Articles 1771-1773)

[G.R. No. 143340. August 15, 2001]

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs. LAMBERTO T.


CHUA, respondent.
DECISION
GONZAGA-REYES, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision of the
Court of Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua vs.
[1]

Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga (hereafter collectively referred to
as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan
(hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively
of the deceased Jacinto L. Sunga (hereafter Jacinto), for Winding Up of Partnership Affairs, Accounting,

Appraisal and Recovery of Shares and Damages with Writ of Preliminary Attachment with the Regional Trial
Court, Branch 11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of
Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto
allegedly agreed to register the business name of their partnership, SHELLITE GAS APPLIANCE CENTER
(hereafter Shellite), under the name of Jacinto as a sole proprietorship. Respondent allegedly delivered his
initial capital contribution of P100,000.00 to Jacinto while the latter in turn produced P100,000.00 as his
counterpart contribution, with the intention that the profits would be equally divided between them. The
partnership allegedly had Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife
of respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or remuneration of 10% of
the gross profit and Josephine would receive 10% of the net profits, in addition to her wages and other
remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite
well and was profitable. Respondent claimed that he could attest to the success of their business because of the
volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum
Corporation. While Jacinto furnished respondent with the merchandise inventories, balance sheets and net
worth of Shellite from 1977 to 1989, respondent however suspected that the amount indicated in these
documents were understated and undervalued by Jacinto and Josephine for their own selfish reasons and for tax
avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his
daughter, petitioner Lilibeth, took over the operations, control, custody, disposition and management of Shellite
without respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal, winding up
and restitution of his net shares in the partnership, petitioners failed to comply.Petitioner Lilibeth allegedly
continued the operations of Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons to evade
respondents demands, she disbursed out of the partnership funds the amount of P200,000.00 and partially paid
the same to respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented
partial payment of the latters share in the partnership, with a promise that the former would make the complete
inventory and winding up of the properties of the business establishment. Despite such commitment, petitioners
allegedly failed to comply with their duty to account, and continued to benefit from the assets and income of
Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and
Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zambaonga del Norte had jurisdiction
over the action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied the
motion to dismiss.

On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending that they
are not liable for partnership shares, unreceived income/profits, interests, damages and attorneys fees, that
respondent does not have a cause of action against them, and that the trial court has no jurisdiction over the
nature of the action, the SEC being the agency that has original and exclusive jurisdiction over the case. As
counterclaim, petitioner sought attorneys fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for
winding up of partnership affairs, accounting and recovery of shares in partnership affairs, accounting and
recovery of shares in partnership assets /properties should be dismissed and prosecuted against the estate of
deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the
Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, as
petitioners failed to show that a reversible error was committed by the appellate court."
[2]

On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the
trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case on
January 17, 1996. Respondent presented his evidence while petitioners were considered to have waived their
right to present evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive portion of
the Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as
follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and
standards of the properties, assets, income and profits of the Shellite Gas Appliance Center since
the time of death of Jacinto L. Sunga, from whom they continued the business operations including
all businesses derived from the Shellite Gas Appliance Center; submit an inventory, and appraisal
of all these properties, assets, income, profits, etc. to the Court and to plaintiff for approval or
disapproval;

(2) ORDERING them to return and restitute to the partnership any and all properties, assets,
income and profits they misapplied and converted to their own use and advantage that legally
pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of
this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in the
partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4-5
of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the
partnership from 1988 to may 30, 1992, when the plaintiff learned of the closure of the store the
sum of P35,000.00 per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities
pursuant to law, after delivering to the plaintiff all the interest, shares, participation and equity in
the partnership, or the value thereof in money or moneys worth, if the properties are not physically
divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and
hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and
P25,00.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED.

[3]

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the
Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision
reads:

WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all
respects.
[4]

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between respondent
Lamberto T. Chua and the late Jacinto L. Sunga upon the latters invitation and offer and that upon his death
the partnership assets and business were taken over by petitioners.

2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply in the
instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible evidence to
warrant the finding of a partnership, and assuming arguendo that indeed there was a partnership, the finding
of highly exaggerated amounts or values in the partnership assets and profits. [5]

Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a
partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the absence of any
written document to show such partnership between respondent and Jacinto, petitioners argue that these courts
were proscribed from hearing the testimonies of respondent and his witness, Josephine, to prove the alleged
partnership three years after Jacintos death. To support this argument, petitioners invoke the Dead Mans Statute
or Survivorship Rule under Section 23, Rule 130 of the Rules of Court that provides:

SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties or assignors of
parties to a case, or persons in whose behalf a case is prosecuted, against an executor or
administrator or other representative of a deceased person, or against a person of unsound mind,
upon a claim or demand against the estate of such deceased person, or against such person of
unsound mind, cannot testify as to any matter of fact occurring before the death of such deceased
person or before such person became of unsound mind.
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should
not have been admitted to prove certain claims against a deceased person (Jacinto), now represented by
petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary. Hence, based on the intention of the
parties, as gathered from the facts and ascertained from their language and conduct, a verbal contract of
partnership may arise. The essential points that must be proven to show that a partnership was agreed upon are
(1) mutual contribution to a common stock, and (2) a joint interest in the profits. Understandably so, in view of
the absence of a written contract of partnership between respondent and Jacinto, respondent resorted to the
introduction of documentary and testimonial evidence to prove said partnership. The crucial issue to settle then
is whether or not the Dead Mans Statute applies to this case so as to render inadmissible respondents testimony
and that of his witness, Josephine.
[6]

[7]

[8]

The Dead Mans Statute provides that if one party to the alleged transaction is precluded from testifying by
death, insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving
his own uncontradicted and unexplained account of the transaction. But before this rule can be successfully
invoked to bar the introduction of testimonial evidence, it is necessary that:
[9]

1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person or a person of
unsound mind;

3. The subject-matter of the action is a claim or demand against the estate of such deceased person or against
person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such deceased person or before
such person became of unsound mind.[10]

Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim against respondent in their answer before the trial court,
and with the filing of their counterclaim, petitioners themselves effectively removed this case from the ambit of
the Dead Mans Statute. Well entrenched is the rule that when it is the executor or administrator or
representatives of the estate that sets up the counterclaim, the plaintiff, herein respondent, may testify to
occurrences before the death of the deceased to defeat the counterclaim. Moreover, as defendant in the
counterclaim, respondent is not disqualified from testifying as to matters of fact occurring before the death of
the deceased, said action not having been brought against but by the estate or representatives of the deceased.
[11]

[12]

[13]

[14]

Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple reason that she
is not a party or assignor of a party to a case or persons in whose behalf a case is prosecuted. Records show that
respondent offered the testimony of Josephine to establish the existence of the partnership between respondent
and Jacinto. Petitioners insistence that Josephine is the alter ego of respondent does not make her an assignor
because the term assignor of a party means assignor of a cause of action which has arisen, and not the assignor
of a right assigned before any cause of action has arisen. Plainly then, Josephine is merely a witness of
respondent, the latter being the party plaintiff.
[15]

We are not convinced by petitioners allegation that Josephines testimony lacks probative value because she
was allegedly coerced by respondent, her brother-in-law, to testify in his favor. Josephine merely declared in
court that she was requested by respondent to testify and that if she were not requested to do so she would not
have testified. We fail to see how we can conclude from this candid admission that Josephines testimony is
involuntary when she did not in any way categorically say that she was forced to be a witness of
respondent. Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of
her testimony since relationship per se, without more, does not affect the credibility of witnesses.
[16]

Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot prevail over the
factual findings of the trial court and the Court of Appeals that a partnership was established between
respondent and Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the
trial court and the Court of Appeals considered the evidence for respondent as sufficient to prove the formation
of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial
precedents, a factual matter like the finding of the existence of a partnership between respondent and Jacinto
cannot be inquired into by this Court on review. This Court can no longer be tasked to go over the proofs
presented by the parties and analyze, assess and weigh them to ascertain if the trial court and the appellate court
were correct in according superior credit to this or that piece of evidence of one party or the other. It must be
also pointed out that petitioners failed to attend the presentation of evidence of respondent. Petitioners cannot
now turn to this Court to question the admissibility and authenticity of the documentary evidence of respondent
when petitioners failed to object to the admissibility of the evidence at the time that such evidence was offered.
[17]

[18]

[19]

With regard to petitioners insistence that laches and/or prescription should have extinguished respondents
claim, we agree with the trial court and the Court of Appeals that the action for accounting filed by respondent
three (3) years after Jacintos death was well within the prescribed period. The Civil Code provides that an
action to enforce an oral contract prescribes in six (6) years while the right to demand an accounting for a
partners interest as against the person continuing the business accrues at the date of dissolution, in the absence
of any contrary agreement. Considering that the death of a partner results in the dissolution of the
partnership , in this case, it was after Jacintos death that respondent as the surviving partner had the right to an
account of his interest as against petitioners. It bears stressing that while Jacintos death dissolved the
partnership, the dissolution did not immediately terminate the partnership. The Civil Code expressly provides
that upon dissolution, the partnership continues and its legal personality is retained until the complete winding
up of its business, culminating in its termination.
[20]

[21]

[22]

[23]

[24]

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto,
petitioners maintain that said partnership that had an initial capital of P200,000.00 should have been registered
with the Securities and Exchange Commission (SEC) since registration is mandated by the Civil Code. True,
Article 1772 of the Civil Code requires that partnerships with a capital of P3,000.00 or more must register with
the SEC, however, this registration requirement is not mandatory. Article 1768 of the Civil Code explicitly
provides that the partnership retains its juridical personality even if it fails to register. The failure to register the
contract of partnership does not invalidate the same as among the partners, so long as the contract has the
essential requisites, because the main purpose of registration is to give notice to third parties, and it can be
assumed that the members themselves knew of the contents of their contract. In the case at bar, noncompliance with this directory provision of the law will not invalidate the partnership considering that the
totality of the evidence proves that respondent and Jacinto indeed forged the partnership in question.
[25]

[26]

WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
AFFIRMED.
SO ORDERED.

[G.R. No. 134559. December 9, 1999]


ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and EMETERIA
BARING, petitioners,
vs.
COURT
OF
APPEALS
and
MANUEL
TORRES, respondents.
DECISION
PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms
of a contract turn out to be financially disadvantageous to them will not relieve them of their
obligations therein. The lack of an inventory of real property will not ipso facto release the
contracting partners from their respective obligations to each other arising from acts executed in
accordance with their agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision [1] Second
Division of the Court of Appeals[2] (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution
denying reconsideration. The assailed Decision affirmed the ruling of the Regional Trial Court
(RTC) of Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and
against the plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the
defendant are likewise ordered dismissed. No pronouncement as to costs.[3]
The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture
agreement" with Respondent Manuel Torres for the development of a parcel of land into a
subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of land
in favor of respondent, who then had it registered in his name. By mortgaging the property,
respondent obtained from Equitable Bank a loan of P40,000 which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. [4] All three of them also agreed to share the
proceeds from the sale of the subdivided lots.

The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of respondents lack of funds or means and
skills. They add that respondent used the loan not for the development of the subdivision, but in
furtherance of his own company, Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With
the said amount, he was able to effect the survey and the subdivision of the lots. He secured the
Lapu Lapu City Councils approval of the subdivision project which he advertised in a local
newspaper. He also caused the construction of roads, curbs and gutters. Likewise, he entered into a
contract with an engineering firm for the building of sixty low-cost housing units and actually even
set up a model house on one of the subdivision lots. He did all of these for a total expense
ofP85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their
relatives had separately caused the annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his requests, petitioners refused to cause the
clearing of the claims, thereby forcing him to give up on the project. [5]
Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who
were however acquitted. Thereafter, they filed the present civil case which, upon respondent's

motion, was later dismissed by the trial court in an Order dated September 6, 1982. On appeal,
however, the appellate court remanded the case for further proceedings. Thereafter, the RTC issued
its assailed Decision, which, as earlier stated, was affirmed by the CA.
Hence, this Petition.[6]
Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent had
formed a partnership for the development of the subdivision. Thus, they must bear the loss suffered
by the partnership in the same proportion as their share in the profits stipulated in the
contract. Disagreeing with the trial courts pronouncement that losses as well as profits in a joint
venture should be distributed equally,[7] the CA invoked Article 1797 of the Civil Code which
provides:
Article 1797 - The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in the losses shall be
in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not be liable for the
losses.As for the profits, the industrial partner shall receive such share as may be just and equitable
under the circumstances. If besides his services he has contributed capital, he shall also receive a
share in the profits in proportion to his capital.
The Issue

Petitioners impute to the Court of Appeals the following error:


x x x [The] Court of Appeals erred in concluding that the transaction x x x between the petitioners
and respondent was that of a joint venture/partnership, ignoring outright the provision of Article
1769, and other related provisions of the Civil Code of the Philippines. [8]
The Courts Ruling

The Petition is bereft of merit.


Main Issue: Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint
Venture Agreement and the earlier Deed of Sale, both of which were the bases of the appellate
courts finding of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is
liable for his failure to implement the project. Because the agreement entitled them to receive 60
percent of the proceeds from the sale of the subdivision lots, they pray that respondent pay them
damages equivalent to 60 percent of the value of the property.[9]
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March,
1969, by and between MR. MANUEL R. TORRES, x x x the FIRST PARTY, likewise, MRS.
ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x the SECOND PARTY:
W I T N E S S E T H:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located
at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total
area of 17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency, upon the execution of this contract for the property
entrusted by the SECOND PARTY, for sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein
contained the respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5, 1969, in
the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS.
(P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS.
(P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not
actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount
of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations
and this particular amount will serve as an advance payment from the FIRST PARTY for the
property mentioned to be sub-divided and to be deducted from the sales.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the
principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
Currency, until the sub-division project is terminated and ready for sale to any interested parties,
and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be
deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be
paid by the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales
after the development of the sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for
the SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional
profits or whatever income deriving from the sales will be divided equally according to the x x x
percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work and all
improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall
[be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property
mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST PARTY, including
all necessary improvements spent by the FIRST PARTY, and the FIRST PARTY will be given a
grace period to turnover the property mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely
and voluntarily for the uses and purposes therein stated. [10]
A reading of the terms embodied in the Agreement indubitably shows the existence of a
partnership 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.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in
the form of land which was to be developed into a subdivision; while respondent would give, in
addition to his industry, the amount needed for general expenses and other costs. Furthermore, the
income from the said project would be divided according to the stipulated percentage.Clearly, the
contract manifested the intention of the parties to form a partnership. [11]

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the
title to the land to facilitate its use in the name of the respondent. On the other hand, respondent
caused the subject land to be mortgaged, the proceeds of which were used for the survey and the
subdivision of the land. As noted earlier, he developed the roads, the curbs and the gutters of the
subdivision and entered into a contract to construct low-cost housing units on the property.
Respondents actions clearly belie petitioners contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or
property, but also industry.
Petitioners Bound by Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been
expressly stipulated, but also to all necessary consequences thereof, as follows:
ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound
not only to the fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the
terms of the contract they voluntarily signed. If it was not in consonance with their expectations,
they should have objected to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and
the fact that the contractual stipulations may turn out to be financially disadvantageous will not
relieve parties thereto of their obligations. They cannot now disavow the relationship formed from
such agreement due to their supposed misunderstanding of its terms.
Alleged Nullity of the Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code,
which provides:
ART. 1773. A contract of partnership is void, whenever immovable property is contributed thereto,
if an inventory of said property is not made, signed by the parties, and attached to the public
instrument.
They contend that since the parties did not make, sign or attach to the public instrument an
inventory of the real property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the
eminent Arturo M. Tolentino states that under the aforecited provision which is a complement of

Article 1771,[12] the execution of a public instrument would be useless if there is no inventory of the
property contributed, because without its designation and description, they cannot be subject to
inscription in the Registry of Property, and their contribution cannot prejudice third persons. This
will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the
guaranty in which the immovables may consist. Thus, the contract is declared void by the law when
no such inventory is made. The case at bar does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property.[13] They cannot in one breath
deny the contract and in another recognize it, depending on what momentarily suits their
purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts will not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint
Venture Agreement an ordinary contract from which the parties rights and obligations to each other
may be inferred and enforced.
Partnership Agreement Not the Result of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422 [14] of the
Civil Code, because it is the direct result of an earlier illegal contract, which was for the sale of the
land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for
the sale was the expectation of profits from the subdivision project. Its first stipulation states that
petitioners did not actually receive payment for the parcel of land sold to
respondent. Consideration, more properly denominated as cause, can take different forms, such as
the prestation or promise of a thing or service by another.[15]
In this case, the cause of the contract of sale consisted not in the stated peso value of the land,
but in the expectation of profits from the subdivision project, for which the land was intended to be
used. As explained by the trial court, the land was in effect given to the partnership as [petitioners]
participation therein. x x x There was therefore a consideration for the sale, the [petitioners] acting
in the expectation that, should the venture come into fruition, they [would] get sixty percent of the
net profits.
Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision project,
petitioners maintain that he should be made to pay damages equivalent to 60 percent of the value of
the property, which was their share in the profits under the Joint Venture Agreement.

We are not persuaded. True, the Court of Appeals held that petitioners acts were not the cause
of the failure of the project. [16] But it also ruled that neither was respondent responsible therefor. [17] In
imputing the blame solely to him, petitioners failed to give any reason why we should disregard the
factual findings of the appellate court relieving him of fault. Verily, factual issues cannot be
resolved in a petition for review under Rule 45, as in this case. Petitioners have not alleged, not to
say shown, that their Petition constitutes one of the exceptions to this doctrine. [18] Accordingly, we
find no reversible error in the CA's ruling that petitioners are not entitled to damages.
WHEREFORE,
the
Petition
is
Decision AFFIRMED. Costs against petitioners.

hereby DENIED and

the

challenged

SO ORDERED.

C. Characteristics (Articles 1768, 1775, 1804-1805)


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55397 February 29, 1988
TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:

dismissing the complaint for


recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent
insurance company in favor of petitioner-intervenor.
This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367

The facts of the case as found by respondent Insurance Commission are as follows:
Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at San Rafael Village, Davao City.
Complainants assumed the mortgage of the building in favor of S.S.S., which building was insured with respondent S.S.S. Accredited Group
of Insurers for P25,000.00.
On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of P100,000.00. To secure the payment of the
loan, a mortgage was executed over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975,
Arsenio Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers Multi-Indemnity Corporation for
P100,000.00 (P70,000.00 for the building and P30,000.00 for the contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").
On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"), covering the building for P50,000.00 with
respondent Zenith Insurance Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from
respondent Philippine British Assurance Company, covering the same building for P50,000.00 and the contents thereof for P70,000.00.
On July 31, 1975, the building and the contents were totally razed by fire.
Adjustment Standard Corporation submitted a report as follow
xxx xxx xxx

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

Poli
cy
No..

C
o
m
p
a
n
y

R
i
s
k

I
n
s
u
r
e
s

P
a
y
s

MIR
O

Z
e
n
it
h

B
u
il
d
i
n
g

P
5
0
,
0
0
0

P
1
7
,
6
1
0
.
9
3

F025
00

I
n
s
u
r
a
n
c
e

H
o
u
s
e
h
o
l
d

7
0
,
0
0
0

2
4
,
6
5
5
.
3
1

C
o
r
p
.

F845
90

P
h
il
.

B
ri
ti
s
h

A
s
s
c
o
.

C
o
.

I
n
c
.

F
F
F

5
0
,
0
0
0

3
9
,
1
8
6
.
1
0

R
i
s
k

I
n
s
u
r
e
s

P
a
y
s

B
u
il
d
i
n
g

P
2
5
,
0
0
0

P
8
,
8
0
5
.
4
7

T
o
t
a
l
s

P
1
9
5
,
0
0

P
9
0
,
2
5
7

&
F
5

Poli
cy
No.

C
o
m
p
a
n
y

FIC
153
81

S
S
S
A
c
c
r
e

d
it
e
d
G
r
o
u
p

o
f
I
n
s
u
r
e
r
s

.
8
1

We are showing hereunder another apportionment of the loss which includes the Travellers Multi-Indemnity policy for reference purposes.

Poli
cy
No.

C
o
m
p
a
n
y

MI
RO/

Z
e
n
it
h

F025
00

I
n
s
u
r
a
n
c
e

C
o
r
p
.

F845
90

R
i
s
k

I
nj
u
r
e
s

P
a
y
s

B
u
il
d
i
n
g

P
5
0
,
0
0
0

P
1
1
,
8
7
7
.
1
4

I
B

7
0
,

1
6
,

P
h
il.

B
ri
ti
s
h

A
s
s

c
o
.
C
o
.

u
il
d
i
n
g

0
0
0

6
2
8
.
0
0

II
B
ui
ld
in
g

F
F
F
&

5
0
,
0
0
0

2
4
,
9
1
8
.
7
9

P
E

PV
C151
81

S
S
S

A
c
c
r
e
d
it
e
d

G
r
o
u
p
o
f

F599
DV

I
n
s
u
r
e
r
s

B
u
il
d
i
n
g

2
5
,
0
0
0

5
,
9
3
8
.
5
0

I
n
s
u
r
e
r

I
R
e
f

3
0
,
0
0
0

1
4
,
4
6
7
.

M
u
lti

3
1

I
I
B
u
il
d
i
n
g

7
0
,
0
0
0

1
6
,
6
2
8
.
0
0

T
o
t
a
l
s

P
2
9
5
.
0
0
0

P
9
0
,
2
5
7
.
8
1

Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents, Zenith Insurance, Phil. British Assurance and
S.S.S. Accredited Group of Insurers, paid their corresponding shares of the loss. Complainants were paid the following: P41,546.79 by
Philippine British Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par. 6.
Amended Complaint). Demand was made from respondent Travellers Multi-Indemnity for its share in the loss but the same was refused.
Hence, complainants demanded from the other three (3) respondents the balance of each share in the loss based on the computation of the
Adjustment Standards Report excluding Travellers Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith Insurance: P22,294.62,
Phil. British: and P2,866.90, SSS Accredited) but the same was refused, hence, this action.
In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the material allegations in the complaint, but denied
liability on the ground that the claim of the complainants had already been waived, extinguished or paid. Both companies set up counterclaim
in the total amount of P 91,546.79.
Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter of July 22, 1977 that the herein claim of
complainants for the balance had been paid in the amount of P 5,938.57 in full, based on the Adjustment Standards Corporation Report of
September 22, 1975.
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its special and affirmative defenses the
following, to wit: that Fire Policy No. 599 DV, covering the furniture and building of complainants was secured by a certain Arsenio Chua,
mortgage creditor, for the purpose of protecting his mortgage credit against the complainants; that the said policy was issued in the name of
Azucena Palomo, only to indicate that she owns the insured premises; that the policy contains an endorsement in favor of Arsenio Chua as
his mortgage interest may appear to indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire policy
was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of the fire Insurance Policy No. F-559 DV,
issued by respondent Travellers Multi-Indemnity.
Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not entitled to indemnity under its Fire
Insurance Policy for lack of insurable interest before the loss of the insured premises and that the complainants, spouses Pedro and
Azucena Palomo, had already paid in full their mortgage indebtedness to the intervenor. 3
As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground that the insurance policy subject of the complaint
was taken out by Tai Tong Chuache & Company, petitioner herein, for its own interest only as mortgagee of the insured property and thus complainant as
mortgagors of the insured property have no right of action against herein respondent. It likewise dismissed petitioner's complaint in intervention in the following
words:
We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenor-mortgagee. The complainant testified that she
was still indebted to Intervenor in the amount of P100,000.00. Such allegation has not however, been sufficiently proven by documentary
evidence. The certification (Exhibit 'E-e') issued by the Court of First Instance of Davao, Branch 11, indicate that the complainant was Antonio
Lopez Chua and not Tai Tong Chuache & Company. 4
From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise denied hence, the present petition.

It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the pleadings of the parties in that it ruled that a certain
Arsenio Lopez Chua is the one entitled to the insurance proceeds and not Tai Tong Chuache & Company.

As correctly
pointed out by respondent insurance commission in their comment, the decision did not pronounce that it was Arsenio
Lopez Chua who has insurable interest over the insured property. Perusal of the decision reveals however that it readily
absolved respondent insurance company from liability on the basis of the commissioner's conclusion that at the time of
the occurrence of the peril insured against petitioner as mortgagee had no more insurable interest over the insured
property. It was based on the inference that the credit secured by the mortgaged property was already paid by the
Palomos before the said property was gutted down by fire. The foregoing conclusion was arrived at on the basis of the
certification issued by the then Court of First Instance of Davao, Branch II that in a certain civil action against the
Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering the manner it was written.

We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted by his own affirmative allegations. Under Section
1, Rule 131 6 each party must prove his own affirmative allegations by the amount of evidence required by law which in civil

cases as in the present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the
affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain
favorable judgment. Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent
insurance company to avoid liability under the policy by setting up an affirmative defense of lack of insurable interest on
the part of the petitioner must prove its own affirmative allegations.
7

It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out by petitioner over the mortgaged property. Neither
did it deny that the said property was totally razed by fire within the period covered by the insurance. Respondent, as mentioned earlier advanced an affirmative
defense of lack of insurable interest on the part of the petitioner that before the occurrence of the peril insured against the Palomos had already paid their credit
due the petitioner. Respondent having admitted the material allegations in the complaint, has the burden of proof to show that petitioner has no insurable interest
over the insured property at the time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted no effort to
present any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the decision must be adverse to it.
However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from liability on the basis of the certification issued
by the then Court of First Instance of Davao, Branch II, that in a certain civil action against the Palomos, Arsenio Lopez Chua stands as the complainant and not
Tai Tong Chuache. From said evidence respondent commission inferred that the credit extended by herein petitioner to the Palomos secured by the insured
property must have been paid. Such is a glaring error which this Court cannot sanction. Respondent Commission's findings are based upon a mere inference.
The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as evidence the contract of mortgage (Exh. 1) which has
not been cancelled nor released. It has been held in a long line of cases that when the creditor is in possession of the document of credit, he need not prove nonpayment for it is presumed. 8 The validity of the insurance policy taken b petitioner was not assailed by private respondent.

Moreover, petitioner's claim that the loan extended to the Palomos has not yet been paid was corroborated by Azucena
Palomo who testified that they are still indebted to herein petitioner.
9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo by petitioner the same should have been
brought by Tai Tong Chuache or by its representative in its own behalf. From the above premise respondent concluded that the obligation secured by the insured
property must have been paid.

respondent pointed out that the action must be brought in the


name of the real party in interest. We agree. However, it should be borne in mind that petitioner being a partnership may
sue and be sued in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is the
representative of petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing
partner of the partnership was corroborated by respondent insurance company. Thus Chua as the managing partner of
the partnership may execute all acts of administration including the right to sue debtors of the partnership in case of their
failure to pay their obligations when it became due and demandable. Or at the very least, Chua being a partner of
petitioner Tai Tong Chuache & Company is an agent of the partnership. Being an agent, it is understood that he acted for
and in behalf of the firm. Public respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as
personal creditor of spouses Palomo has no basis.
The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2

10

11

12

13

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

D. Classification of Partnerships (Articles 1776-1781, 1783, 1825)

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
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.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

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 executed 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 extrajudicially 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.

Obligations of the Partners- Articles 1784-1827


A. Obligations of the Partners among Themselves (Section 1)
1. Contributions (Articles 1784-1796, 1808)

SEE - Luzviminda J. Villareal vs. Donaldo Efren C. Ramirez, et al, G.R. No. 144214, July 14, 2003
SEE - Moran v. CA, G.R. No. L-59956, October 31, 1984
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-19819 October 26, 1977
WILLIAM UY, plaintiff-appellee,
vs.
BARTOLOME PUZON, substituted by FRANCO PUZON, defendant-appellant.
R.P. Sarandi for appellant.
Jose L. Uy & Andres P. Salvador for appellee.

CONCEPCION JR., J.:

t.hqw

Appeal from the decision of the Court of First Instanre of Manila, dissolving the "U.P. Construction Company" and ordering the defendant Bartolome Puzon to pay
the plaintiff the amounts of: (1) P115,102.13, with legal interest thereon from the date of the filing of the complaint until fully paid; (2) P200,000.00, as plaintiffs
share in the unrealized profits of the "U.P. Construction Company" and (3) P5,000.00, as and for attorney's fees.
It is of record that the defendant Bartolome Puzon had a contract with the Republic of the Philippines for the construction of the Ganyangan Bato Section of the
Pagadian Zamboanga City Road, province of Zamboanga del Sur 1 and of five (5) bridges in the Malangas-Ganyangan Road. 2 Finding

difficulty in accomplishing both projects, Bartolome Puzon sought the financial assistance of the plaintiff, William Uy. As an
inducement, Puzon proposed the creation of a partnership between them which would be the sub-contractor of the
projects and the profits to be divided equally between them. William Uy inspected the projects in question and, expecting

to derive considerable profits therefrom, agreed to the proposition, thus resulting in the formation of the "U.P. Construction
Company" which was subsequently engaged as subcontractor of the construction projects.
3

But, as
heretofore stated, Puzon was short of cash and he promised to contribute his share in the partnership capital as soon as
his application for a loan with the Philippine National Bank in the amount of P150,000.00 shall have been approved.
However, before his loan application could be acted upon, he had to clear his collaterals of its incumbrances first. For this
purpose, on October 24, 1956, Wilham Uy gave Bartolome Puzon the amount of P10,000.00 as advance contribution of
his share in the partnership to be organized between them under the firm name U.P. CONSTRUCTION COMPANY which
amount mentioned above will be used by Puzon to pay his obligations with the Philippine National Bank to effect the
release of his mortgages with the said Bank. On October 29, 1956, William Uy again gave Puzon the amount of
P30,000.00 as his partial contribution to the proposed partnership and which the said Puzon was to use in payment of his
obligation to the Rehabilitation Finance Corporation. Puzon promised William Uy that the amount of P150,000.00 would
be given to the partnership to be applied thusly: P40,000.00, as reimbursement of the capital contribution of William Uy
which the said Uy had advanced to clear the title of Puzon's property; P50,000.00, as Puzon's contribution to the
partnership; and the balance of P60,000.00 as Puzon's personal loan to the partnership.
The partners agreed that the capital of the partnership would be P100,000.00 of which each partner shall contribute the amount of P50,000.00 in cash.

work on the projects was started by the partnership on


October 1, 1956 in view of the insistence of the Bureau of Public Highways to complete the project right away. Since
Puzon was busy with his other projects, William Uy was entrusted with the management of the projects and whatever
expense the latter might incur, would be considered as part of his contribution. At the end of December, 1957, William
Uy had contributed to the partnership the amount of P115,453.39, including his capital.
Although the partnership agreement was signed by the parties on January 18, 1957, 9

10

11

12

The loan of Puzon was approved by the Philippine National Bank in November, 1956 and he gave to William Uy the amount of P60,000.00. Of this amount,
P40,000.00 was for the reimbursement of Uy's contribution to the partnership which was used to clear the title to Puzon's property, and the P20,000.00 as Puzon's
contribution to the partnership capital. 13

assigned to the
Philippine National Bank all the payments to be received on account of the contracts with the Bureau of Public Highways
for the construction of the afore-mentioned projects. By virtue of said assignment, the Bureau of Public Highways paid
the money due on the partial accomplishments on the government projects in question to the Philippine National Bank
which, in turn, applied portions of it in payment of Puzon's loan. Of the amount of P1,047,181.07, released by the Bureau
of Public Highways in payment of the partial work completed by the partnership on the projects, the amount of
P332,539.60 was applied in payment of Puzon's loan and only the amount of P27,820.80 was deposited in the partnership
funds, which, for all practical purposes, was also under Puzon's account since Puzon was the custodian of the common
funds.
To guarantee the repayment of the above-mentioned loan, Bartolome Puzon, without the knowledge and consent of William Uy,

14

15

16

As time passed and the financial demands of the projects increased, William Uy, who supervised the said projects, found difficulty in obtaining the necessary funds
with which to pursue the construction projects. William Uy correspondingly called on Bartolome Puzon to comply with his obligations under the terms of their
partnership agreement and to place, at lest, his capital contribution at the disposal of the partnership. Despite several promises, Puzon, however, failed to do
so. 17 Realizing that his verbal demands were to no avail, William Uy consequently wrote Bartolome Puzon pormal letters of

demand, to which Puzon replied that he is unable to put in additional capital to continue with the projects.
18

19

Failing to reach an agreement with William Uy, Bartolome Puzon, as prime contractor of the construction projects, wrote the subcontractor, U.P. Construction
Company, on November 20, 1957, advising the partnership, of which he is also a partner, that unless they presented an immediate solution and capacity to
prosecute the work effectively, he would be constrained to consider the sub-contract terminated and, thereafter, to assume all responsibilities in the construction of
the projects in accordance with his original contract with the Bureau of Public Highways. 20 On November 27, 1957, Bartolome Puzon again

wrote the U.P.Construction Company finally terminating their subcontract agreement as of December 1, 1957.

21

Thereafter, William Uy was not allowed to hold office in the U.P. Construction Company and his authority to deal with the Bureau of Public Highways in behalf of
the partnership was revoked by Bartolome Puzon who continued with the construction projects alone. 22
On May 20, 1958, William Uy, claiming that Bartolome Puzon had violated the terms of their partnership agreement, instituted an action in court, seeking, inter alia,
the dissolution of the partnership and payment of damages.
Answering, Bartolome Puzon denied that he violated the terms of their agreement claiming that it was the plaintiff, William Uy, who violated the terms thereof. He,
likewise, prayed for the dissolution of the partnership and for the payment by the plaintiff of his, share in the losses suffered by the partnership.
After appropriate proceedings, the trial court found that the defendant, contrary to the terms of their partnership agreement, failed to contribute his share in the
capital of the partnership applied partnership funds to his personal use; ousted the plaintiff from the management of the firm, and caused the failure of the
partnership to realize the expected profits of at least P400,000.00. As a consequence, the trial court dismissed the defendant's counterclaim and ordered the
dissolution of the partnership. The trial court further ordered the defendant to pay the plaintiff the sum of P320,103.13.
Hence, the instant appeal by the defendant Bartolome Puzon during the pendency of the appeal before this Court, the said Bartolome Puzon died, and was
substituted by Franco Puzon.

The appellant makes in his brief nineteen (19) assignment of errors, involving questions of fact, which relates to the following points:
(1) That the appellant is not guilty of breach of contract; and
(2) That the amounts of money the appellant has been order to pay the appellee is not supported by the evidence and the law.
After going over the record, we find no reason for rejecting the findings of fact below, justifying the reversal of the decision appealed from.
The findings of the trial court that the appellant failed to contribute his share in the capital of the partnership is clear incontrovertible. The record shows that after
the appellant's loan the amount of P150,000.00 was approved by the Philippin National Bank in November, 1956, he gave the amount P60,000.00 to the appellee
who was then managing the construction projects. Of this amount, P40,000.00 was to be applied a reimbursement of the appellee's contribution to the partnership
which was used to clear the title to the appellant's property, and th balance of P20,000.00, as Puzon's contribution to the partnership. 23 Thereafter, the

appellant failed to make any further contributions the partnership funds as shown in his letters to the appellee wherein he
confessed his inability to put in additional capital to continue with the projects.
24

Parenthetically, the claim of the appellant that the appellee is equally guilty of not contributing his share in the partnership capital inasmuch as the amount of
P40,000.00, allegedly given to him in October, 1956 as partial contribution of the appellee is merely a personal loan of the appellant which he had paid to the
appellee, is plainly untenable. The terms of the receipts signed by the appellant are clear and unequivocal that the sums of money given by the appellee are
appellee's partial contributions to the partnership capital. Thus, in the receipt for P10,000.00 dated October 24, 1956, 25 the appellant stated:
+.wph!1

Received from Mr. William Uy the sum of TEN THOUSAND PESOS (P10,000.00) in Check No. SC 423285 Equitable Banking Corporation,
dated October 24, 1956, as advance contribution of the share of said William Uy in the partnership to be organized between us under the
firm name U.P. CONSTRUCTION COMPANY which amount mentioned above will be used by the undersigned to pay his obligations with the
Philippine National Bank to effect the release of his mortgages with the said bank. (Emphasis supplied)
In the receipt for the amount of P30,000.00 dated October 29, 1956,

26

the appellant also said:

+.wph!1

Received from William Uy the sum of THIRTY THOUSAND PESOS (P30,000.00) in Check No. SC423287, of the Equitable Banking
Corporation, as partial contribution of the share of the said William Uy to the U.P. CONSTRUCTION COMPANY for which the undersigned
will use the said amount in payment of his obligation to the Rehabilitation Finance Corporation. (Emphasis supplied)
The findings of the trial court that the appellant misapplied partnership funds is, likewise, sustained by competent evidence. It is of record that the appellant
assigned to the Philippine National Bank all the payments to be received on account of the contracts with the Bureau of Public Highways for the construction of the
aforementioned projects to guarantee the repayment of the bank. 27 By virtue of the said appeflant's personal loan with the said bank

assignment, the Bureau of Public Highways paid the money due on the partial accomplishments on the construction
projects in question to the Philippine National Bank who, in turn, applied portions of it in payment of the appellant's loan.

28

The appellant claims, however, that the said assignment was made with the consent of the appellee and that the assignment not prejudice the partnership as it
was reimbursed by the appellant.
But, the appellee categorically stated that the assignment to the Philippine National Bank was made without his prior knowledge and consent and that when he
learned of said assignment, he cal the attention of the appellant who assured him that the assignment was only temporary as he would transfer the loan to the
Rehabilitation Finance Corporation within three (3) months time. 29
The question of whom to believe being a matter large dependent on the trier's discretion, the findings of the trial court who had the better opportunity to examine
and appraise the fact issue, certainly deserve respect.
That the assignment to the Philippine National Bank prejudicial to the partnership cannot be denied. The record show that during the period from March, 1957 to
September, 1959, the appellant Bartolome Puzon received from the Bureau of Public highways, in payment of the work accomplished on the construction projects,
the amount of P1,047,181.01, which amount rightfully and legally belongs to the partnership by virtue of the subcontract agreements between the appellant and
the U.P. Construction Company. In view of the assignemt made by Puzon to the Philippine National Bank, the latter withheld and applied the amount of
P332,539,60 in payment of the appellant's personal loan with the said bank. The balance was deposited in Puzon's current account and only the amount of
P27,820.80 was deposited in the current account of the partnership. 30 For sure, if the appellant gave to the partnership all that were eamed

and due it under the subcontract agreements, the money would have been used as a safe reserve for the discharge of all
obligations of the firm and the partnership would have been able to successfully and profitably prosecute the projects it
subcontracted.
When did the appellant make the reimbursement claimed by him?

Since the
appellant received from the Bureau of Public Highways the sum of P1,047,181.01, the appellant has a deficit balance of
P94,342.24. The appellant, therefore, did not make complete restitution.
For the same period, the appellant actually disbursed for the partnership, in connection with the construction projects, the amount of P952,839.77.

31

The findings of the trial court that the appellee has been ousted from the management of the partnership is also based upon persuasive evidence. The appellee
testified that after he had demanded from the appellant payment of the latter's contribution to the partnership capital, the said appellant did not allow him to hold
office in the U.P. Construction Company and his authority to deal with the Bureau of Public Highways was revoked by the appellant. 32

As the record stands, We cannot say, therefore, that the decis of the trial court is not sustained by the evidence of record as warrant its reverw.
Since the defendantappellant was at fauh, the tral court properly ordered him to reimburse the plaintiff-appellee whatever amount latter had invested in or spent for
the partnership on account of construction projects.
How much did the appellee spend in the construction projects question?
It appears that although the partnership agreement stated the capital of the partnership is P100,000.00 of which each part shall contribute to the partnership the
amount of P50,000.00 cash 33 the partners of the U.P. Construction Company did contribute their agreed share in the

capitalization of the enterprise in lump sums of P50,000.00 each. Aside from the initial amount P40,000.00 put up by the
appellee in October, 1956, the partners' investments took, the form of cash advances coveting expenses of the
construction projects as they were incurred. Since the determination of the amount of the disbursements which each of
them had made for the construction projects require an examination of the books of account, the trial court appointed two
commissioners, designated by the parties, "to examine the books of account of the defendant regarding the U.P.
Construction Company and his personal account with particular reference to the Public Works contract for the construction
of the Ganyangan-Bato Section, Pagadian-Zamboanga City Road and five (5) Bridges in Malangas-Ganyangan Road,
including the payments received by defendant from the Bureau of Public Highways by virtue of the two projects above
mentioned, the disbursements or disposition made by defendant of the portion thereof released to him by the Philippine
National Bank and in whose account these funds are deposited .
34

35

In due time, the loners so appointed,

36

submitted their report they indicated the items wherein they are in agreement, as well as
37

their points of disagreement.


In the commissioners' report, the appellant's advances are listed under Credits; the money received from the firm, under Debits; and the resulting monthly
investment standings of the partners, under Balances. The commissioners are agreed that at the end of December, 1957, the appellee had a balance of
P8,242.39. 38 It is in their respective adjustments of the capital account of the appellee that the commissioners had disagreed.
Mr. Ablaza, designated by the appellant, would want to charge the appellee with the sum of P24,239.48, representing the checks isssued by the appellant,

39

and

encashed by the appellee or his brother, Uy Han so that the appellee would owe the partnership the amount of
P15,997.09.
Mr. Tayag, designated by the appellee, upon the other hand, would credit the appellee the following additional amounts:
(1) P7,497.80 items omitted from the books of partnership but recognized and charged to Miscellaneous Expenses by Mr. Ablaza;
(2) P65,103.77 payrolls paid by the appellee in the amount P128,103.77 less payroll remittances from the appellant in amount of P63,000.00; and
(3) P26,027.04 other expeses incurred by the appellee at construction site.
With respect to the amount of P24,239.48, claimed by appellant, we are hereunder adopting the findings of the trial which we find to be in accord with the
evidence:
To enhance defendant's theory that he should be credited P24,239.48, he presented checks allegedly given to plaintiff and the latter's brother, Uy Han, marked as
Exhibits 2 to 11. However, defendant admitted that said cheeks were not entered nor record their books of account, as expenses for and in behalf of partnership or
its affairs. On the other hand, Uy Han testified that of the cheeks he received were exchange for cash, while other used in the purchase of spare parts
requisitioned by defendant. This testimony was not refuted to the satisfaction of the Court, considering that Han's explanation thereof is the more plausible
because if they were employed in the prosecution of the partners projects, the corresponding disbursements would have certainly been recorded in its books,
which is not the case. Taking into account defendant is the custodian of the books of account, his failure to so enter therein the alleged disbursements,
accentuates the falsity of his claim on this point. 40
Besides, as further noted by the trial court, the report Commissioner Ablaza is unreliable in view of his proclivity to favor the appellant and because of the
inaccurate accounting procedure adopted by him in auditing the books of account of the partnership unlike Mr. Tayag's report which inspires faith and credence.

41

As explained by Mr. Tayag, the amount of P7,497.80 represen expenses paid by the appellee out of his personal funds which not been entered in the books of the
partnership but which been recognized and conceded to by the auditor designated by the appellant who included the said amount under Expenses. 42
The explanation of Mr. Tayag on the inclusion of the amount of P65,103.77 is likewise clear and convincing.

43

As for the sum of of P26,027.04, the same represents the expenses which the appelle paid in connection withe the projects and not entered in the books of the
partnership since all vouchers and receipts were sent to the Manila office which were under the control of the appellant. However, officer which were under the
control of the appellant. However, a list of these expenses are incorporated in Exhibits ZZ, ZZ-1 to ZZ-4.
In resume', the appelllee's credit balance would be as follows:

+.wph!1

Undisputed balance as
of Dec. 1967

Add: Items omitted


from the books but

P 8,242.

recognized and
charged to
Miscellaneous

Expenses by Mr.
Ablaza

7,497.80

Add:
Payrolls
paid by
the
appelle
e

P128,10
3.77

Less:
Payroll
remittan
ces
receive
d

63,000.0
0

65,103.7
7

Add:
Other
expens
es
incurred
at the

site
(Exhs,
ZZ, ZZ1 to ZZ4)

26,027.0
4

TOTAL

P106,87
1.00

At the trial, the appellee presented a claim for the amounts of P3,917.39 and P4,665.00 which he also advanced for the construction projects but which were not
included in the Commissioner's Report. 44
Appellee's total investments in the partnership would, therefore, be:

Appellee's total
credits

P106,871.00

Add: unrecorded
balances for the
month of Dec.
1957 (Exhs. KKK,
KK-1 to KKK_19,
KKK-22)

3,917,39

Add: Payments to
Munoz, as
subcontractor of
five,(5) Bridges (p.
264 tsn; Exhs.
KKK-20, KKK-21)

4,665.00

Total Investments

Pl 15,453.39

Regarding the award of P200,000.00 as his share in the unrealized profits of the partnership, the appellant contends that the findings of the trial court that the
amount of P400,000.00 as reasonable profits of the partnership venture is without any basis and is not supported by the evidence. The appemnt maintains that the
lower court, in making its determination, did not take into consideration the great risks involved in business operations involving as it does the completion of the
projects within a definite period of time, in the face of adverse and often unpredictable circumstances, as well as the fact that the appellee, who was in charge of
the projects in the field, contributed in a large measure to the failure of the partnership to realize such profits by his field management.
This argument must be overruled in the light of the law and evidence on the matter. Under Article 2200 of the Civil Code, indemnification for damages shall
comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain. In other words lucrum cessans is also a basis for
indemnification.
Has the appellee failed to make profits because of appellant's breach of contract?
There is no doubt that the contracting business is a profitable one and that the U.P. Construction Company derived some profits from' co io oa ects its sub ntracts
in the construction of the road and bridges projects its deficient working capital and the juggling of its funds by the appellant.
Contrary to the appellant's claim, the partnership showed some profits during the period from July 2, 1956 to December 31, 1957. If the Profit and Loss
Statement 45 showed a net loss of P134,019.43, this was primarily due to the confusing accounting method employed

by the
auditor who intermixed h and accthe cas ruamethod of accounting and the erroneous inclusion of certain items, like
personal expenses of the appellant and afteged extraordinary losses due to an accidental plane crash, in the operating
expenses of the partnership, Corrected, the Profit and Loss Statement would indicate a net profit of P41,611.28.
For the period from January 1, 1958 to September 30, 1959, the partnership admittedly made a net profit of P52,943.89.

46

Besides, as We have heretofore pointed out, the appellant received from the Bureau of Public Highways, in payment of the zonstruction projects in question, the
amount of P1,047,181.01 47 and disbursed the amount of P952,839.77, 48 leaving an unaccounted balance of P94,342.24.

Obviously, this amount is also part of the profits of the partnership.


During the trial of this case, it was discovered that the appellant had money and credits receivable froin the projects in question, in the custody of the Bureau of
Public Highways, in the amount of P128,669.75, representing the 10% retention of said projects. 49 After the trial of this case, it was shown that the

total retentions Wucted from the appemnt amounted to P145,358.00.


the profits of the partnership.

50

Surely, these retained amounts also form part of

Had the appellant not been remiss in his obligations as partner and as prime contractor of the construction projects in question as he was bound to perform
pursuant to the partnership and subcontract agreements, and considering the fact that the total contract amount of these two projects is P2,327,335.76, it is
reasonable to expect that the partnership would have earned much more than the P334,255.61 We have hereinabove indicated. The award, therefore, made by
the trial court of the amount of P200,000.00, as compensatory damages, is not speculative, but based on reasonable estimate.
WHEREFORE, finding no error in the decision appealed from, the said decision is hereby affirmed with costs against the appellant, it being understood that the
liability mentioned herein shall be home by the estate of the deceased Bartolome Puzon, represented in this instance by the administrator thereof, Franco Puzon.

SO ORDERED.

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


192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B. MAGLANA,Defendant-Appellee.
DECISION
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 copartnership 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
contravention 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 CoPartnership (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 19561961 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 provided for in the duly registered Articles of CoPartnership, 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 partnership 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.

2. Profits and Losses (Articles 1797-1799)

[G.R. No. 149844. October 13, 2004]

MIGUEL CUENCO, Substituted by MARIETTA C. CUYEGKENG, petitioner,


vs. CONCEPCION CUENCO Vda. DE MANGUERRA, respondent.
DECISION
PANGANIBAN, J.:

Inasmuch as the facts indubitably and eloquently show an implied trust in favor of
respondent, the Court of Appeals did not err in affirming the Decision of the Regional Trial
Court ordering petitioner to convey the subject property to her. That Decision satisfied the
demands of justice and prevented unjust enrichment.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the
August 22, 2001 Decision of the Court of Appeals (CA) in CA-GR CV No. 54852. The
assailed Decision disposed as follows:
[1]

[2]

WHEREFORE, the decision appealed from is AFFIRMED.

[3]

On the other hand, the Regional Trial Court (RTC) Decision affirmed by the CA
disposed as follows:
WHEREFORE, considering that this action is essentially one for reconveyance or enforcement of a
trust, judgment is hereby rendered ordering the substituted defendant Marietta Cuenco Cuyegkeng
to reconvey or transfer, in a duly registrable public instrument, Lot No 903-A-6 under TCT No.
113781 of the Registry of Deeds of Cebu City, of the Banilad Estate with an area of 834 square
meters, in favor of plaintiff Concepcion Cuenco Vda. De Manguerra; or should the substituted
defendant, for one reason or another, fail to execute the necessary instrument once the decision
becomes final, the Clerk of Court of this Court (RTC) is hereby instructed, in accordance with the
Rules of Court, to prepare and execute the appropriate and requisite conveyance and instrument in
favor of herein plaintiff which, in either case, shall be registered with the Office of the Register of
Deeds of Cebu City.
Without costs in this instance.

[4]

The Facts
The facts were summarized by the appellate court as follows:
On September 19, 1970, the [respondent] filed the initiatory complaint herein for specific
performance against her uncle [Petitioner] Miguel Cuenco which averred, inter alia that her father,
the late Don Mariano Jesus Cuenco (who became Senator) and said [petitioner] formed the Cuenco
and Cuenco Law Offices; that on or around August 4, 1931, the Cuenco and Cuenco Law Offices
served as lawyers in two (2) cases entitled Valeriano Solon versus Zoilo Solon (Civil Case 9037)
and Valeriano Solon versus Apolonia Solon (Civil Case 9040) involving a dispute among relatives
over ownership of lot 903 of the Banilad Estate which is near the Cebu Provincial Capitol; that
records of said cases indicate the name of the [petitioner] alone as counsel of record, but in truth
and in fact, the real lawyer behind the success of said cases was the influential Don Mariano Jesus

Cuenco; that after winning said cases, the awardees of Lot 903 subdivided said lot into three (3)
parts as follows:
Lot 903-A: 5,000 [square meters]: Mariano Cuencos attorneys fees
Lot 903-B: 5,000 [square meters]: Miguel Cuencos attorneys fees
Lot 903-C: 54,000 [square meters]: Solons retention
That at the time of distribution of said three (3) lots in Cebu, Mariano Jesus Cuenco was actively
practicing law in Manila, and so he entrusted his share (Lot 903-A) to his brother law partner (the
[petitioner]); that on September 10, 1938, the [petitioner] was able to obtain in his own name a title
for Lot 903-A (Transfer Certificate of Title [TCT] RT-6999 [T-21108]); that he was under the
obligation to hold the title in trust for his brother Marianos children by first marriage; that
sometime in 1947, the Cuenco family was anticipating Marianos second marriage, and so on
February 1, 1947, they partitioned Lot 903-A into six (6) sub-lots (Lots 903-A-1 to 903-A-6) to
correspond to the six (6) children of Marianos first marriage (Teresita, Manuel, Lourdes, Carmen,
Consuelo, and Concepcion); that the [petitioner] did not object nor oppose the partition plan; that
on June 4, 1947, the [petitioner] executed four (4) deeds of donation in favor of Marianos four (4)
children: Teresita, Manuel, Lourdes, and Carmen, pursuant to the partition plan (per notary
documents 183, 184, 185, 186, Book III, Series 1947 of Cebu City Notary Public Candido
Vasquez); that on June 24, 1947, the [petitioner] executed the fifth deed of donation in favor of
Marianos fifth child Consuelo (per notary document 214, Book III, Series 1947 of Cebu City
Notary Public Candido Vasquez) (Exhibits 2 to 5); that said five (5) deeds of donation left out
Marianos sixth child Concepcion who later became the [respondent] in this case; that in 1949,
[respondent] occupied and fenced a portion of Lot 903-A-6 for taxation purposes (Exhibit F,
Exhibit 6); that she also paid the taxes thereon (Exhibit G); that her father died on February 25,
1964 with a Last Will and Testament; that the pertinent portion of her fathers Last Will and
Testament bequeaths the lot.
near the Cebu provincial capitol, which were my attorneys fees from my clients, Victoria Rallos
and Zoilo Solon, respectively have already long been disposed of, and distributed by me, through
my brother, Miguel, to all my said children in the first marriage;
That on June 3, 1966, the [petitioner] wrote a letter petitioning the Register of Deeds of Cebu to
transfer Lot 903-A-6 to his name on the ground that Lot 903-A-6 is a portion of Lot 903-A; that on
April 6, 1967, the [respondent] requested the Register of Deeds to annotate an affidavit of adverse
claim against the [petitioners] TCT RT-6999 (T-21108) which covers Lot 903-A; that on June 3,
1967, the Register of Deeds issued TCT 35275 covering Lot 903-A-6 in the name of the [petitioner]
but carrying the earlier annotation of adverse claim; that in 1969, the [petitioner] tore down the

wire fence which the [respondent] constructed on Lot 903-A-6 which compelled the latter to
institute the instant complaint dated August 20, 1970 on September 19, 1970.
On December 5, 1970, the answer with counterclaim dated December 3, 1970 of [petitioner]
Miguel Cuenco was filed where he alleged that he was the absolute owner of Lot 903-A-6; that this
lot was a portion of Lot 903-A which in turn was part of Lot 903 which was the subject matter of
litigation; that he was alone in defending the cases involving Lot 903 without the participation of
his brother Mariano Cuenco; that he donated five (5) of the six (6) portions of Lot 903-A to the five
(5) children of his brother Mariano out of gratitude for the love and care they exhibited to him
(Miguel) during the time of his long sickness; that he did not give or donate any portion of the lot to
the [respondent] because she never visited him nor took care of him during his long sickness; that
he became critically ill on February 11, 1946 and was confined at the Singians Clinic in Manila and
then transferred to Cebu where he nearly died in 1946; that his wife Fara Remia Ledesma Cuenco
had an operation on January 1951 and was confined at the University of Santo Tomas Hospital and
John Hopkins Hospital in the United States; that two of his children died at the University of Santo
Tomas Hospital in 1951 and 1952; and that his wife was blind for many months due to malignant
hypertension but [respondent] never remembered her nor did she commiserate with him and his
wife in their long period of sorrow.
[Petitioner] Miguel Cuenco took the witness stand as early as September 13, 1974. His selfconducted direct examination lasted until 1985, the last one on November 22, 1985. Unfortunately,
he died before he was able to submit himself for cross-examination and so his testimony had to be
stricken off the record. His only surviving daughter, Marietta Cuyegkeng, stood as the substitute
[petitioner] in this case. She testified that she purchased Lot 903-A-6 (the property subject matter of
this case) from her late father sometime in 1990 and constructed a house thereon in the same year;
that she became aware of this case because her late father used to commute to Cebu City to attend
to this case; and that Lot 903-A-6 is in her name per Transfer Certificate of Title #113781 of the
Registry of Deeds for Cebu.
[5]

[6]

Ruling of the Court of Appeals


The CA found respondents action not barred by res judicata, because there was no
identity of causes of action between the Petition for cancellation of adverse claim in L.R.C.
Records 5988 and the Complaint for specific performance to resolve the issue of
ownership in Civil Case No. R-11891.
The appellate court further found no reason to disturb the findings of the trial court that
respondent has the legal right of ownership over lot 903-A-6. The CA ruled that the subject
land is part of the attorneys fees of Don Mariano Cuenco, predecessor-in-interest of
[Respondent] Concepcion Cuenco vda. de Manguerra and [petitioner] merely holds such
property in trust for [her], his title there[to] notwithstanding.

Finally, the CA held that the right of action of respondent has not yet prescribed as she
was in possession of the lot in dispute and the prescriptive period to file the case
commences to run only from the time she acquired knowledge of an adverse claim over
[her] possession.
Hence, this Petition.

[7]

The Issues
In her Memorandum, petitioner raises the following issues for our consideration:
I.

On question of law, the Court of Appeals failed to consider facts of substance and significance
which, if considered, will show that the preponderance of evidence is in favor of the petitioner.
II.

On question of law, the Court of Appeals failed to appreciate the proposition that, contrary to
the position taken by the trial court, no constructive or implied trust exists between the parties,
and neither is the action one for reconveyance based upon a constructive or implied trust.
III.

On question of law, the Court of Appeals erred in not finding that even where implied trust is
admitted to exist the respondents action for relief is barred by laches and prescription.
IV.

On question of law, the trial court and the appellate court erred in expunging from the records
the testimony of Miguel Cuenco.
[8]

This Courts Ruling


The Petition has no merit.
First Issue:
Evaluation of Evidence
Petitioner asks us to appreciate and weigh the evidence offered in support of the
finding that Lot 903-A-6 constituted a part of Mariano Cuencos share in the attorneys fees.
In other words, she seeks to involve us in a reevaluation of the veracity and probative
value of the evidence submitted to the lower court. What she wants us to do is contrary to

the dictates of Rule 45 that only questions of law may be raised and resolved in a petition
for review. Absent any whimsical or capricious exercise of judgment, and unless the lack
of any basis for the conclusions made by the lower courts be amply demonstrated, the
Supreme Court will not disturb such factual findings.
[9]

As a rule, findings of fact of the Court of Appeals affirming those of the trial court are
binding and conclusive. Normally, such factual findings are not disturbed by this Court, to
which only questions of law may be raised in an appeal by certiorari. This Court has
consistently ruled that these questions must involve no examination of the probative value
of the evidence presented by the litigants or any of them. Emphasizing the difference
between the two types of question, it has explained that there is a question of law in a
given case when the doubt or difference arises as to what the law is pertaining to a certain
state of facts, and there is a question of fact when the doubt arises as the truth or the
falsity of alleged facts.
[10]

[11]

[12]

Indeed, after going over the records of the present case, we are not inclined to disturb
the factual findings of the trial and the appellate courts, just because of the insistent claim
of petitioner. His witnesses allegedly testified that Civil Case No. 9040 involving Lot 903
had not been handled by Mariano for defendants therein -- Apolonia Solon, Zoilo Solon, et
al. It has sufficiently been proven, however, that these defendants were represented by
the Cuenco and Cuenco Law Office, composed of Partners Mariano Cuenco and Miguel
Cuenco.
Given as attorneys fees was one hectare of Lot 903, of which two five-thousand
square meter portions were identified as Lot 903-A and Lot 903-B. That only Miguel
handled Civil Case No. 9040 does not mean that he alone is entitled to the attorneys fees
in the said cases. When a client employs the services of a law firm, he does not employ
the services of the lawyer who is assigned to personally handle the case. Rather, he
employs the entire law firm. Being a partner in the law firm, Mariano -- like Miguel -- was
likewise entitled to a share in the attorneys fees from the firms clients. Hence, the lower
courts finding that Lot 903-A was a part of Mariano Cuencos attorneys fees has ample
support.
[13]

[14]

Second Issue:
Implied Trust
Petitioner then contends that no constructive or implied trust exists between the
parties.

A trust is a legal relationship between one having an equitable ownership in a property


and another having legal title to it.
[15]

Trust relations between parties may either be express or implied. Express trusts are
created by the direct and positive acts of the parties, indicated through some writing,
deed, will, or words evidencing an intention to create a trust. On the other hand, implied
trusts are those that, without being express, are deducible from the nature of the
transaction as matters of intent[;] or which are superinduced on the transaction by
operation of law as a matter of equity, independently of the particular intention of the
parties. Implied trusts may either be resulting or constructive trusts, both coming into
being by operation of law.
[16]

[17]

[18]

Resulting trusts are presumed to have been contemplated by the parties and are
based on the equitable doctrine that valuable consideration, not legal title, determines the
equitable title or interest. These trusts arise from the nature of or the circumstances
involved in a transaction, whereby legal title becomes vested in one person, who is
obligated in equity to hold that title for the benefit of another.
[19]

[20]

Constructive trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary to intention against
one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to
property which he ought not, in equity and good conscience, to hold.
[21]

A review of the records shows that indeed there is an implied trust between the
parties.
Although Lot 903-A was titled in Miguels name, the circumstances surrounding the
acquisition and the subsequent partial dispositions of this property eloquently speak of the
intent that the equitable or beneficial ownership of the property should belong to Mariano
and his heirs.
First, Lot 903-A was one half of the one-hectare portion of Lot 903 given as attorneys
fees by a client of the law firm of Partners Miguel and Mariano Cuenco. It constituted the
latters share in the attorneys fees and thus equitably belonged to him, as correctly found
by the CA. That Lot 903-A had been titled in the name of Miguel gave rise to an implied
trust between him and Mariano, specifically, the former holds the property in trust for the
latter. In the present case, it is of no moment that the implied trust arose from the
circumstance -- a share in the attorneys fees -- that does not categorically fall under
Articles 1448 to 1456 of the Civil Code. The cases of implied trust enumerated therein
does not exclude others established by the general law of trust.
[22]

Second, from the time it was titled in his name in 1938, Lot 903-A remained undivided
and untouched by Miguel. Only on February 3, 1947, did Lourdes Cuenco, upon the
instruction of Mariano, have it surveyed and subdivided into six almost equal portions -903-A-1 to 903-A-6. Each portion was specifically allocated to each of the six children of
Mariano with his first wife.
[23]

[24]

[25]

[26]

Third, Miguel readily surrendered his Certificate of Title and interposed no


objection to the subdivision and the allocation of the property to Marianos six children,
including Concepcion.
[27]

[28]

Fourth, Marianos children, including Concepcion, were the ones who shouldered the
expenses incurred for the subdivision of the property.
[29]

Fifth, after the subdivision of the property, Marianos children -- including


Concepcion -- took possession of their respective portions thereof.
[30]

Sixth, the legal titles to five portions of the property were transferred via
a gratuitous deed of conveyance to Marianos five children, following the allocations
specified in the subdivision plan prepared for Lourdes Cuenco.
[31]

With respect to Lot 903-A-6 in particular, the existence of Concepcions equitable


ownership thereof is bolstered, not just by the above circumstances, but also by the fact
that respondent fenced the portion allocated to her and planted trees thereon.
[32]

More significantly, she also paid real property taxes on Lot 903-A-6 yearly, from 1956
until 1969 -- the year when she was dispossessed of the property. Although tax
declarations or realty tax payments of property are not conclusive evidence of ownership,
nevertheless, they are good indicia of possession in the concept of owner, for no one in
his right mind would be paying taxes for a property that is not in his actual or at least
constructive possession. Such realty tax payments constitute proof that the holder has a
claim of title over the property.
[33]

[34]

Tellingly, Miguel started paying real property taxes on Lot 903-A-6 only on April 4,
1964, after the death of Mariano. This fact shows that it was only in that year that he
was emboldened to claim the property as his own and to stop recognizing Marianos, and
subsequently Concepcions, ownership rights over it. It was only by then that the one who
could have easily refuted his claim had already been silenced by death. Such a situation
cannot be permitted to arise, as will be explained below.
[35]

Estoppel

[36]

From the time Lot 903-A was subdivided and Marianos six children -- including
Concepcion -- took possession as owners of their respective portions, no whimper of
protest from petitioner was heard until 1963. By his acts as well as by his omissions,
Miguel led Mariano and the latters heirs, including Concepcion, to believe that Petitioner
Cuenco respected the ownership rights of respondent over Lot 903-A-6. That Mariano
acted and relied on Miguels tacit recognition of his ownership thereof is evident from his
will, executed in 1963, which states:
I hereby make it known and declare that x x x all properties which my first wife and I had brought
to, or acquired during our marriage, or which I had acquired during the years I was a widower
including jewelry, war damage compensation, and two other lots also located at Cebu City, one near
the South-Western University and the other near the Cebu provincial capitol, which were my
attorneys fees from my clients, Victoria Rallos and Zoilo Solon, respectively have already long
been disposed of, and distributed by me, through my brother, Miguel, to all my said six
children in the first marriage. (emphasis supplied)
[37]

Indeed, as early as 1947, long before Mariano made his will in 1963, Lot 903-A -situated along Juana Osmea Extension, Kamputhaw, Cebu City, near the Cebu
Provincial Capitol -- had been subdivided and distributed to his six children in his first
marriage. Having induced him and his heirs to believe that Lot 903-A-6 had already been
distributed to Concepcion as her own, petitioner is estopped from asserting the contrary
and claiming ownership thereof.
[38]

The principle of estoppel in pais applies when -- by ones acts, representations,


admissions, or silence when there is a need to speak out -- one, intentionally or through
culpable negligence, induces another to believe certain facts to exist; and the latter
rightfully relies and acts on such belief, so as to be prejudiced if the former is permitted to
deny the existence of those facts.
[39]

Third Issue:
Laches
Petitioner claims that respondents action is already barred by laches.
We are not persuaded. Laches is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled to it has either
abandoned or declined to assert it. In the present case, respondent has persistently
asserted her right to Lot 903-A-6 against petitioner.
[40]

Concepcion was in possession as owner of the property from 1949 to 1969. When
Miguel took steps to have it separately titled in his name, despite the fact that she had the
[41]

owners duplicate copy of TCT No. RT-6999 -- the title covering the entire Lot 903-A -- she
had her adverse claim annotated on the title in 1967. When petitioner ousted her from her
possession of the lot by tearing down her wire fence in 1969, she commenced the
present action on September 19, 1970, to protect and assert her rights to the property.
We find that she cannot be held guilty of laches, as she did not sleep on her rights.
[42]

[43]

Fourth Issue:
Expunging of Testimony
Petitioner Cuyegkeng questions the expunging of the direct testimony of Miguel
Cuenco. Respondent points out that this issue was not raised before the CA. Neither had
petitioner asked the trial court to reconsider its Order expunging the testimony. Hence, this
issue cannot for the first time be raised at this point of the appeal. Issues, arguments and
errors not adequately and seriously brought below cannot be raised for the first time on
appeal. Basic considerations of due process impel this rule.
[44]

[45]

WHEREFORE, the Petition is DENIED, and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

SEE - Marjorie Tocao, et al. vs. Court of Appeals, et al


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 85494

May 7, 1991

CHOITHRAM JETHMAL RAMNANI AND/OR NIRMLA V. RAMNANI and MOTI G. RAMNANI, petitioners,
vs.
COURT OF APPEALS, SPOUSES ISHWAR JETHMAL RAMNANI, SONYA JETHMAL RAMNANI and OVERSEAS HOLDING CO., LTD., respondents.
G.R. No. 85496

May 7, 1991

SPOUSES ISHWAR JETHMAL RAMNANI AND SONYA JET RAMNANI, petitioners,


vs.
THE HONORABLE COURT OF APPEALS, ORTIGAS & CO., LTD. PARTNERSHIP, and OVERSEAS HOLDING CO., LTD., respondents.
Quasha, Asperilla Ancheta, Pea and Nolasco for petitioners Ishwar Jethmal Ramnani & Sonya Ramnani.
Salonga, Andres, Hernandez & Allado for Choithram Jethmal Ramnani, Nirmla Ramnani & Moti Ramnani.
Rama Law Office for private respondents in collaboration with Salonga, Andres, Hernandez & Allado.
Eulogio R. Rodriguez for Ortigas & Co., Ltd.

GANCAYCO, J.:

This case involves the bitter quarrel of two brothers over two (2) parcels of land and its improvements now worth a fortune. The bone of contention is the
apparently conflicting factual findings of the trial court and the appellate court, the resolution of which will materially affect the result of the contest.
The following facts are not disputed.
Ishwar, Choithram and Navalrai, all surnamed Jethmal Ramnani, are brothers of the full blood. Ishwar and his spouse Sonya had their main business based in
New York. Realizing the difficulty of managing their investments in the Philippines they executed a general power of attorney on January 24, 1966 appointing
Navalrai and Choithram as attorneys-in-fact, empowering them to manage and conduct their business concern in the Philippines.
1

On February 1, 1966 and on May 16, 1966, Choithram, in his capacity as aforesaid attorney-in-fact of Ishwar, entered into two agreements for the purchase of two
parcels of land located in Barrio Ugong, Pasig, Rizal, from Ortigas & Company, Ltd. Partnership (Ortigas for short) with a total area of approximately 10,048 square
meters. Per agreement, Choithram paid the down payment and installments on the lot with his personal checks. A building was constructed thereon by Choithram
in 1966 and this was occupied and rented by Jethmal Industries and a wardrobe shop called Eppie's Creation. Three other buildings were built thereon by
Choithram through a loan of P100,000.00 obtained from the Merchants Bank as well as the income derived from the first building. The buildings were leased out
by Choithram as attorney-in-fact of Ishwar. Two of these buildings were later burned.
2

Sometime in 1970 Ishwar asked Choithram to account for the income and expenses relative to these properties during the period 1967 to 1970. Choithram failed
and refused to render such accounting. As a consequence, on February 4, 1971, Ishwar revoked the general power of attorney. Choithram and Ortigas were duly
notified of such revocation on April 1, 1971 and May 24, 1971, respectively. Said notice was also registered with the Securities and Exchange Commission on
March 29, 1971 and was published in the April 2, 1971 issue of The Manila Times for the information of the general public.
3

Nevertheless, Choithram as such attorney-in-fact of Ishwar, transferred all rights and interests of Ishwar and Sonya in favor of his daughter-in-law, Nirmla
Ramnani, on February 19, 1973. Her husband is Moti, son of Choithram. Upon complete payment of the lots, Ortigas executed the corresponding deeds of sale in
favor of Nirmla. Transfer Certificates of Title Nos. 403150 and 403152 of the Register of Deeds of Rizal were issued in her favor.
6

Thus, on October 6, 1982, Ishwar and Sonya (spouses Ishwar for short) filed a complaint in the Court of First Instance of Rizal against Choithram and/or spouses
Nirmla and Moti (Choithram et al. for brevity) and Ortigas for reconveyance of said properties or payment of its value and damages. An amended complaint for
damages was thereafter filed by said spouses.
After the issues were joined and the trial on the merits, a decision was rendered by the trial court on December 3, 1985 dismissing the complaint and counterclaim.
A motion for reconsideration thereof filed by spouses Ishwar was denied on March 3, 1986.
An appeal therefrom was interposed by spouses Ishwar to the Court of Appeals wherein in due course a decision was promulgated on March 14, 1988, the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered reversing and setting aside the appealed decision of the lower court dated December 3, 1985 and the
Order dated March 3, 1986 which denied plaintiffs-appellants' Motion for Reconsideration from aforesaid decision. A new decision is hereby rendered
sentencing defendants- appellees Choithram Jethmal Ramnani, Nirmla V. Ramnani, Moti C. Ramnani, and Ortigas and Company Limited Partnership to
pay, jointly and severally, plaintiffs-appellants the following:
1. Actual or compensatory damages to the extent of the fair market value of the properties in question and all improvements thereon covered by
Transfer Certificate of Title No. 403150 and Transfer Certificate of Title No. 403152 of the Registry of Deeds of Rizal, prevailing at the time of the
satisfaction of the judgment but in no case shall such damages be less than the value of said properties as appraised by Asian Appraisal, Inc. in its
Appraisal Report dated August 1985 (Exhibits T to T-14, inclusive).
2. All rental incomes paid or ought to be paid for the use and occupancy of the properties in question and all improvements thereon consisting of
buildings, and to be computed as follows:
a) On Building C occupied by Eppie's Creation and Jethmal Industries from 1967 to 1973, inclusive, based on the 1967 to 1973 monthly
rentals paid by Eppie's Creation;
b) Also on Building C above, occupied by Jethmal Industries and Lavine from 1974 to 1978, the rental incomes based on then rates
prevailing as shown under Exhibit "P"; and from 1979 to 1981, based on then prevailing rates as indicated under Exhibit "Q";
c) On Building A occupied by Transworld Knitting Mills from 1972 to 1978, the rental incomes based upon then prevailing rates shown under
Exhibit "P", and from 1979 to 1981, based on prevailing rates per Exhibit "Q";
d) On the two Bays Buildings occupied by Sigma-Mariwasa from 1972 to 1978, the rentals based on the Lease Contract, Exhibit "P", and
from 1979 to 1980, the rentals based on the Lease Contract, Exhibit "Q",
and thereafter commencing 1982, to account for and turn over the rental incomes paid or ought to be paid for the use and occupancy of the properties
and all improvements totalling 10,048 sq. m based on the rate per square meter prevailing in 1981 as indicated annually cumulative up to 1984. Then,
commencing 1985 and up to the satisfaction of the judgment, rentals shall be computed at ten percent (10%) annually of the fair market values of the
properties as appraised by the Asian Appraisal, Inc. in August 1985 (Exhibits T to T-14, inclusive.)
3. Moral damages in the sum of P200,000.00;
4. Exemplary damages in the sum of P100,000.00;
5. Attorney's fees equivalent to 10% of the award herein made;

6. Legal interest on the total amount awarded computed from first demand in 1967 and until the full amount is paid and satisfied; and
7. The cost of suit.

Acting on a motion for reconsideration filed by Choithram, et al. and Ortigas, the appellate court promulgated an amended decision on October 17, 1988 granting
the motion for reconsideration of Ortigas by affirming the dismissal of the case by the lower court as against Ortigas but denying the motion for reconsideration of
Choithram, et al.
8

Choithram, et al. thereafter filed a petition for review of said judgment of the appellate court alleging the following grounds:
1. The Court of Appeals gravely abused its discretion in making a factual finding not supported by and contrary, to the evidence presented at the Trial
Court.
2. The Court of Appeals acted in excess of jurisdiction in awarding damages based on the value of the real properties in question where the cause of
action of private respondents is recovery of a sum of money.
ARGUMENTS
I
THE COURT OF APPEALS ACTED IN GRAVE ABUSE OF ITS DISCRETION IN MAKING A FACTUAL FINDING THAT PRIVATE RESPONDENT
ISHWAR REMITTED THE AMOUNT OF US $150,000.00 TO PETITIONER CHOITHRAM IN THE ABSENCE OF PROOF OF SUCH REMITTANCE.
II
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION AND MANIFEST PARTIALITY IN DISREGARDING THE TRIAL COURTS
FINDINGS BASED ON THE DIRECT DOCUMENTARY AND TESTIMONIAL EVIDENCE PRESENTED BY CHOITHRAM IN THE TRIAL COURT
ESTABLISHING THAT THE PROPERTIES WERE PURCHASED WITH PERSONAL FUNDS OF PETITIONER CHOITHRAM AND NOT WITH MONEY
ALLEGEDLY REMITTED BY RESPONDENT ISHWAR.
III
THE COURT OF APPEALS ACTED IN EXCESS OF JURISDICTION IN AWARDING DAMAGES BASED ON THE VALUE OF THE PROPERTIES AND
THE FRUITS OF THE IMPROVEMENTS THEREON.
9

Similarly, spouses Ishwar filed a petition for review of said amended decision of the appellate court exculpating Ortigas of liability based on the following assigned
errors
I
THE RESPONDENT HONORABLE COURT OF APPEALS COMMITTED GRAVE ERROR AND HAS DECIDED A QUESTION OF SUBSTANCE NOT
IN ACCORD WITH LAW AND/OR WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT
A) IN PROMULGATING THE QUESTIONED AMENDED DECISION (ANNEX "A") RELIEVING RESPONDENT ORTIGAS FROM LIABILITY
AND DISMISSING PETITIONERS' AMENDED COMPLAINT IN CIVIL CASE NO. 534-P, AS AGAINST SAID RESPONDENT ORTIGAS;
B) IN HOLDING IN SAID AMENDED DECISION THAT AT ANY RATE NO ONE EVER TESTIFIED THAT ORTIGAS WAS A SUBSCRIBER
TO THE MANILA TIMES PUBLICATION OR THAT ANY OF ITS OFFICERS READ THE NOTICE AS PUBLISHED IN THE MANILA TIMES,
THEREBY ERRONEOUSLY CONCLUDING THAT FOR RESPONDENT ORTIGAS TO BE CONSTRUCTIVELY BOUND BY THE
PUBLISHED NOTICE OF REVOCATION, ORTIGAS AND/OR ANY OF ITS OFFICERS MUST BE A SUBSCRIBER AND/OR THAT ANY OF
ITS OFFICERS SHOULD READ THE NOTICE AS ACTUALLY PUBLISHED;
C) IN HOLDING IN SAID AMENDED DECISION THAT ORTIGAS COULD NOT BE HELD LIABLE JOINTLY AND SEVERALLY WITH THE
DEFENDANTS-APPELLEES CHOITHRAM, MOTI AND NIRMLA RAMNANI, AS ORTIGAS RELIED ON THE WORD OF CHOITHRAM THAT
ALL ALONG HE WAS ACTING FOR AND IN BEHALF OF HIS BROTHER ISHWAR WHEN IT TRANSFERRED THE RIGHTS OF THE
LATTER TO NIRMLA V. RAMNANI;
D) IN IGNORING THE EVIDENCE DULY PRESENTED AND ADMITTED DURING THE TRIAL THAT ORTIGAS WAS PROPERLY NOTIFIED
OF THE NOTICE OF REVOCATION OF THE GENERAL POWER OF ATTORNEY GIVEN TO CHOITHRAM, EVIDENCED BY THE
PUBLICATION IN THE MANILA TIMES ISSUE OF APRIL 2, 1971 (EXH. F) WHICH CONSTITUTES NOTICE TO THE WHOLE WORLD;
THE RECEIPT OF THE NOTICE OF SUCH REVOCATION WHICH WAS SENT TO ORTIGAS ON MAY 22, 1971 BY ATTY. MARIANO P.
MARCOS AND RECEIVED BY ORTIGAS ON MAY 24, 1971 (EXH. G) AND THE FILING OF THE NOTICE WITH THE SECURITIES AND
EXCHANGE COMMISSION ON MARCH 29,1971 (EXH. H);
E) IN DISCARDING ITS FINDINGS CONTAINED IN ITS DECISION OF 14 MARCH 1988 (ANNEX B) THAT ORTIGAS WAS DULY
NOTIFIED OF THE REVOCATION OF THE POWER OF ATTORNEY OF CHOITHRAM, HENCE ORTIGAS ACTED IN BAD FAITH IN
EXECUTING THE DEED OF SALE TO THE PROPERTIES IN QUESTION IN FAVOR OF NIRMLA V. RAMNANI;
F) IN SUSTAINING RESPONDENT ORTIGAS VACUOUS REHASHED ARGUMENTS IN ITS MOTION FOR RECONSIDERATION THAT IT
WOULD NOT GAIN ONE CENTAVO MORE FROM CHOITHRAM FOR THE SALE OF SAID LOTS AND THE SUBSEQUENT TRANSFER

OF THE SAME TO THE MATTER'S DAUGHTER-IN-LAW, AND THAT IT WAS IN GOOD FAITH WHEN IT TRANSFERRED ISHWAR'S
RIGHTS TO THE LOTS IN QUESTION.
II
THE RESPONDENT HONORABLE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDING WHEN IT HELD IN THE QUESTIONED AMENDED DECISION OF 17 NOVEMBER 1988 (ANNEX A) THAT RESPONDENT ORTIGAS
& CO., LTD., IS NOT JOINTLY AND SEVERALLY LIABLE WITH DEFENDANTS-APPELLEES CHOITHRAM, MOTI AND NIRMLA RAMNANI IN SPITE
OF ITS ORIGINAL DECISION OF 14 MARCH 1988 THAT ORTIGAS WAS DULY NOTIFIED OF THE REVOCATION OF THE POWER OF ATTORNEY
OF CHOITHRAM RAMNANI.
10

The center of controversy is the testimony of Ishwar that during the latter part of 1965, he sent the amount of US $150,000.00 to Choithram in two bank drafts of
US$65,000.00 and US$85,000.00 for the purpose of investing the same in real estate in the Philippines. The trial court considered this lone testimony unworthy of
faith and credit. On the other hand, the appellate court found that the trial court misapprehended the facts in complete disregard of the evidence, documentary and
testimonial.
Another crucial issue is the claim of Choithram that because he was then a British citizen, as a temporary arrangement, he arranged the purchase of the properties
in the name of Ishwar who was an American citizen and who was then qualified to purchase property in the Philippines under the then Parity Amendment. The trial
court believed this account but it was debunked by the appellate court.
As to the issue of whether of not spouses Ishwar actually sent US$150,000.00 to Choithram precisely to be used in the real estate business, the trial court made
the following disquisition
After a careful, considered and conscientious examination of the evidence adduced in the case at bar, plaintiff Ishwar Jethmal Ramanani's main
evidence, which centers on the alleged payment by sending through registered mail from New York two (2) US$ drafts of $85,000.00 and $65,000.00 in
the latter part of 1965 (TSN 28 Feb. 1984, p. 10-11). The sending of these moneys were before the execution of that General Power of Attorney, which
was dated in New York, on January 24, 1966. Because of these alleged remittances of US $150,000.00 and the subsequent acquisition of the
properties in question, plaintiffs averred that they constituted a trust in favor of defendant Choithram Jethmal Ramnani. This Court can be in full
agreement if the plaintiffs were only able to prove preponderantly these remittances. The entire record of this case is bereft of even a shred of proof to
that effect. It is completely barren. His uncorroborated testimony that he remitted these amounts in the "later part of 1965" does not engender enough
faith and credence. Inadequacy of details of such remittance on the two (2) US dollar drafts in such big amounts is completely not positive, credible,
probable and entirely not in accord with human experience. This is a classic situation, plaintiffs not exhibiting any commercial document or any
document and/or paper as regard to these alleged remittances. Plaintiff Ishwar Ramnani is not an ordinary businessman in the strict sense of the word.
Remember his main business is based in New York, and he should know better how to send these alleged remittances. Worst, plaintiffs did not present
even a scum of proof, that defendant Choithram Ramnani received the alleged two US dollar drafts. Significantly, he does not know even the bank
where these two (2) US dollar drafts were purchased. Indeed, plaintiff Ishwar Ramnani's lone testimony is unworthy of faith and credit and, therefore,
deserves scant consideration, and since the plaintiffs' theory is built or based on such testimony, their cause of action collapses or falls with it.
Further, the rate of exchange that time in 1966 was P4.00 to $1.00. The alleged two US dollar drafts amounted to $150,000.00 or about P600,000.00.
Assuming the cash price of the two (2) lots was only P530,000.00 (ALTHOUGH he said: "Based on my knowledge I have no evidence," when asked if
he even knows the cash price of the two lots). If he were really the true and bonafide investor and purchaser for profit as he asserted, he could have
paid the price in full in cash directly and obtained the title in his name and not thru "Contracts To Sell" in installments paying interest and thru an
attorney-in fact (TSN of May 2, 1984, pp. 10-11) and, again, plaintiff Ishwar Ramnani told this Court that he does not know whether or not his late
father-in-law borrowed the two US dollar drafts from the Swiss Bank or whether or not his late father-in-law had any debit memo from the Swiss
Bank (TSN of May 2, 1984, pp. 9-10).
11

On the other hand, the appellate court, in giving credence to the version of Ishwar, had this to say
While it is true, that generally the findings of fact of the trial court are binding upon the appellate courts, said rule admits of exceptions such as when (1)
the conclusion is a finding grounded entirely on speculations, surmises and conjectures; (2) when the inferences made is manifestly mistaken, absurd
and impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts and when the court, in
making its findings, went beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee (Ramos vs. Court
of Appeals, 63 SCRA 33; Philippine American Life Assurance Co. vs. Santamaria, 31 SCRA 798; Aldaba vs. Court of Appeals, 24 SCRA 189).
The evidence on record shows that the t court acted under a misapprehension of facts and the inferences made on the evidence palpably a mistake.
The trial court's observation that "the entire records of the case is bereft of even a shred of proof" that plaintiff-appellants have remitted to defendantappellee Choithram Ramnani the amount of US $ 150,000.00 for investment in real estate in the Philippines, is not borne by the evidence on record and
shows the trial court's misapprehension of the facts if not a complete disregard of the evidence, both documentary and testimonial.
Plaintiff-appellant Ishwar Jethmal Ramnani testifying in his own behalf, declared that during the latter part of 1965, he sent the amount of US
$150,000.00 to his brother Choithram in two bank drafts of US $65,000.00 and US $85,000.00 for the purpose of investing the same in real estate in the
Philippines. His testimony is as follows:
ATTY. MARAPAO:
Mr. Witness, you said that your attorney-in-fact paid in your behalf. Can you tell this Honorable Court where your attorney-in-fact got the
money to pay this property?
ATTY. CRUZ:
Wait. It is now clear it becomes incompetent or hearsay.

COURT:
Witness can answer.
A I paid through my attorney-in-fact. I am the one who gave him the money.
ATTY. MARAPAO:
Q You gave him the money?
A That's right.
Q How much money did you give him?
A US $ 150,000.00.
Q How was it given then?
A Through Bank drafts. US $65,000.00 and US $85,000.00 bank drafts. The total amount which is $ 150,000.00 (TSN, 28 February 1984, p.
10; Emphasis supplied.)
xxx

xxx

xxx

ATTY. CRUZ:
Q The two bank drafts which you sent I assume you bought that from some banks in New York?
A No, sir.
Q But there is no question those two bank drafts were for the purpose of paying down payment and installment of the two parcels of land?
A Down payment, installment and to put up the building.
Q I thought you said that the buildings were constructed . . . subject to our continuing objection from rentals of first building?
ATTY. MARAPAO:
Your Honor, that is misleading.
COURT;
Witness (may) answer.
A Yes, the first building was immediately put up after the purchase of the two parcels of land that was in 1966 and the finds were used for the
construction of the building from the US $150,000.00 (TSN, 7 March 1984, page 14; Emphasis supplied.)
xxx

xxx

xxx

Q These two bank drafts which you mentioned and the use for it you sent them by registered mail, did you send them from New Your?
A That is right.
Q And the two bank drafts which were put in the registered mail, the registered mail was addressed to whom?
A Choithram Ramnani. (TSN, 7 March 1984, pp. 14-15).
On cross-examination, the witness reiterated the remittance of the money to his brother Choithram, which was sent to him by his father-in-law,
Rochiram L. Mulchandoni from Switzerland, a man of immense wealth, which even defendants-appellees' witness Navalrai Ramnani admits to be so
(tsn., p. 16, S. Oct. 13, 1985). Thus, on cross-examination, Ishwar testified as follows:
Q How did you receive these two bank drafts from the bank the name of which you cannot remember?
A I got it from my father-in-law.

Q From where did your father- in-law sent these two bank drafts?
A From Switzerland.
Q He was in Switzerland.
A Probably, they sent out these two drafts from Switzerland.
(TSN, 7 March 1984, pp. 16-17; Emphasis supplied.)
This positive and affirmative testimony of plaintiff-appellant that he sent the two (2) bank drafts totalling US $ 150,000.00 to his brother, is proof of said
remittance. Such positive testimony has greater probative force than defendant-appellee's denial of receipt of said bank drafts, for a witness who
testifies affirmatively that something did happen should be believed for it is unlikely that a witness will remember what never happened (Underhill's Cr.
Guidance, 5th Ed., Vol. 1, pp. 10-11).
That is not all. Shortly thereafter, plaintiff-appellant Ishwar Ramnani executed a General Power of Attorney (Exhibit "A") dated January 24, 1966
appointing his brothers, defendants-appellees Navalrai and Choithram as attorney-in-fact empowering the latter to conduct and manage plaintiffsappellants' business affairs in the Philippines and specifically
No. 14. To acquire, purchase for us, real estates and improvements for the purpose of real estate business anywhere in the Philippines and
to develop, subdivide, improve and to resell to buying public (individual, firm or corporation); to enter in any contract of sale in oar behalf and
to enter mortgages between the vendees and the herein grantors that may be needed to finance the real estate business being undertaken.
Pursuant thereto, on February 1, 1966 and May 16, 1966, Choithram Jethmal Ramnani entered into Agreements (Exhibits "B' and "C") with the other
defendant. Ortigas and Company, Ltd., for the purchase of two (2) parcels of land situated at Barrio Ugong, Pasig, Rizal, with said defendant-appellee
signing the Agreements in his capacity as Attorney-in-fact of Ishwar Jethmal Ramnani.
Again, on January 5, 1972, almost seven (7) years after Ishwar sent the US $ 150,000.00 in 1965, Choithram Ramnani, as attorney-in fact of Ishwar
entered into a Contract of Lease with Sigma-Mariwasa (Exhibit "P") thereby re-affirming the ownership of Ishwar over the disputed property and the
trust relationship between the latter as principal and Choithram as attorney-in-fact of Ishwar.
All of these facts indicate that if plaintiff-appellant Ishwar had not earlier sent the US $ 150,000.00 to his brother, Choithram, there would be no purpose
for him to execute a power of attorney appointing his brothers as s attorney-in-fact in buying real estate in the Philippines.
As against Choithram's denial that he did not receive the US $150,000.00 remitted by Ishwar and that the Power of Attorney, as well as the Agreements
entered into with Ortigas & Co., were only temporary arrangements, Ishwar's testimony that he did send the bank drafts to Choithram and was received
by the latter, is the more credible version since it is natural, reasonable and probable. It is in accord with the common experience, knowledge and
observation of ordinary men (Gardner vs. Wentors 18 Iowa 533). And in determining where the superior weight of the evidence on the issues involved
lies, the court may consider the probability or improbability of the testimony of the witness (Sec. 1, Rule 133, Rules of Court).
Contrary, therefore, to the trial court's sweeping observation that 'the entire records of the case is bereft of even a shred of proof that Choithram
received the alleged bank drafts amounting to US $ 150,000.00, we have not only testimonial evidence but also documentary and circumstantial
evidence proving said remittance of the money and the fiduciary relationship between the former and Ishwar.
12

The Court agrees. The environmental circumstances of this case buttress the claim of Ishwar that he did entrust the amount of US $ 150,000.00 to his brother,
Choithram, which the latter invested in the real property business subject of this litigation in his capacity as attorney-in-fact of Ishwar.
True it is that there is no receipt whatever in the possession of Ishwar to evidence the same, but it is not unusual among brothers and close family members to
entrust money and valuables to each other without any formalities or receipt due to the special relationship of trust between them.
And another proof thereof is the fact that Ishwar, out of frustration when Choithram failed to account for the realty business despite his demands, revoked the
general power of attorney he extended to Choithram and Navalrai. Thereafter, Choithram wrote a letter to Ishwar pleading that the power of attorney be renewed
or another authority to the same effect be extended, which reads as follows:
June 25,1971
MR. ISHWAR JETHMAL
NEW YORK
(1) Send power of Atty. immediately, because the case has been postponed for two weeks. The same way as it has been send before in
favor of both names. Send it immediately otherwise everything will be lost unnecessarily, and then it will take us in litigation. Now that we
have gone ahead with a case and would like to end it immediately otherwise squatters will take the entire land. Therefore, send it
immediately.
(2) Ortigas also has sued us because we are holding the installments, because they have refused to give a rebate of P5.00 per meter which
they have to give us as per contract. They have filed the law suit that since we have not paid the installment they should get back the land.
The hearing of this case is in the month of July. Therefore, please send the power immediately. In one case DADA (Elder Brother) will
represent and in another one, I shall.

(3) In case if you do not want to give power then make one letter in favor of Dada and the other one in my favor showing that in any litigation
we can represent you and your wife, and whatever the court decide it will be acceptable by me. You can ask any lawyer, he will be able to
prepare these letters. After that you can have these letters ratify before P.I. Consulate. It should be dated April 15, 1971.
(4) Try to send the power because it will be more useful. Make it in any manner whatever way you have confident in it. But please send it
immediately.
You have cancelled the power. Therefore, you have lost your reputation everywhere. What can I further write you about it. I have told everybody that due to certain
reasons I have written you to do this that is why you have done this. This way your reputation have been kept intact. Otherwise if I want to do something about it, I
can show you that inspite of the power you have cancelled you can not do anything. You can keep this letter because my conscience is clear. I do not have
anything in my mind.
I should not be writing you this, but because my conscience is clear do you know that if I had predated papers what could you have done? Or do you know that I
have many paper signed by you and if had done anything or do then what can you do about it? It is not necessary to write further about this. It does not matter if
you have cancelled the power. At that time if I had predated and done something about it what could you have done? You do not know me. I am not after money. I
can earn money anytime. It has been ten months since I have not received a single penny for expenses from Dada (elder brother). Why there are no expenses?
We can not draw a single penny from knitting (factory). Well I am not going to write you further, nor there is any need for it. This much I am writing you because of
the way you have conducted yourself. But remember, whenever I hale the money I will not keep it myself Right now I have not got anything at all.
I am not going to write any further.
Keep your business clean with Naru. Otherwise he will discontinue because he likes to keep his business very clean.

13

The said letter was in Sindhi language. It was translated to English by the First Secretary of the Embassy of Pakistan, which translation was verified correct by the
Chairman, Department of Sindhi, University of Karachi.
14

From the foregoing letter what could be gleaned is that


1. Choithram asked for the issuance of another power of attorney in their favor so they can continue to represent Ishwar as Ortigas has sued them for
unpaid installments. It also appears therefrom that Ortigas learned of the revocation of the power of attorney so the request to issue another.
2. Choithram reassured Ishwar to have confidence in him as he was not after money, and that he was not interested in Ishwar's money.
3. To demonstrate that he can be relied upon, he said that he could have ante-dated the sales agreement of the Ortigas lots before the issuance of the
powers of attorney and acquired the same in his name, if he wanted to, but he did not do so.
4. He said he had not received a single penny for expenses from Dada (their elder brother Navalrai). Thus, confirming that if he was not given money by
Ishwar to buy the Ortigas lots, he could not have consummated the sale.
5. It is important to note that in said letter Choithram never claimed ownership of the property in question. He affirmed the fact that he bought the same
as mere agent and in behalf of Ishwar. Neither did he mention the alleged temporary arrangement whereby Ishwar, being an American citizen, shall
appear to be the buyer of the said property, but that after Choithram acquires Philippine citizenship, its ownership shall be transferred to Choithram.
This brings us to this temporary arrangement theory of Choithram.
The appellate court disposed of this matter in this wise
Choithram's claim that he purchased the two parcels of land for himself in 1966 but placed it in the name of his younger brother, Ishwar, who is an
American citizen, as a temporary arrangement,' because as a British subject he is disqualified under the 1935 Constitution to acquire real property in
the Philippines, which is not so with respect to American citizens in view of the Ordinance Appended to the Constitution granting them parity
rights, there is nothing in the records showing that Ishwar ever agreed to such a temporary arrangement.
During the entire period from 1965, when the US $ 150,000. 00 was transmitted to Choithram, and until Ishwar filed a complaint against him in 1982, or
over 16 years, Choithram never mentioned of a temporary arrangement nor can he present any memorandum or writing evidencing such temporary
arrangement, prompting plaintiff-appellant to observe:
The properties in question which are located in a prime industrial site in Ugong, Pasig, Metro Manila have a present fair market value of no
less than P22,364,000.00 (Exhibits T to T-14, inclusive), and yet for such valuable pieces of property, Choithram who now belatedly that he
purchased the same for himself did not document in writing or in a memorandum the alleged temporary arrangement with Ishwar' (pp. 4-41,
Appellant's Brief).
Such verbal allegation of a temporary arrangement is simply improbable and inconsistent. It has repeatedly been held that important contracts made
without evidence are highly improbable.
The improbability of such temporary arrangement is brought to fore when we consider that Choithram has a son (Haresh Jethmal Ramnani) who is an
American citizen under whose name the properties in question could be registered, both during the time the contracts to sell were executed and at the
time absolute title over the same was to be delivered. At the time the Agreements were entered into with defendant Ortigas & Co. in 1966, Haresh, was
already 18 years old and consequently, Choithram could have executed the deeds in trust for his minor son. But, he did not do this. Three (3) years,
thereafter, or in 1968 after Haresh had attained the age of 21, Choithram should have terminated the temporary arrangement with Ishwar, which
according to him would be effective only pending the acquisition of citizenship papers. Again, he did not do anything.

Evidence to be believed, said Vice Chancellor Van Fleet of New Jersey, must not only proceed from the mouth of a credible witness, but it
must be credible in itselfsuch as the common experience and observation of mankind can approve as probable under the circumstances.
We have no test of the truth of human testimony, except its conformity to our knowledge, observation and experience. Whatever is repugnant
to these belongs to the miraculous and is outside of judicial cognizance. (Daggers vs. Van Dyek 37 M.J. Eq. 130, 132).
Another factor that can be counted against the temporary arrangement excuse is that upon the revocation on February 4, 1971 of the Power of attorney
dated January 24, 1966 in favor of Navalrai and Choithram by Ishwar, Choithram wrote (tsn, p. 21, S. July 19, 1985) a letter dated June 25, 1971
(Exhibits R, R-1, R-2 and R-3) imploring Ishwar to execute a new power of attorney in their favor. That if he did not want to give power, then Ishwar
could make a letter in favor of Dada and another in his favor so that in any litigation involving the properties in question, both of them could represent
Ishwar and his wife. Choithram tried to convince Ishwar to issue the power of attorney in whatever manner he may want. In said letter no mention was
made at all of any temporary arrangement.
On the contrary, said letter recognize(s) the existence of principal and attorney-in-fact relationship between Ishwar and himself. Choithram wrote: . . . do
you know that if I had predated papers what could you have done? Or do you know that I have many papers signed by you and if I had done anything
or do then what can you do about it?' Choithram was saying that he could have repudiated the trust and ran away with the properties of Ishwar by
predating documents and Ishwar would be entirely helpless. He was bitter as a result of Ishwar's revocation of the power of attorney but no mention
was made of any temporary arrangement or a claim of ownership over the properties in question nor was he able to present any memorandum or
document to prove the existence of such temporary arrangement.
Choithram is also estopped in pais or by deed from claiming an interest over the properties in question adverse to that of Ishwar. Section 3(a) of Rule
131 of the Rules of Court states that whenever a party has, by his own declaration, act, or omission intentionally and deliberately led another to believe
a particular thing true and act upon such belief, he cannot in any litigation arising out of such declaration, act or omission be permitted to falsify it.' While
estoppel by deed is a bar which precludes a party to a deed and his privies from asserting as against the other and his privies any right of title in
derogation of the deed, orfrom denying the truth of any material fact asserted in it (31 C.J.S. 195; 19 Am. Jur. 603).
Thus, defendants-appellees are not permitted to repudiate their admissions and representations or to assert any right or title in derogation of the deeds
or from denying the truth of any material fact asserted in the (1) power of attorney dated January 24, 1966 (Exhibit A); (2) the Agreements of February
1, 1966 and May 16, 1966 (Exhibits B and C); and (3) the Contract of Lease dated January 5, 1972 (Exhibit P).
. . . The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its purpose is to forbid one to
speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been applied by court wherever and whenever special
circumstances of a case so demands' (Philippine National Bank vs. Court of Appeals, 94 SCRA 357, 368 [1979]).
It was only after the services of counsel has been obtained that Choithram alleged for the first time in his Answer that the General Power of attorney
(Annex A) with the Contracts to Sell (Annexes B and C) were made only for the sole purpose of assuring defendants' acquisition and ownership of the
lots described thereon in due time under the law; that said instruments do not reflect the true intention of the parties (par. 2, Answer dated May 30,
1983), seventeen (17) long years from the time he received the money transmitted to him by his brother, Ishwar.
Moreover, Choithram's 'temporary arrangement,' by which he claimed purchasing the two (2) parcels in question in 1966 and placing them in the name
of Ishwar who is an American citizen, to circumvent the disqualification provision of aliens acquiring real properties in the Philippines under the 1935
Philippine Constitution, as Choithram was then a British subject, show a palpable disregard of the law of the land and to sustain the supposed
"temporary arrangement" with Ishwar would be sanctioning the perpetration of an illegal act and culpable violation of the Constitution.
Defendants-appellees likewise violated the Anti-Dummy Law (Commonwealth Act 108, as amended), which provides in Section 1 thereof that:
In all cases in which any constitutional or legal provision requires Philippine or any other specific citizenship as a requisite for the exercise or
enjoyment of a right, franchise or privilege, . . . any alien or foreigner profiting thereby, shall be punished . . . by imprisonment . . . and of a
fine of not less than the value of the right, franchise or privileges, which is enjoyed or acquired in violation of the provisions hereof . . .
Having come to court with unclean hands, Choithram must not be permitted foist his 'temporary arrangement' scheme as a defense before this court.
Being in delicto, he does not have any right whatsoever being shielded from his own wrong-doing, which is not so with respect to Ishwar, who was not a
party to such an arrangement.
The falsity of Choithram's defense is further aggravated by the material inconsistencies and contradictions in his testimony. While on January 23, 1985
he testified that he purchased the land in question on his own behalf (tsn, p. 4, S. Jan. 23, 1985), in the July 18, 1985 hearing, forgetting probably what
he stated before, Choithram testified that he was only an attorney-in-fact of Ishwar (tsn, p. 5, S. July 18, 1985). Also in the hearing of January 23, 1985,
Choithram declared that nobody rented the building that was constructed on the parcels of land in question (tsn, pp. 5 and 6), only to admit in the
hearing of October 30, 1985, that he was in fact renting the building for P12,000. 00 per annum (tsn, p. 3). Again, in the hearing of July 19, 1985,
Choithram testified that he had no knowledge of the revocation of the Power of Attorney (tsn, pp. 20- 21), only to backtrack when confronted with the
letter of June 25, 1971 (Exhibits R to R-3), which he admitted to be in "his own writing," indicating knowledge of the revocation of the Power of Attorney.
These inconsistencies are not minor but go into the entire credibility of the testimony of Choithram and the rule is that contradictions on a very crucial
point by a witness, renders s testimony incredible People vs. Rafallo, 80 Phil. 22). Not only this the doctrine of falsus in uno, falsus in omnibus is fully
applicable as far as the testimony of Choithram is concerned. The cardinal rule, which has served in all ages, and has been applied to all conditions of
men, is that a witness willfully falsifying the truth in one particular, when upon oath, ought never to be believed upon the strength of his own testimony,
whatever he may assert (U.S. vs. Osgood 27 Feb. Case No. 15971-a, p. 364); Gonzales vs. Mauricio, 52 Phil, 728), for what ground of judicial relief can
there be left when the party has shown such gross insensibility to the difference between right and wrong, between truth and falsehood? (The Santisima
Trinidad, 7 Wheat, 283, 5 U.S. [L. ed.] 454).
True, that Choithram's testimony finds corroboration from the testimony of his brother, Navalrai, but the same would not be of much help to Choithram.
Not only is Navalrai an interested and biased witness, having admitted his close relationship with Choithram and that whenever he or Choithram had
problems, they ran to each other (tsn, pp. 17-18, S. Sept. 20, 1985), Navalrai has a pecuniary interest in the success of Choithram in the case in
question. Both he and Choithram are business partners in Jethmal and Sons and/or Jethmal Industries, wherein he owns 60% of the company and

Choithram, 40% (p. 62, Appellant's Brief). Since the acquisition of the properties in question in 1966, Navalrai was occupying 1,200 square meters
thereof as a factory site plus the fact that his son (Navalrais) was occupying the apartment on top of the factory with his family rent free except the
amount of P l,000.00 a month to pay for taxes on said properties (tsn, p. 17, S. Oct. 3, 1985).
Inherent contradictions also marked Navalrai testimony. "While the latter was very meticulous in keeping a receipt for the P 10,000.00 that he paid
Ishwar as settlement in Jethmal Industries, yet in the alleged payment of P 100,000.00 to Ishwar, no receipt or voucher was ever issued by him (tsn, p.
17, S. Oct. 3, 1983).
15

We concur.
The foregoing findings of facts of the Court of Appeals which are supported by the evidence is conclusive on this Court. The Court finds that Ishwar entrusted
US$150,000.00 to Choithram in 1965 for investment in the realty business. Soon thereafter, a general power of attorney was executed by Ishwar in favor of both
Navalrai and Choithram. If it is true that the purpose only is to enable Choithram to purchase realty temporarily in the name of Ishwar, why the inclusion of their
elder brother Navalrai as an attorney-in-fact?
Then, acting as attorney-in-fact of Ishwar, Choithram purchased two parcels of land located in Barrio Ugong Pasig, Rizal, from Ortigas in 1966. With the balance of
the money of Ishwar, Choithram erected a building on said lot. Subsequently, with a loan obtained from a bank and the income of the said property, Choithram
constructed three other buildings thereon. He managed the business and collected the rentals. Due to their relationship of confidence it was only in 1970 when
Ishwar demanded for an accounting from Choithram. And even as Ishwar revoked the general power of attorney on February 4, 1971, of which Choithram was
duly notified, Choithram wrote to Ishwar on June 25, 1971 requesting that he execute a new power of attorney in their favor. When Ishwar did not respond
thereto, Choithram nevertheless proceeded as such attorney-in-fact to assign all the rights and interest of Ishwar to his daughter-in-law Nirmla in 1973 without the
knowledge and consent of Ishwar. Ortigas in turn executed the corresponding deeds of sale in favor of Nirmla after full payment of the purchase accomplice of the
lots.
16

In the prefatory statement of their petition, Choithram pictured Ishwar to be so motivated by greed and ungratefulness, who squandered the family business in New
York, who had to turn to his wife for support, accustomed to living in ostentation and who resorted to blackmail in filing several criminal and civil suits against them.
These statements find no support and should be stricken from the records. Indeed, they are irrelevant to the proceeding.
Moreover, assuming Ishwar is of such a low character as Choithram proposes to make this Court to believe, why is it that of all persons, under his temporary
arrangement theory, Choithram opted to entrust the purchase of valuable real estate and built four buildings thereon all in the name of Ishwar? Is it not an
unconscious emergence of the truth that this otherwise wayward brother of theirs was on the contrary able to raise enough capital through the generosity of his
father-in-law for the purchase of the very properties in question? As the appellate court aptly observed if truly this temporary arrangement story is the only
motivation, why Ishwar of all people? Why not the own son of Choithram, Haresh who is also an American citizen and who was already 18 years old at the time of
purchase in 1966? The Court agrees with the observation that this theory is an afterthought which surfaced only when Choithram, Nirmla and Moti filed their
answer.
When Ishwar asked for an accounting in 1970 and revoked the general power of attorney in 1971, Choithram had a total change of heart. He decided to claim the
property as his. He caused the transfer of the rights and interest of Ishwar to Nirmla. On his representation, Ortigas executed the deeds of sale of the properties in
favor of Nirmla. Choithram obviously surmised Ishwar cannot stake a valid claim over the property by so doing.
Clearly, this transfer to Nirmla is fictitious and, as admitted by Choithram, was intended only to place the property in her name until Choithram acquires Philippine
citizenship. What appears certain is that it appears to be a scheme of Choithram to place the property beyond the reach of Ishwar should he successfully claim
the same. Thus, it must be struck down.
17

Worse still, on September 27, 1990 spouses Ishwar filed an urgent motion for the issuance of a writ of preliminary attachment and to require Choithram, et al. to
submit certain documents, inviting the attention of this Court to the following:
a) Donation by Choithram of his 2,500 shares of stock in General Garments Corporation in favor of his children on December 29, 1989;

18

b) Sale on August 2, 1990 by Choithram of his 100 shares in Biflex (Phils.), Inc., in favor of his children; and
19

c) Mortgage on June 20, 1989 by Nirmla through her attorney-in-fact, Choithram, of the properties subject of this litigation, for the amount of $3 Million in
favor of Overseas Holding, Co. Ltd., (Overseas for brevity), a corporation which appears to be organized and existing under and by virtue of the laws of
Cayman Islands, with a capital of only $100.00 divided into 100 shares of $1.00 each, and with address at P.O. Box 1790, Grand Cayman, Cayman
Islands.
20

An opposition thereto was filed by Choithram, et al. but no documents were produced. A manifestation and reply to the opposition was filed by spouses Ishwar.
All these acts of Choithram, et al. appear to be fraudulent attempts to remove these properties to the detriment of spouses Ishwar should the latter prevail in this
litigation.
On December 10, 1990 the court issued a resolution that substantially reads as follows:
Considering the allegations of petitioners Ishwar Jethmal Ramnani and Sonya Ramnani that respondents Choithram Jethmal Ramnani, Nirmla Ramnani
and Moti G. Ramnani have fraudulently executed a simulated mortgage of the properties subject of this litigation dated June 20, 1989, in favor of
Overseas Holding Co., Ltd. which appears to be a corporation organized in Cayman Islands, for the amount of $ 3,000,000.00, which is much more
than the value of the properties in litigation; that said alleged mortgagee appears to be a "shell" corporation with a capital of only $100.00; and that this
alleged transaction appears to be intended to defraud petitioners Ishwar and Sonya Jethmal Ramnani of any favorable judgment that this Court may
render in this case;
Wherefore the Court Resolved to issue a writ of preliminary injunction enjoining and prohibiting said respondents Choithram Jethmal Ramnani, Nirmla
V. Ramnani, Moti G. Ramnani and the Overseas Holding Co., Ltd. from encumbering, selling or otherwise disposing of the properties and improvements
subject of this litigation until further orders of the Court. Petitioners Ishwar and Sonya Jethmal Ramnani are hereby required to post a bond of P

100,000.00 to answer for any damages d respondents may suffer by way of this injunction if the Court finally decides the said petitioners are not entitled
thereto.
The Overseas Holding Co., Ltd. with address at P.O. Box 1790 Grand Cayman, Cayman Islands, is hereby IMPLEADED as a respondent in these
cases, and is hereby required to SUBMIT its comment on the Urgent Motion for the Issuance of a Writ of Preliminary Attachment and Motion for
Production of Documents, the Manifestation and the Reply to the Opposition filed by said petitioners, within Sixty (60) days after service by publication
on it in accordance with the provisions of Section 17, Rule 14 of the Rules of Court, at the expense of petitioners Ishwar and Sonya Jethmal Ramnani.
Let copies of this resolution be served on the Register of Deeds of Pasig, Rizal, and the Provincial Assessor of Pasig, Rizal, both in Metro Manila, for its
annotation on the transfer Certificates of Titles Nos. 403150 and 403152 registered in the name of respondent Nirmla V. Ramnani, and on the tax
declarations of the said properties and its improvements subject of this litigation.
21

The required injunction bond in the amount of P 100,000.00 was filed by the spouses Ishwar which was approved by the Court. The above resolution of the Court
was published in the Manila Bulletin issue of December 17, 1990 at the expense of said spouses. On December 19, 1990 the said resolution and petition for
review with annexes in G.R. Nos. 85494 and 85496 were transmitted to respondent Overseas, Grand Cayman Islands at its address c/o Cayman Overseas Trust
Co. Ltd., through the United Parcel Services Bill of Lading and it was actually delivered to said company on January 23, 1991.
22

23

24

On January 22, 1991, Choithram, et al., filed a motion to dissolve the writ of preliminary injunction alleging that there is no basis therefor as in the amended
complaint what is sought is actual damages and not a reconveyance of the property, that there is no reason for its issuance, and that acts already executed cannot
be enjoined. They also offered to file a counterbond to dissolve the writ.
A comment/opposition thereto was filed by spouses Ishwar that there is basis for the injunction as the alleged mortgage of the property is simulated and the other
donations of the shares of Choithram to his children are fraudulent schemes to negate any judgment the Court may render for petitioners.
No comment or answer was filed by Overseas despite due notice, thus it is and must be considered to be in default and to have lost the right to contest the
representations of spouses Ishwar to declare the aforesaid alleged mortgage nun and void.
This purported mortgage of the subject properties in litigation appears to be fraudulent and simulated. The stated amount of $3 Million for which it was mortgaged
is much more than the value of the mortgaged properties and its improvements. The alleged mortgagee-company (Overseas) was organized only on June 26,1989
but the mortgage was executed much earlier, on June 20, 1989, that is six (6) days before Overseas was organized. Overseas is a "shelf" company worth only
$100.00. In the manifestation of spouses Ishwar dated April 1, 1991, the Court was informed that this matter was brought to the attention of the Central Bank
(CB) for investigation, and that in a letter of March 20, 1991, the CB informed counsel for spouses Ishwar that said alleged foreign loan of Choithram, et al. from
Overseas has not been previously approved/registered with the CB.
25

26

Obviously, this is another ploy of Choithram, et al. to place these properties beyond the reach of spouses Ishwar should they obtain a favorable judgment in this
case. The Court finds and so declares that this alleged mortgage should be as it is hereby declared null and void.
All these contemporaneous and subsequent acts of Choithram, et al., betray the weakness of their cause so they had to take an steps, even as the case was
already pending in Court, to render ineffective any judgment that may be rendered against them.
The problem is compounded in that respondent Ortigas is caught in the web of this bitter fight. It had all the time been dealing with Choithram as attorney-in-fact of
Ishwar. However, evidence had been adduced that notice in writing had been served not only on Choithram, but also on Ortigas, of the revocation of Choithram's
power of attorney by Ishwar's lawyer, on May 24, 1971. A publication of said notice was made in the April 2, 1971 issue of The Manila Times for the information
of the general public. Such notice of revocation in a newspaper of general circulation is sufficient warning to third persons including Ortigas. A notice of
revocation was also registered with the Securities and Exchange Commission on March 29, 1 971.
27

28

29

30

Indeed in the letter of Choithram to Ishwar of June 25, 1971, Choithram was pleading that Ishwar execute another power of attorney to be shown to Ortigas who
apparently learned of the revocation of Choithram's power of attorney. Despite said notices, Ortigas nevertheless acceded to the representation of Choithram, as
alleged attorney-in-fact of Ishwar, to assign the rights of petitioner Ishwar to Nirmla. While the primary blame should be laid at the doorstep of Choithram, Ortigas is
not entirely without fault. It should have required Choithram to secure another power of attorney from Ishwar. For recklessly believing the pretension of Choithram
that his power of attorney was still good, it must, therefore, share in the latter's liability to Ishwar.
31

In the original complaint, the spouses Ishwar asked for a reconveyance of the properties and/or payment of its present value and damages. In the amended
complaint they asked, among others, for actual damages of not less than the present value of the real properties in litigation, moral and exemplary damages,
attorneys fees, costs of the suit and further prayed for "such other reliefs as may be deemed just and equitable in the premises . The amended complaint contain
the following positive allegations:
32

33

7. Defendant Choithram Ramnani, in evident bad faith and despite due notice of the revocation of the General Power of Attorney, Annex 'D" hereof,
caused the transfer of the rights over the said parcels of land to his daughter-in-law, defendant Nirmla Ramnani in connivance with defendant Ortigas &
Co., the latter having agreed to the said transfer despite receiving a letter from plaintiffs' lawyer informing them of the said revocation; copy of the letter
is hereto attached and made an integral part hereof as Annex "H";
8. Defendant Nirmla Ramnani having acquired the aforesaid property by fraud is, by force of law, considered a trustee of an implied trust for the benefit
of plaintiff and is obliged to return the same to the latter:
9. Several efforts were made to settle the matter within the family but defendants (Choithram Ramnani, Nirmla Ramnani and Moti Ramnani) refused and
up to now fail and still refuse to cooperate and respond to the same; thus, the present case;
10. In addition to having been deprived of their rights over the properties (described in par. 3 hereof), plaintiffs, by reason of defendants' fraudulent act,
suffered actual damages by way of lost rental on the property which defendants (Choithram Ramnani, Nirmla Ramnani and Moti Ramnani have
collected for themselves;
34

In said amended complaint, spouses Ishwar, among others, pray for payment of actual damages in an amount no less than the value of the properties in litigation
instead of a reconveyance as sought in the original complaint. Apparently they opted not to insist on a reconveyance as they are American citizens as alleged in
the amended complaint.
The allegations of the amended complaint above reproduced clearly spelled out that the transfer of the property to Nirmla was fraudulent and that it should be
considered to be held in trust by Nirmla for spouses Ishwar. As above-discussed, this allegation is well-taken and the transfer of the property to Nirmla should be
considered to have created an implied trust by Nirmla as trustee of the property for the benefit of spouses Ishwar.
35

The motion to dissolve the writ of preliminary injunction filed by Choithram, et al. should be denied. Its issuance by this Court is proper and warranted under the
circumstances of the case. Under Section 3(c) Rule 58 of the Rules of Court, a writ of preliminary injunction may be granted at any time after commencement of
the action and before judgment when it is established:
(c) that the defendant is doing, threatens, or is about to do, or is procuring or suffering to be done, some act probably in violation of plaintiffs's rights
respecting the subject of the action, and tending to render the judgment ineffectual.
As above extensively discussed, Choithram, et al. have committed and threaten to commit further acts of disposition of the properties in litigation as well as the
other assets of Choithram, apparently designed to render ineffective any judgment the Court may render favorable to spouses Ishwar.
The purpose of the provisional remedy of preliminary injunction is to preserve the status quo of the things subject of the litigation and to protect the rights of the
spouses Ishwar respecting the subject of the action during the pendency of the Suit and not to obstruct the administration of justice or prejudice the adverse
party. In this case for damages, should Choithram, et al. continue to commit acts of disposition of the properties subject of the litigation, an award of damages to
spouses Ishwar would thereby be rendered ineffectual and meaningless.
36

37

38

Consequently, if only to protect the interest of spouses Ishwar, the Court hereby finds and holds that the motion for the issuance of a writ of preliminary attachment
filed by spouses Ishwar should be granted covering the properties subject of this litigation.
Section 1, Rule 57 of the Rules of Court provides that at the commencement of an action or at any time thereafter, the plaintiff or any proper party may have the
property of the adverse party attached as security for the satisfaction of any judgment that may be recovered, in, among others, the following cases:
(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon which the action is brought, or in
concealing or disposing of the property for the taking, detention or conversion of which the action is brought;
(e) In an action against a party who has removed or disposed of his property, or is about to do so, with intent to defraud his creditors; . . .
Verily, the acts of Choithram, et al. of disposing the properties subject of the litigation disclose a scheme to defraud spouses Ishwar so they may not be able to
recover at all given a judgment in their favor, the requiring the issuance of the writ of attachment in this instance.
Nevertheless, under the peculiar circumstances of this case and despite the fact that Choithram, et al., have committed acts which demonstrate their bad faith and
scheme to defraud spouses Ishwar and Sonya of their rightful share in the properties in litigation, the Court cannot ignore the fact that Choithram must have been
motivated by a strong conviction that as the industrial partner in the acquisition of said assets he has as much claim to said properties as Ishwar, the capitalist
partner in the joint venture.
The scenario is clear. Spouses Ishwar supplied the capital of $150,000.00 for the business. They entrusted the money to Choithram to invest in a profitable
business venture in the Philippines. For this purpose they appointed Choithram as their attorney-in-fact.
1wphi1

Choithram in turn decided to invest in the real estate business. He bought the two (2) parcels of land in question from Ortigas as attorney-in-fact of Ishwar- Instead
of paying for the lots in cash, he paid in installments and used the balance of the capital entrusted to him, plus a loan, to build two buildings. Although the buildings
were burned later, Choithram was able to build two other buildings on the property. He rented them out and collected the rentals. Through the industry and genius
of Choithram, Ishwar's property was developed and improved into what it is nowa valuable asset worth millions of pesos. As of the last estimate in 1985, while
the case was pending before the trial court, the market value of the properties is no less than P22,304,000.00. It should be worth much more today.
39

We have a situation where two brothers engaged in a business venture. One furnished the capital, the other contributed his industry and talent. Justice and equity
dictate that the two share equally the fruit of their joint investment and efforts. Perhaps this Solomonic solution may pave the way towards their reconciliation. Both
would stand to gain. No one would end up the loser. After all, blood is thicker than water.
However, the Court cannot just close its eyes to the devious machinations and schemes that Choithram employed in attempting to dispose of, if not dissipate, the
properties to deprive spouses Ishwar of any possible means to recover any award the Court may grant in their favor. Since Choithram, et al. acted with evident bad
faith and malice, they should pay moral and exemplary damages as well as attorney's fees to spouses Ishwar.
WHEREFORE, the petition in G.R. No. 85494 is DENIED, while the petition in G.R. No. 85496 is hereby given due course and GRANTED. The judgment of the
Court of Appeals dated October 18, 1988 is hereby modified as follows:
1. Dividing equally between respondents spouses Ishwar, on the one hand, and petitioner Choithram Ramnani, on the other, (in G.R. No. 85494) the two parcels of
land subject of this litigation, including all the improvements thereon, presently covered by transfer Certificates of Title Nos. 403150 and 403152 of the Registry of
Deeds, as well as the rental income of the property from 1967 to the present.
2. Petitioner Choithram Jethmal Ramnani, Nirmla V. Ramnani, Moti C. Ramnani and respondent Ortigas and Company, Limited Partnership (in G.R. No. 85496)
are ordered solidarily to pay in cash the value of said one-half (1/2) share in the said land and improvements pertaining to respondents spouses Ishwar and Sonya
at their fair market value at the time of the satisfaction of this judgment but in no case less than their value as appraised by the Asian Appraisal, Inc. in its Appraisal
Report dated August 1985 (Exhibits T to T-14, inclusive).

3. Petitioners Choithram, Nirmla and Moti Ramnani and respondent Ortigas & Co., Ltd. Partnership shall also be jointly and severally liable to pay to said
respondents spouses Ishwar and Sonya Ramnani one-half (1/2) of the total rental income of said properties and improvements from 1967 up to the date of
satisfaction of the judgment to be computed as follows:
a. On Building C occupied by Eppie's Creation and Jethmal Industries from 1967 to 1973, inclusive, based on the 1967 to 1973 monthly
rentals paid by Eppie's Creation;
b. Also on Building C above, occupied by Jethmal Industries and Lavine from 1974 to 1978, the rental incomes based on then rates
prevailing as shown under Exhibit "P"; and from 1979 to 1981, based on then prevailing rates as indicated under Exhibit "Q";
c. On Building A occupied by Transworld Knitting Mills from 1972 to 1978, the rental incomes based upon then prevailing rates shown under
Exhibit "P", and from 1979 to 1981, based on prevailing rates per Exhibit "Q";
d. On the two Bays Buildings occupied by Sigma-Mariwasa from 1972 to 1978, the rentals based on the Lease Contract, Exhibit "P", and
from 1979 to 1980, the rentals based on the Lease Contract, Exhibit "Q".
and thereafter commencing 1982, to account for and turn over the rental incomes paid or ought to be paid for the use and occupancy of the properties and all
improvements totalling 10,048 sq. m., based on the rate per square meter prevailing in 1981 as indicated annually cumulative up to 1984. Then, commencing 1985
and up to the satisfaction of the judgment, rentals shall be computed at ten percent (10%) annually of the fair market values of the properties as appraised by the
Asian Appraisals, Inc. in August 1985. (Exhibits T to T-14, inclusive.)
4. To determine the market value of the properties at the time of the satisfaction of this judgment and the total rental incomes thereof, the trial court is hereby
directed to hold a hearing with deliberate dispatch for this purpose only and to have the judgment immediately executed after such determination.
5. Petitioners Choithram, Nirmla and Moti, all surnamed Ramnani, are also jointly and severally liable to pay respondents Ishwar and Sonya Ramnani the amount
of P500,000.00 as moral damages, P200,000.00 as exemplary damages and attorney's fees equal to 10% of the total award. to said respondents spouses.
6. The motion to dissolve the writ of preliminary injunction dated December 10, 1990 filed by petitioners Choithram, Nirmla and Moti, all surnamed Ramnani, is
hereby DENIED and the said injunction is hereby made permanent. Let a writ of attachment be issued and levied against the properties and improvements subject
of this litigation to secure the payment of the above awards to spouses Ishwar and Sonya.
7. The mortgage constituted on the subject property dated June 20, 1989 by petitioners Choithram and Nirmla, both surnamed Ramnani in favor of respondent
Overseas Holding, Co. Ltd. (in G.R. No. 85496) for the amount of $3-M is hereby declared null and void. The Register of Deeds of Pasig, Rizal, is directed to
cancel the annotation of d mortgage on the titles of the properties in question.
8. Should respondent Ortigas Co., Ltd. Partnership pay the awards to Ishwar and Sonya Ramnani under this judgment, it shall be entitled to reimbursement from
petitioners Choithram, Nirmla and Moti, all surnamed Ramnani.
9. The above awards shag bear legal rate of interest of six percent (6%) per annum from the time this judgment becomes final until they are fully paid by
petitioners Choithram Ramnani, Nirmla V. Ramnani, Moti C. Ramnani and Ortigas, Co., Ltd. Partnership. Said petitioners Choithram, et al. and respondent Ortigas
shall also pay the costs.
SO ORDERED.

SEE - Moran v. CA, G.R. No. L-59956, October 31, 1984

3. Management (Articles 1800-1804)

SEE Tai Tong Chuache & Co. v. Insurance Commission, G.R. No. L-55397, February 29, 1988

4. Accounting of Partnership Affairs (Articles 1805-1809)

SEE Marjorie Tocao, et al. vs. Court of Appeals, et al., G.R. No. 127405, October 4, 2000
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 70926 January 31, 1989
DAN FUE LEUNG, petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT and LEUNG YIU, respondents.
John L. Uy for petitioner.
Edgardo F. Sundiam for private respondent.

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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

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.
Zosa, Zosa, Castillo, Alcudia & Koh for petitioners.
Fidel Manalo and Florido & Associates for 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 (/ 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 (/ 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
C O U N T E R C LAI M
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 Nuez who testified that he is her adopted son, was up for re-crossexamination, 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 petitioners, 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 pretrial, 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 plaintiff 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 possible 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. (Vao 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 choosethe 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 exparte 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. Pea, 80 Phil. 488.)
Defaulting defendant may ask execution if judgment is in his favor. (Castro v. Pea, supra.) (Moran, Rules of Court, Vol. 1, pp. 538-539.)
In Castro vs. Pea, 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 requirement, 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 paradilemma. 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 Nuez 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 Nuez, 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 Nuez, thereby making him
the real party in interest here and, therefore, naturally as biased as herself. Besides, in the portion of the testimony of Nuez 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, Nuez 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. Nio, 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
T R AN S LAT I O N
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.

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 / 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?
In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is entitled to / 3

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 / 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 / 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?
3

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

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."
the controlling interest", / 3

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 Nuez 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 Nuez, 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. Nuez 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 Nuez 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

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 / 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.
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 / 3

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.

B. Property Rights of a Partner (Articles 1810-1814)


Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-31684 June 28, 1973


EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.
Leonardo Abola for petitioners.
Baisas, Alberto & Associates for respondent.

MAKALINTAL, J.:
On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co." On June 7, 1955 the Articles of Co-partnership was amended as to
include herein respondent, Estrella Abad Santos, as industrial partner, with herein petitioners Domingo C. Evangelista, Jr., Leonardo Atienza Abad Santos and
Conchita P. Navarro, the original capitalist partners, remaining in that capacity, with a contribution of P17,500 each. The amended Articles provided, inter alia, that
"the contribution of Estrella Abad Santos consists of her industry being an industrial partner", and that the profits and losses "shall be divided and distributed
among the partners ... in the proportion of 70% for the first three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and Leonardo Atienza Abad Santos to
be divided among them equally; and 30% for the fourth partner Estrella Abad Santos."
On December 17, 1963 herein respondent filed suit against the three other partners in the Court of First Instance of Manila, alleging that the partnership, which
was also made a party-defendant, had been paying dividends to the partners except to her; and that notwithstanding her demands the defendants had refused and
continued to refuse and let her examine the partnership books or to give her information regarding the partnership affairs to pay her any share in the dividends
declared by the partnership. She therefore prayed that the defendants be ordered to render accounting to her of the partnership business and to pay her
corresponding share in the partnership profits after such accounting, plus attorney's fees and costs.
The defendants, in their answer, denied ever having declared dividends or distributed profits of the partnership; denied likewise that the plaintiff ever demanded
that she be allowed to examine the partnership books; and byway of affirmative defense alleged that the amended Articles of 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.

C. Obligations of the Partners with Regard to Third Persons (Articles 1815-1827)


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

MELENCIO-HERRERA, J.:

+.wph!1

Two separate Petitions were filed before this Court 1) by the surviving partners of Atty. Alexander Sycip, who died on May 5, 1975, and 2) by the surviving partners
of Atty. Herminio Ozaeta, who died on February 14, 1976, praying that they be allowed to continue using, in the names of their firms, the names of partners who
had passed away. In the Court's Resolution of September 2, 1976, both Petitions were ordered consolidated.
Petitioners base their petitions on the following arguments:
1. Under the law, a partnership is not prohibited from continuing its business under a firm name which includes the name of a deceased partner; in fact, Article
1840 of the Civil Code explicitly sanctions the practice when it provides in the last paragraph that:
t.hqw

The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part
thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or
partnership. 1
2. In regulating other professions, such as accountancy and engineering, the legislature has authorized the adoption of firm names without any restriction as to the

the legislative authorization given to those engaged in the practice of


accountancy a profession requiring the same degree of trust and confidence in respect of clients as that implicit in the
relationship of attorney and client to acquire and use a trade name, strongly indicates that there is no fundamental
policy that is offended by the continued use by a firm of professionals of a firm name which includes the name of a
deceased partner, at least where such firm name has acquired the characteristics of a "trade name."
use, in such firm name, of the name of a deceased partner;

3. The Canons of Professional Ethics are not transgressed by the continued use of the name of a deceased partner in the firm name of a law partnership because
Canon 33 of the Canons of Professional Ethics adopted by the American Bar Association declares that:
t.hqw

... The continued use of the name of a deceased or former partner when permissible by local custom, is not unethical but care should be
taken that no imposition or deception is practiced through this use. ... 4
4. There is no possibility of imposition or deception because the deaths of their respective deceased partners were well-publicized in all newspapers of general
circulation for several days; the stationeries now being used by them carry new letterheads indicating the years when their respective deceased partners were
connected with the firm; petitioners will notify all leading national and international law directories of the fact of their respective deceased partners' deaths. 5

there is no custom or usage in the


Philippines, or at least in the Greater Manila Area, which recognizes that the name of a law firm necessarily Identifies the
individual members of the firm.
5. No local custom prohibits the continued use of a deceased partner's name in a professional firm's name;

6. The continued use of a deceased partner's name in the firm name of law partnerships has been consistently allowed by U.S. Courts and is an accepted practice
in the legal profession of most countries in the world. 8
The question involved in these Petitions first came under consideration by this Court in 1953 when a law firm in Cebu (the Deen case) continued its practice of
including in its firm name that of a deceased partner, C.D. Johnston. The matter was resolved with this Court advising the firm to desist from including in their firm
designation the name of C. D. Johnston, who has long been dead."
The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled Register of Deeds of Manila vs. China Banking Corporation. The
law firm of Perkins & Ponce Enrile moved to intervene asamicus curiae. Before acting thereon, the Court, in a Resolution of April 15, 1957, stated that it "would like
to be informed why the name of Perkins is still being used although Atty. E. A. Perkins is already dead." In a Manifestation dated May 21, 1957, the law firm of
Perkins and Ponce Enrile, raising substantially the same arguments as those now being raised by petitioners, prayed that the continued use of the firm name
"Perkins & Ponce Enrile" be held proper.
On June 16, 1958, this Court resolved:

t.hqw

After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile and Associates for their continued use of the name of the
deceased E. G. Perkins, the Court found no reason to depart from the policy it adopted in June 1953 when it required Attorneys Alfred P.
Deen and Eddy A. Deen of Cebu City to desist from including in their firm designation, the name of C. D. Johnston, deceased. The Court
believes that, in view of the personal and confidential nature of the relations between attorney and client, and the high standards demanded
in the canons of professional ethics, no practice should be allowed which even in a remote degree could give rise to the possibility of
deception. Said attorneys are accordingly advised to drop the name "PERKINS" from their firm name.
Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.
The Court finds no sufficient reason to depart from the rulings thus laid down.

A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De Leon, Mabanta and Reyes" are partnerships, the use in their
partnership names of the names of deceased partners will run counter to Article 1815 of the Civil Code which provides:
t.hqw

Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.
Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability, of a partner.
It is clearly tacit in the above provision that names in a firm name of a partnership must either be those of living partners and. in the case of non-partners, should
be living persons who can be subjected to liability. In fact, Article 1825 of the Civil Code prohibits a third person from including his name in the firm name under
pain of assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm
particularly where they are non-lawyers. Thus, Canon 34 of the Canons of Professional Ethics "prohibits an agreement for the payment to the widow and heirs of a
deceased lawyer of a percentage, either gross or net, of the fees received from the future business of the deceased lawyer's clients, both because the recipients of
such division are not lawyers and because such payments will not represent service or responsibility on the part of the recipient. " Accordingly, neither the widow
nor the heirs can be held liable for transactions entered into after the death of their lawyer-predecessor. There being no benefits accruing, there ran be no
corresponding liability.
Prescinding the law, there could be practical objections to allowing the use by law firms of the names of deceased partners. The public relations value of the use of
an old firm name can tend to create undue advantages and disadvantages in the practice of the profession. An able lawyer without connections will have to make
a name for himself starting from scratch. Another able lawyer, who can join an old firm, can initially ride on that old firm's reputation established by deceased
partners.
B. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the first factor to consider is that it is within Chapter 3 of Title IX of
the Code entitled "Dissolution and Winding Up." The Article primarily deals with the exemption from liability in cases of a dissolved partnership, of the individual
property of the deceased partner for debts contracted by the person or partnership which continues the business using the partnership name or the name of the
deceased partner as part thereof. What the law contemplates therein is a hold-over situation preparatory to formal reorganization.
Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather than of aprofessional partnership, with no saleable good will but
whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a commercial
partnership and cannot arise in a professional partnership consisting of lawyers. 9
t.hqw

As a general rule, upon the dissolution of a commercial partnership the succeeding partners or parties have the right to carry on the business
under the old name, in the absence of a stipulation forbidding it, (s)ince the name of a commercial partnership is a partnership asset
inseparable from the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)
On the other hand,

t.hqw

... a professional partnership the reputation of which depends or; the individual skill of the members, such as partnerships of attorneys or
physicians, has no good win to be distributed as a firm asset on its dissolution, however intrinsically valuable such skill and reputation may
be, especially where there is no provision in the partnership agreement relating to good will as an asset. ... (ibid, s 203, p. 115) (Emphasis
supplied)
C. A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. For one thing, the law on accountancy
specifically allows the use of a trade name in connection with the practice of accountancy. 10

t.hqw

A partnership for the practice of law is not a legal entity. It is a mere relationship or association for a particular purpose. ... It is not a

Thus, it has been stated that "the


use of a nom de plume, assumed or trade name in law practice is improper.
partnership formed for the purpose of carrying on trade or business or of holding property."

11

12

The usual reason given for different standards of conduct being applicable to the practice of law from
those pertaining to business is that the law is a profession.
Dean Pound, in his recently published contribution to the Survey of the Legal Profession, (The Lawyer from Antiquity to Modern Times, p. 5)
defines a profession as "a group of men pursuing a learned art as a common calling in the spirit of public service, no less a public service
because it may incidentally be a means of livelihood."
xxx xxx xxx
Primary characteristics which distinguish the legal profession from business are:
1. A duty of public service, of which the emolument is a byproduct, and in which one may attain the highest eminence without making much
money.
2. A relation as an "officer of court" to the administration of justice involving thorough sincerity, integrity, and reliability.

3. A relation to clients in the highest degree fiduciary.


4. A relation to colleagues at the bar characterized by candor, fairness, and unwillingness to resort to current business methods of advertising
and encroachment on their practice, or dealing directly with their clients. 13

It is limited to persons of good moral


character with special qualifications duly ascertained and certified. The right does not only presuppose in its possessor
integrity, legal standing and attainment, but also the exercise of a special privilege, highly personal and partaking of the
nature of a public trust."
"The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise.

14

15

16

D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar Association" in support of their petitions.
It is true that Canon 33 does not consider as unethical the continued use of the name of a deceased or former partner in the firm name of a law partnership when
such a practice is permissible by local custom but the Canon warns that care should be taken that no imposition or deception is practiced through this use.
It must be conceded that in the Philippines, no local custom permits or allows the continued use of a deceased or former partner's name in the firm names of law
partnerships. Firm names, under our custom, Identify the more active and/or more senior members or partners of the law firm. A glimpse at the history of the firms
of petitioners and of other law firms in this country would show how their firm names have evolved and changed from time to time as the composition of the
partnership changed.
t.hqw

The continued use of a firm name after the death of one or more of the partners designated by it is proper only where sustained by local
custom and not where by custom this purports to Identify the active members. ...
There would seem to be a question, under the working of the Canon, as to the propriety of adding the name of a new partner and at the
same time retaining that of a deceased partner who was never a partner with the new one. (H.S. Drinker, op. cit., supra, at pp. 207208)
(Emphasis supplied).
The possibility of deception upon the public, real or consequential, where the name of a deceased partner continues to be used cannot be ruled out. A person in
search of legal counsel might be guided by the familiar ring of a distinguished name appearing in a firm title.
E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased partner's name in the firm name of law partnerships. But that is so
because it is sanctioned by custom.
In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which petitioners Salazar, et al. quoted in their memorandum, the New York
Supreme Court sustained the use of the firm name Alexander & Green even if none of the present ten partners of the firm bears either name because the practice
was sanctioned by custom and did not offend any statutory provision or legislative policy and was adopted by agreement of the parties. The Court stated therein:

t.hqw

The practice sought to be proscribed has the sanction of custom and offends no statutory provision or legislative policy. Canon 33 of the
Canons of Professional Ethics of both the American Bar Association and the New York State Bar Association provides in part as follows: "The
continued use of the name of a deceased or former partner, when permissible by local custom is not unethical, but care should be taken that
no imposition or deception is practiced through this use." There is no question as to local custom. Many firms in the city use the names of
deceased members with the approval of other attorneys, bar associations and the courts. The Appellate Division of the First Department has
considered the matter and reached The conclusion that such practice should not be prohibited. (Emphasis supplied)
xxx xxx xxx
Neither the Partnership Law nor the Penal Law prohibits the practice in question. The use of the firm name herein is also sustainable by
reason of agreement between the partners. 18
Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has been defined as a rule of conduct formed by repetition of acts,

Courts take no judicial notice of custom. A custom must be


proved as a fact, according to the rules of evidence. A local custom as a source of right cannot be considered by a court
of justice unless such custom is properly established by competent evidence like any other fact. We find such proof of
the existence of a local custom, and of the elements requisite to constitute the same, wanting herein. Merely because
something is done as a matter of practice does not mean that Courts can rely on the same for purposes of adjudication as
a juridical custom. Juridical custom must be differentiated from social custom. The former can supplement statutory law or
be applied in the absence of such statute. Not so with the latter.
uniformly observed (practiced) as a social rule, legally binding and obligatory.

19

20

21

When the Supreme Court in the Deen and Perkins


cases issued its Resolutions directing lawyers to desist from including the names of deceased partners in their firm
designation, it laid down a legal rule against which no custom or practice to the contrary, even if proven, can prevail. This
Moreover, judicial decisions applying or interpreting the laws form part of the legal system.

22

is not to speak of our civil law which clearly ordains that a partnership is dissolved by the death of any partner.
which are contrary to law, public order or public policy shall not be countenanced.

23

Custom

24

The practice of law is intimately and peculiarly related to the administration of justice and should not be considered like an ordinary "money-making trade."

t.hqw

... It is of the essence of a profession that it is practiced in a spirit of public service. A trade ... aims primarily at personal gain; a profession at
the exercise of powers beneficial to mankind. If, as in the era of wide free opportunity, we think of free competitive self assertion as the
highest good, lawyer and grocer and farmer may seem to be freely competing with their fellows in their calling in order each to acquire as
much of the world's good as he may within the allowed him by law. But the member of a profession does not regard himself as in competition
with his professional brethren. He is not bartering his services as is the artisan nor exchanging the products of his skill and learning as the
farmer sells wheat or corn. There should be no such thing as a lawyers' or physicians' strike. The best service of the professional man is
often rendered for no equivalent or for a trifling equivalent and it is his pride to do what he does in a way worthy of his profession even if
done with no expectation of reward, This spirit of public service in which the profession of law is and ought to be exercised is a prerequisite of
sound administration of justice according to law. The other two elements of a profession, namely, organization and pursuit of a learned art
have their justification in that they secure and maintain that spirit. 25
In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must bow to legal and ethical impediment.
ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names "SYCIP" and "OZAETA" from their respective firm names. Those
names may, however, be included in the listing of individuals who have been partners in their firms indicating the years during which they served as such.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-22493 July 31, 1975


ISLAND SALES, INC., plaintiff-appellee,
vs.
UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, ET. AL defendants. BENJAMIN C.
DACO,defendant-appellant.
Grey, Buenaventura and Santiago for plaintiff-appellee.
Anacleto D. Badoy, Jr. for 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-parte 3 , 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.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-39780 November 11, 1985
ELMO MUASQUE, petitioner,
vs.
COURT OF APPEALS,CELESTINO GALAN TROPICAL COMMERCIAL COMPANY and RAMON PONS,respondents.
John T. Borromeo for petitioner.
Juan D. Astete for respondent C. Galan.
Paul Gornes for respondent R. Pons.
Viu Montecillo for respondent Tropical.
Paterno P. Natinga for Intervenor Blue Diamond Glass Palace.

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 Muasque 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 Muasque 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 Muasque; 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 Muasque 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 Muasque 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. Muasque filed this petition.
The present controversy began when petitioner Muasque in behalf of the partnership of "Galan and Muasque" 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 Muasque 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
Muasque." 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 Muasque 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 Muasque 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 Muasque
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 Muasque and Galan,justice also dictates that Muasque 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 Muasque 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.

SEE Pioneer Insurance & Security Corp. v. CA, G.R. Nos. 84197 & 84157, July 28, 1989
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 70403 July 7, 1989

SANTIAGO SYJUCO, INC., petitioner,


vs.
HON. JOSE P. CASTRO, AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF THE NATIONAL CAPITAL JUDICIAL REGION, BRANCH LXXXV,
QUEZON CITY, THE CITY SHERIFF OF THE CITY OF MANILA, THE CITY REGISTER OF DEEDS OF THE CITY OF MANILA, EUGENIO LIM, ARAMIS LIM,
MARIO LIM, PAULINO LIM, LORENZO LIM, NILA LIM and/ or THE PARTNERSHIP OF THE HEIRS OF HUGO LIM and ATTORNEY PATERNO P.
CANLAS, respondents.
Doroteo B. Daguna and Felix D. Carao for petitioner.
Paterno Canlas for private respondents.

NARVASA, J.:
This case may well serve as a textbook example of how judicial processes, designed to promote the swift and efficient disposition of disputes at law, can be so
grossly abused and manipulated as to produce precisely the opposite result; how they can be utilized by parties with small scruples to forestall for an
unconscionably long time so essentially simple a matter as making the security given for a just debt answer for its payment.
The records of the present proceedings and of two other cases already decided by this Court expose how indeed the routine procedure of an extrajudicial
foreclosure came by dint of brazen forum shopping and other devious maneuvering to grow into a veritable thicket of litigation from which the mortgagee has been
trying to extricate itself for the last twenty years.
Back in November 1964, Eugenio Lim, for and in his own behalf and as attorney-in-fact of his mother, the widow Maria Moreno (now deceased) and of his brother
Lorenzo, together with his other brothers, Aramis, Mario and Paulino, and his sister, Nila, all hereinafter collectively called the Lims, borrowed from petitioner
Santiago Syjuco, Inc. (hereinafter, Syjuco only) the sum of P800,000.00. The loan was given on the security of a first mortgage on property registered in the
names of said borrowers as owners in common under Transfer Certificates of Title Numbered 75413 and 75415 of the Registry of Deeds of Manila. Thereafter
additional loans on the same security were obtained by the Lims from Syjuco, so that as of May 8, 1967, the aggregate of the loans stood at P2,460,000.00,
exclusive of interest, and the security had been augmented by bringing into the mortgage other property, also registered as owned pro indiviso by the Lims under
two titles: TCT Nos. 75416 and 75418 of the Manila Registry.
There is no dispute about these facts, nor about the additional circumstance that as stipulated in the mortgage deed the obligation matured on November 8, 1967;
that the Lims failed to pay it despite demands therefor; that Syjuco consequently caused extra-judicial proceedings for the foreclosure of the mortgage to be

The attempt to
foreclose triggered off a legal battle that has dragged on for more than twenty years now, fought through five (5) cases in
the trial courts, two (2) in the Court of Appeals, and three (3) more in this Court, with the end only now in sight.
commenced by the Sheriff of Manila; and that the latter scheduled the auction sale of the mortgaged property on December 27, 1968.

1. CIVIL CASE NO. 75180, CFI MANILA, BR.5; CA-G.R. NO. 00242-R; G.R. NO. L-34683
To stop the foreclosure, the Lims through Atty. Marcial G. Mendiola, who was later joined by Atty. Raul Correa filed Civil Case No. 75180 on December
24,1968 in the Court of First Instance of Manila (Branch 5). In their complaint they alleged that their mortgage was void, being usurious for stipulating interest of
23% on top of 11 % that they had been required to pay as "kickback." An order restraining the auction sale was issued two days later, on December 26,1968,
premised inter alia on the Lims' express waiver of "their rights to the notice and re-publication of the notice of sale which may be conducted at some future date." 5

rendered judgment finding that usury tained


the mortgage without, however, rendering it void, declaring the amount due to be only Pl,136,235.00 and allowing the
foreclosure to proceed for satisfaction of the obligation reckoned at only said amount .
On November 25,1970, the Court of First Instance (then presided over by Judge Conrado M. Vasquez

Syjuco moved for new trial to enable it to present additional evidence to overthrow the finding of usury, and the Court ordered the case reopened for that purpose.
The Lims tried to negate that order of reopening in the Court of Appeals, the proceedings being docketed as CA-G.R. No. 00242-R. They failed. The Court of
Appeals upheld the Trial Court. The Lims then sought to nullify this action of the Appellate Court; towards that end, they filed with this Court a petition
for certiorari and prohibition, docketed as G.R. No. L-34683. But here, too, they failed; their petition was dismissed. 8
Thereafter, and on the basis of the additional evidence adduced by Syjuco on remand of the case from this Court, the Trial Court promulgated an amended
decision on August 16, 1972, reversing its previous holding that usury had flawed the Lims' loan obligation. It declared that the principal of said obligation indeed
amounted to P2,460,000.00, exclusive of interest at the rate of 12% per annum from November 8, 1967, and, that obligation being already due, the defendants
(Syjuco and the Sheriff of Manila) could proceed with the extrajudicial foreclosure of the mortgage given to secure its satisfaction. 9
2. APPEAL FROM CIVIL CASE NO. 75180; CA-G.R. NO. 51752; G.R. NO. L-45752
On September 9, 1972, Atty. Paterno R. Canlas entered his appearance in Civil Case No. 75180 as counsel for the Lims in collaboration with Atty. Raul Correa,

In that appeal, which was docketed as CA


G.R. No. 51752, Messrs. Canlas and Correa prayed that the loans be declared usurious; that the principal of the loans be
and on the same date appealed to the Court of Appeals from the amended decision of August 16, 1972.

10

found to be in the total amount of Pl,269,505.00 only, and the interest thereon fixed at only 6% per annum from the filing of
the complaint; and that the mortgage be also pronounced void ab initio.
11

The appeal met with no success. In a decision promulgated on October 25,1976, the Court of Appeals affirmed in toto the Trial Court's amended decision.

12

The Lims came to this Court seeking reversal of the appellate Court's decision. However, their petition for review-filed in their behalf by Canlas, and Atty. Pio R.
Marcos, and docketed as G.R. No. L-45752-was denied for lack of merit in a minute resolution dated August 5, 1977. The Lims' motion for reconsideration was
denied and entry of judgment was made on September 24,1977.

13

Here the matter should have ended; it marked only the beginning of

Syjuco's travails.
3. CIVIL CASE NO.112762, CFI MANILA BRANCH 9
Syjuco then resumed its efforts to proceed with the foreclosure. It caused the auction sale of the mortgaged property to be scheduled on December 20, 1977, only
to be frustrated again by another action filed by the Lims on December 19, 1977, docketed as Civil Case No. 112762 of the Court of First Instance of

The action sought to stop the sale on the ground that the notice of foreclosure had not been republished; this,
notwithstanding that as earlier stressed, the restraining order of December 26, 1968 issued in Civil Case No 75180
explicitly declared itself to be predicated on the Lims' waiver of "their rights to the notice and republication of the notice of
sale which may be conducted at some future date." An order restraining the sale issued in the case, although the
petition for preliminary injunction was subsequently denied. A supplemental complaint was also filed by the Lims seeking
recovery of some Pl million in damages allegedly suffered by reason of said lack of republication.
Manila. 14

15

16

4. CIVIL CASE NO. 75180


That very same claim that there had been no republication of the notice of sale, which was the foundation of the Lims' action in Civil Case No. 112762 as
aforesaid was made by the Lims the basis of an urgent motion filed on December 15, 1977 in Civil Case No. 75180, in which, as earlier narrated, the judgement
authorizing the foreclosure had been affirmed by both the Court of Appeals and this Court, and had become final and executory. And that motion sought exactly the
same remedy prayed for in Civil Case No. 112762 (filed by the Lims four [4] days later, on December 19, 1977), i.e., the prevention of the auction sale. The Court

the very same day that the Lims


commenced Civil Case No. 112762 in the same Court and in which subsequent action they asked for and obtained a
similar restraining order.
-- Branch 5, then presided over by Judge Jose H. Tecson granted the restraining order on December 19, 1977,

17

The Lims' counsel thus brought about the anomalous situation of two (2) restraining orders directed against the same auction sale, based on the same ground,
issued by different courts having cognizance of two (2) separate proceedings instituted for identical objectives. This situation lasted for all of three (3) years,
despite the republication of the notice of sale caused by Syjuco in January, 1978 in an effort to end all dispute about the matter, and despite Judge Tecson's having
been made aware of Civil Case No. 112762. It should have been apparent to Judge Tecson that there was nothing more to be done in Civil Case No. 75180 except
to enforce the judgment, already final and executory, authorizing the extrajudicial foreclosure of the mortgage, a judgment sanctioned, to repeat, by both the Court
of Appeals and the Supreme Court; that there was in truth no need for another publication of the notice since the Lims had precisely waived such republication,
this waiver having been the condition under which they had earlier obtained an order restraining the first scheduled sale; that, in any event, the republication
effected by Syjuco had removed the only asserted impediment to the holding of the same; and that, finally, the Lims were acting in bad faith: they were maintaining

Incredibly, not only did Judge Tecson refuse to allow the holding of
the auction sale, as was the only just and lawful course indicated by the circumstances, he authorized the Lims to sell
the mortgaged property in a private sale, with the evident intention that the proceeds of the sale, which he directed to be
deposited in court, would be divided between Syjuco and the Lims; this, in line with the patently specious theory
advocated by the Lims' counsel that the bond flied by them for the postponement of the sale, set at P6 million by the Court
(later increased by P 3 million) had superseded and caused novation of the mortgage. The case lay fallow for a year,
certain other, incidents arising and remaining unresolved on account of numerous postponements.
proceedings in two (2) different courts for essentially the same relief.

18

19

20

21

5. G.R. No. L-56014


Finally, on January 28, 1981, Syjuco betook itself to this Court, presumably no longer disposed to await Judge Tecson's pleasure or the Lims' convenience. It filed
a petition for certiorari and prohibition, docketed as G.R. No. L-56014, alleging that in Civil Case No. 75180, Judge Tecson had gravely abused discretion in:
(1) unreasonably delaying the foreclosure of the mortgage;
(2) entertaining the Lims' motion to discharge said mortgage grounded on the theory that it had been superseded and novated by the Lims'
act of filing the bond required by Judge Tecson in connection with the postponement of the foreclosure sale, and unreasonably delaying
resolution of the issue; and
(3) authorizing the Lims to negotiate and consummate the private sale of the mortgaged property and motu proprio extending the period
granted the Lims for the purpose, in disregard of the final and executory judgment rendered in the case.

issued the writ prayed for and nullified the


orders and actuations of Judge Tecson in Civil Case No. 75180. The judgment declared that:
By judgment rendered on September 21, 1982, after due proceedings, this Court

22

(1) the republication by Syjuco of the notice of foreclosure sale rendered the complaint in Civil Case No. 112762 moot and academic; hence,
said case could not operate to bar the sale;
(2) the Lims' bonds (of P 6 million and P 3 million), having by the terms thereof been given to guarantee payment of damages to Syjuco and
the Sheriff of Manila resulting from the suspension of the auction sale, could not in any sense and from any aspect have the effect of
superseding the mortgage or novating it;
(3) in fact, the bonds had become worthless when, as shown by the record, the bondsman's authority to transact non-life insurance business
in the Philippines was not renewed, for cause, as of July 1, 1981.
The decision consequently decreed that the Sheriff of Manila should proceed with the mortgage sale, there being no further impediment thereto. 23
Notice of the decision was served on the Lims, through Atty. Canlas, on October 2, 1982. A motion for reconsideration was filed,

denied with finality for lack of merit and entry of final judgment was made on March 22,1983.

24

but the same was

25

6. THE SECRET ACTION CIVIL CASE NO. Q-36845 OF THE REGIONAL TRIAL COURT, QUEZON CITY, JUDGE
JOSE P. CASTRO, PRESIDING
Twelve (12) days after the Lims were served, as above mentioned, with notice of this Court's judgment in G.R. No. 56014, or on October 14,1982, they caused the
filing with the Regional Trial Court of Quezon City of still another action, the third, also designed, like the first two, to preclude enforcement of the mortgage held by
Syjuco.
This time the complaint was presented, not in their individual names, but in the name of a partnership of which they themselves were the only partners: "Heirs of
Hugo Lim." The complaint advocated the theory that the mortgage which they, together with their mother, had individually constituted (and thereafter amended
during the period from 1964 to 1967) over lands standing in their names in the Property Registry as owners pro indiviso, in fact no longer belonged to them at that
time, having been earlier deeded over by them to the partnership, "Heirs of Hugo Lim", more precisely, on March 30, 1959, hence, said mortgage was void
because executed by them without authority from the partnership.
The complaint was signed by a lawyer other than Atty. Canlas, but the records disclose that Atty. Canlas took over as counsel as of November 4,1982. The case,
docketed as Civil Case No. Q-39295, was assigned to Branch 35 of the Quezon City Regional Trial Court, then presided over by Judge Jose P. Castro.
Judge Castro issued a restraining order on October 15, 1982. Then, Sheriff Perfecto G. Dalangin submitted a return of summons to the effect that on December 6,
1982 he
.. served personally and left a copy of summons together with a copy of Complaint and its annexes x x upon defendant's office formerly at
313 Quirino Ave., Paranaque, Metro-Manila and now at 407 Dona Felisa Syjuco Building, Remedios St., corner Taft Avenue, Manila, through
the Manager, a person of sufficient age and discretion duly authorized to receive service of such nature, but who refused to accept service
and signed receipt thereof. 26
A vaguer return will be hard to find. It is impossible to discern from it where precisely the summons was served, whether at Quirino Avenue, Paranaque, or Taft
Avenue, Manila; and it is inexplicable that the name of the person that the sheriff had been able to identify as the manager is not stated, the latter being described
merely as "a person of sufficient age and discretion." In any event, as it was to claim later, Syjuco asserts that it was never so served with summons, or with any
other notice, pleading, or motion relative to the case, for that matter.
On February 10, 1983, Atty. Canlas filed an ex-parte motion to declare Syjuco in default. The order of default issued the next day, also directing the plaintiff
partnership to present evidence ex parte within three (3) days. On February 22, 1983, judgment by default was rendered, declaring void the mortgage in question
because executed by the Lims without authority from the partnership which was and had been since March 30,1959 the exclusive owner of the mortgaged

Service of notice of the default


judgment was, according to the return of the same Sheriff Perfecto Dalangin, effected on the following day, February 23,
1983. His return is a virtual copy of his earlier one regarding service of summons: it also states the place of service as the
defendant's office, either at its former location, 313 Quirino Avenue, Paranaque, or at the later address, 407 Dona Felisa,
Syjuco Building, Taft Avenue, Manila; and it also fails to identify the person on whom service was made, describing him
only as "the clerk or person in charge" of the office.
property, and making permanent an injunction against the foreclosure sale that had issued on January 14,1983.

27

28

Unaccountably, and contrary to what might be expected from the rapidity with which it was decided-twelve (12) days from February 10, 1983, when the motion to
declare defendant Syjuco in default was filed-the case was afterwards allowed by Atty. Canlas to remain dormant for seventeen (17) months. He made no effort to
have the judgment executed, or to avail of it in other actions instituted by him against Syjuco. The judgment was not to be invoked until sometime in or after July,
1984, again to stop the extrajudicial mortgage sale scheduled at or about that time at the instance of Syjuco, as shall presently be recounted.
7. Other Actions in the Interim:

a. CIVIL CASE No. 83-19018, RTC MANILA


While the Lims, through their partnership ("Heirs of Hugo Lim"), were prosecuting their action in the sala of Judge Castro, as above narrated, Syjuco once again
tried to proceed with the foreclosure after entry of judgment had been made in G.R. No. 56014 on March 22, 1983. It scheduled the auction sale on July 30, 1983.
But once again it was frustrated. Another obstacle was put up by the Lims and their counsel, Atty. Canlas. This was Civil Case No. 83-19018 of the Manila
Regional Trial Court. The case was filed to stop the sale on the theory that what was sought to be realized from the sale was much in excess of the judgment in
Civil Case No. 75180, and that there was absence of the requisite notice. It is significant that the judgment by default rendered by Judge Castro in Civil Case No.
Q-36485 was not asserted as additional ground to support the cause of action. Be this as it may, a restraining order was issued on July 20,1983 in said Civil Case
No. 83-9018. 29
b. CIVIL CASE NO. Q-32924, RTC QUEZON CITY
What the outcome of this case, No. 83-19018, is not clear. What is certain is (1) that the auction sale was re-scheduled for September 20, 1983, (2) that it was
aborted because the Lims managed to obtain still another restraining order in another case commenced by their lawyer, Atty. Canlas: Civil Case No. Q-32924 of
the Court of First Instance of Quezon City, grounded on the proposition that the publication of the notice of sale was defective; and (3) that the action was
dismissed by the Regional Trial Court on February 3, 1984. 30
No other salient details about these two (2) cases are available in the voluminous records before the Court, except that it was Atty. Canlas who had filed them. He
admits having done so unequivocally: "Thus, the undersigned counsel filed injunction cases in Civil Case No. 83-19018 and Civil Case No. 39294, Regional Trial
Courts of Manila and Quezon City. ... " 31
7. RE-ACTIVATION OF CIVIL CASE NO. Q-36485, RTC, Q QUEZON CITY, BRANCH XXXV
Upon the dismissal of Civil Case No. 39294, Syjuco once more resumed its efforts to effect the mortgage sale which had already been stymied for more than
fifteen (15) years. At its instance, the sheriff once again set a date for the auction sale. But on the date of the sale, a letter of Atty. Canlas was handed to the sheriff

Syjuco
lost no time in inquiring about Civil Case No. Q-36485, and was very quickly made aware of the judgment by default
therein promulgated and the antecedent events leading thereto. It was also made known that on July 9, 1984, Judge
Castro had ordered execution of the judgment; that Judge Castro had on July 16, 1984 granted Atty. Canlas' motion to
declare cancelled the titles to the Lims' mortgaged properties and as nun and void the annotation of the mortgage and its
amendments on said titles, and to direct the Register of Deeds of Manila to issue new titles, in lieu of the old, in the name
of the partnership, "Heirs of Hugo Lim."
drawing attention to the permanent injunction of the sale embodied in the judgment by default rendered by Judge Castro in Civil Case No. Q- 36485.

32

33

On July 17,1984, Syjuco filed in said Civil Case No. Q-36485 a motion for reconsideration of the decision and for dismissal of the action, alleging that it had never
been served with summons; that granting arguendo that service had somehow been made, it had never received notice of the decision and therefore the same
had not and could not have become final; and that the action should be dismissed on the ground of bar by prior judgment premised on the final decisions of the
Supreme Court in G.R. No. L-45752 and G.R. No. 56014.
Two other motions by Syjuco quickly followed. The first, dated July 20, 1984, prayed for abatement of Judge Castro's order decreeing the issuance of new

The second, filed on July 24, 1984, was a supplement to


the motion to dismiss earlier filed, asserting another ground for the dismissal of the action, i.e., failure to state a cause of
action, it appearing that the mortgaged property remained registered in the names of the individual members of the Lim
family notwithstanding that the property had supposedly been conveyed to the plaintiff partnership long before the
execution of the mortgage and its amendments,-and that even assuming ownership of the property by the partnership, the
mortgage executed by all the partners was valid and binding under Articles 1811 and 1819 of the Civil Code.
certificates of title over the mortgaged lands in the name of the plaintiff partnership.

34

35

The motions having been opposed in due course by the plaintiff partnership, they remained pending until January 31, 1985 when Syjuco moved for their
immediate resolution. Syjuco now claims that Judge Castro never acted on the motions. The latter however states that that he did issue an order on February 22,
1985 declaring that he had lost jurisdiction to act thereon because, petitio principii, his decision had already become final and executory.
8. G.R.NO.L-70403; THE PROCEEDING AT BAR
For the third time Syjuco is now before this Court on the same matter. It filed on April 3, 1985 the instant petition for certiorari, prohibition and mandamus. It prays
in its petition that the default judgment rendered against it by Judge Castro in said Civil Case No. Q-36485 be annulled on the ground of lack of service of
summons, res judicata and laches, and failure of the complaint to state a cause of action; that the sheriff be commanded to proceed with the foreclosure of the
mortgage on the property covered by Transfer Certificates of Title Numbered 75413, 75415, 75416 and 75418 of the Manila Registry; and that the respondents the
Lims, Judge Castro, the Sheriff and the Register of Deeds of Manila, the partnership known as "Heirs of Hugo Lim," and Atty. Paterno R. Canlas, counsel for-the
Lims and their partnership-be perpetually enjoined from taking any further steps to prevent the foreclosure.
The comment filed for the respondents by Atty. Canlas in substance alleged that (a) Syjuco was validly served with summons in Civil Case No. Q-36485, hence,
that the decision rendered by default therein was also valid and, having been also duly served on said petitioner, became final by operation of law after the lapse of
the reglementary appeal period; (b) finality of said decision removed the case from the jurisdiction of the trial court, which was powerless to entertain and act on
the motion for reconsideration and motion to dismiss; (c) the petition was in effect an action to annul a judgment, a proceeding within the original jurisdiction of the

Court of Appeals; (d) the plea of res judicata came too late because raised after the decision had already become final; moreover, no Identity of parties existed
between the cases invoked, on the one hand, and Civil Case No. Q-36485, on the other, the parties in the former being the Lims in their personal capacities and in
the latter, the Lim Partnership, a separate and distinct juridical entity; and the pleaded causes of action being different, usury in the earlier cases and authority of
the parties to encumber partnership property in the case under review; (e) the plea of laches also came too late, not having been invoked in the lower court; and (f)
the property involved constituted assets of the Lim partnership, being registered as such with the Securities and Exchange Commission. 36
On his own behalf Atty. Canlas submitted that he had no knowledge of the institution of Civil Case No. Q-36485 (though he admitted being collaborating counsel in
said case); that he did not represent the Lims in all their cases against Syjuco, having been counsel for the former only since 1977, not for the last seventeen
years as claimed by Syjuco; and that he had no duty to inform opposing counsel of the pendency of Civil Case No. Q-36485. 37

disclaiming knowledge of previous controversies regarding the mortgaged property.


He asserted that Syjuco had been properly declared in default for having failed to answer the complaint despite service of
summons upon it, and that his decision in said case which was also properly served on Syjuco became final when it was
not timely appealed, after which he lost jurisdiction to entertain the motion for reconsideration and motion to dismiss. He
also denied having failed to act on said motions, adverting to an alleged order of February 22, 1985 where he declared his
lack of jurisdiction to act thereon.
Respondent Judge Castro also filed a comment

38

The respondent Register of Deeds for his part presented a comment wherein he stated that by virtue of an order of execution in Civil Case No. Q-36485, he had
cancelled TCTs Nos. 75413, 75415, 75416 and 75418 of his Registry and prepared new certificates of title in lieu thereof, but that cancellation had been held in
abeyance for lack of certain registration requirements and by reason also of the motion of Syjuco's Atty. Formoso to hold in abeyance enforcement of the trial
court's order of July 16, 1984 as well as of the temporary restraining order subsequently issued by the Court. 39
It is time to write finis to this unedifying narrative which is notable chiefly for the deception, deviousness and trickery which have marked the private respondents'
thus far successful attempts to avoid the payment of a just obligation. The record of the present proceeding and the other records already referred to, which the
Court has examined at length, make it clear that the dispute should have been laid to rest more than eleven years ago, with entry of judgment of this Court (on
September 24, 1977) in G.R. No. L-45752 sealing the fate of the Lims' appeal against the amended decision in Civil Case No. 75180 where they had originally
questioned the validity of the mortgage and its foreclosure. That result, the records also show, had itself been nine (9) years in coming, Civil Case No. 75180
having been instituted in December 1968 and, after trial and judgment, gone through the Court of Appeals (in CA-G.R. No. 00242-R) and this Court (in G.R. No.
34683), both at the instance of the Lims, on the question of reopening before the amended decision could be issued.
Unwilling, however, to concede defeat, the Lims moved (in Civil Case No. 75180) to stop the foreclosure sale on the ground of lack of republication. On December
19,1977 they obtained a restraining order in said case, but this notwithstanding, on the very same date they filed another action (Civil Case No. 117262) in a
different branch of the same Court of First Instance of Manila to enjoin the foreclosure sale on the same ground of alleged lack of republication. At about this time,
Syjuco republished the notice of sale in order, as it was later to manifest, to end all further dispute.
That move met with no success. The Lims managed to persuade the judge in Civil Case No. 75180, notwithstanding his conviction that the amended decision in
said case had already become final, not only to halt the foreclosure sale but also to authorize said respondents to dispose of the mortgaged property at a private
sale upon posting a bond of P6,000,000.00 (later increased by P3,000,000.00) to guarantee payment of Syjuco's mortgage credit. This gave the Lims a convenient
excuse for further suspension of the foreclosure sale by introducing a new wrinkle into their contentions-that the bond superseded the mortgage which should, they
claimed, therefore be discharged instead of foreclosed.
Thus from the final months of 1977 until the end of 1980, a period of three years, Syjuco found itself fighting a legal battle on two fronts: in the already finally
decided Civil Case No. 75180 and in Civil Case No. 117262, upon the single issue of alleged lack of republication, an issue already mooted by the Lims' earlier
waiver of republication as a condition for the issuance of the original restraining order of December 26,1968 in Civil Case No. 75180, not to mention the fact that
said petitioner had also tried to put an end to it by actually republishing the notice of sale.
With the advent of 1981, its pleas for early resolution having apparently fallen on deaf ears, Syjuco went to this Court (in G.R. No. L-56014) from which, on
September 21, 1982, it obtained the decision already referred to holding, in fine, that there existed no further impediment to the foreclosure sale and that the sheriff
could proceed with the same.
Said decision, instead of deterring further attempts to derail the foreclosure, apparently gave the signal for the clandestine filing this time by the Partnership of
the Heirs of Hugo Lim -on October 14,1982 of Civil Case No. Q-36485, the subject of the present petition, which for the first time asserted the claim that the
mortgaged property had been contributed to the plaintiff partnership long before the execution of the Syjuco's mortgage in order to defeat the foreclosure.
Syjuco now maintains that it had no actual knowledge of the existence and pendency of Civil Case No. Q-36485 until confronted, in the manner already adverted
to, with the fait accompli of a "final" judgment with permanent injunction therein, and nothing in the record disabuses the Court about the truth of this disclaimer.
Indeed, considering what had transpired up to that denouement, it becomes quite evident that actuations of the Lims and their lawyer had been geared to keeping
Syjuco in the dark about said case. Their filing of two other cases also seeking to enjoin the foreclosure sale (Civil Case No. 83-19018, Regional Trial Court of
Manila in July 1983, and Civil Case No. Q-32924, Regional Trial Court of Quezon City in September of the same year) after said sale had already been
permanently enjoined by default judgment in Civil Case No. Q-36485, appears in retrospect to be nothing but a brace of feints calculated to keep Syjuco in that
state of ignorance and to lull any apprehensions it mat may have harbored about encountering further surprises from any other quarter.
Further credence is lent to this appraisal by the unusually rapid movement of Civil Case No. Q-36485 itself in its earlier stages, which saw the motion to declare
Syjuco in default filed, an order of default issued, evidence ex parte for the plaintiffs received and judgment by default rendered, all within the brief span of twelve
days, February 10-22, 1983. Notice of said judgment was "served" on February 23, 1983, the day after it was handed down, only to be followed by an
unaccountable lull of well over a year before it was ordered executed on July 9, 1984 unaccountable, considering that previous flurry of activity, except in the

context of a plan to rush the case to judgment and then divert Syjuco's attention to the Lims' moves in other directions so as to prevent discovery of the existence
of the case until it was too late.
The Court cannot but condemn in the strongest terms this trifling with the judicial process which degrades the administration of justice, mocks, subverts and
misuses that process for purely dilatory purposes, thus tending to bring it into disrepute, and seriously erodes public confidence in the will and competence of the
courts to dispense swift justice.
Upon the facts, the only defense to the foreclosure that could possibly have merited the full-blown trial and appeal proceedings it actually went through was that of
alleged usury pleaded in Civil Case No. 75180 and finally decided against the respondent Lims in G.R. No. L-45752 in September 1977. The other issues of failure
to republish and discharge of mortgage by guarantee set up in succeeding actions were sham issues, questions without substance raised only for purposes of
delay by the private respondents, in which they succeeded only too well. The claim urged in this latest case: that the mortgaged property had been contributed to
the respondent partnership and was already property of said partnership when the individual Lims unauthorizedly mortgaged it to Syjuco, is of no better stripe, and
this, too, is clear from the undisputed facts and the legal conclusions to be drawn therefrom.
The record shows that the respondent partnership is composed exclusively of the individual Lims in whose name all the cases herein referred to, with the sole
exception of Civil Case No. Q-36485, were brought and prosecuted, their contribution to the partnership consisting chiefly, if not solely, of the property subject of
the Syjuco mortgage. It is also a fact that despite its having been contributed to the partnership, allegedly on March 30, 1959, the property was never registered
with the Register of Deeds in the name of the partnership, but to this date remains registered in the names of the Lims as owners in common. The original
mortgage deed of November 14,1964 was executed by the Lims as such owners, as were all subsequent amendments of the mortgage. There can be no dispute
that in those circumstances, the respondent partnership was chargeable with knowledge of the mortgage from the moment of its execution. The legal fiction of a
separate juridical personality and existence will not shield it from the conclusion of having such knowledge which naturally and irresistibly flows from the undenied
facts. It would violate all precepts of reason, ordinary experience and common sense to propose that a partnership, as commonly known to all the partners or of
acts in which all of the latter, without exception, have taken part, where such matters or acts affect property claimed as its own by said partnership.
If, therefore, the respondent partnership was inescapably chargeable with knowledge of the mortgage executed by all the partners thereof, its silence and failure to
impugn said mortgage within a reasonable time, let alone a space of more than seventeen years, brought into play the doctrine of estoppel to preclude any attempt
to avoid the mortgage as allegedly unauthorized.
The principles of equitable estoppel, sometimes called estoppel in pais, are made part of our law by Art. 1432 of the Civil Code. Coming under this class is
estoppel by silence, which obtains here and as to which it has been held that:
... an estoppel may arise from silence as well as from words. 'Estoppel by silence' arises where a person, who by force of circumstances is
under a duty to another to speak, refrains from doing so and thereby leads the other to believe in the existence of a state of facts in reliance
on which he acts to his prejudice. Silence may support an estoppel whether the failure to speak is intentional or negligent.
Inaction or silence may under some circumstances amount to a misrepresentation and concealment of the facts, so as to raise an equitable
estoppel. When the silence is of such a character and under such circumstances that it would become a fraud on the other party to permit
the party who has kept silent to deny what his silence has induced the other to believe and act on, it will operate as an estoppel. This
doctrine rests on the principle that if one maintains silence, when in conscience he ought to speak, equity will debar him from speaking when
in conscience he ought to remain silent. He who remains silent when he ought to speak cannot be heard to speak when he should be
silent. 40

And more to the point:


A property owner who knowingly permits another to sell or encumber the property, without disclosing his title or objecting to the transaction, is
estopped to set up his title or interest as against a person who has been thereby misled to his injury.
xxx
An owner of real property who stands by and sees a third person selling or mortgaging it under claim of title without asserting his own title or
giving the purchaser or mortgagee any notice thereof is estopped, as against such purchaser or mortgagee, afterward to assert his title; and,
although title does not pass under these circumstances, a conveyance will be decreed by a court of equity. Especially is the rule applicable
where the party against whom the estoppel is claimed, in addition to standing by, takes part in malting the sale or mortgage. 41

More specifically, the concept to which that species of estoppel which results from the non-disclosure of
an estate or interest in real property has ordinarily been referred is fraud, actual or constructive. ...
Although fraud is not an essential element of the original conduct working the estoppel, it may with perfect
property be said that it would be fraudulent for the party to repudiate his conduct, and to assert a right or
claim in contravention thereof.
42

Equally or even more preclusive of the respondent partnership's claim to the mortgaged property is the last paragraph of Article 1819 of the Civil Code, which
contemplates a situation duplicating the circumstances that attended the execution of the mortgage in favor of Syjuco and therefore applies foursquare thereto:
Where the title to real property is in the names of all the partners a conveyance executed by all the partners passes all their rights in such
property.

The term "conveyance" used in said provision, which is taken from Section 10 of the American Uniform Partnership Act, includes a mortgage.
Interpreting Sec. 10 of the Uniform Partnership Act, it has been held that the right to mortgage is included in the right to convey. This is
different from the rule in agency that a special power to sell excludes the power to mortgage (Art. 1879). 43
As indisputable as the propositions and principles just stated is that the cause of action in Civil Case No. Q-36485 is barred by prior judgment. The right subsumed
in that cause is the negation of the mortgage, postulated on the claim that the parcels of land mortgaged by the Lims to Syjuco did not in truth belong to them but
to the partnership. Assuming this to be so, the right could have been asserted at the time that the Lims instituted their first action on December 24, 1968 in the
Manila Court of First Instance, Civil Case No. 75180, or when they filed their subsequent actions: Civil Case No. 112762, on December 19, 1977; Civil Case No.
83-19018, in 1983, and Civil Case No. Q-39294, also in 1983. The claim could have been set up by the Lims, as members composing the partnership, "Heirs of
Hugo Lim." It could very well have been put forth by the partnership itself, as co-plaintiff in the corresponding complaints, considering that the actions involved
property supposedly belonging to it and were being prosecuted by the entire membership of the partnership, and therefore, the partnership was in actuality, the
real party in interest. In fact, consistently with the Lims' theory, they should be regarded, in all the actions presented by them, as having sued for vindication, not of
their individual rights over the property mortgaged, but those of the partnership. There is thus no reason to distinguish between the Lims, as individuals, and the
partnership itself, since the former constituted the entire membership of the latter. In other words, despite the concealment of the existence of the partnership, for
all intents and purposes and consistently with the Lims' own theory, it was that partnership which was the real party in interest in all the actions; it was actually
represented in said actions by all the individual members thereof, and consequently, those members' acts, declarations and omissions cannot be deemed to be
simply the individual acts of said members, but in fact and in law, those of the partnership.
What was done by the Lims or by the partnership of which they were the only members-was to split their cause of action in violation of the well known rule that

The right sought to be enforced by them in all their actions was, at bottom,
to strike down the mortgage constituted in favor of Syjuco, a right which, in their view, resulted from several
circumstances, namely that the mortgage was constituted over property belonging to the partnership without the latter's
authority; that the principal obligation thereby secured was usurious; that the publication of the notice of foreclosure sale
was fatally defective, circumstances which had already taken place at the time of the institution of the actions. They
instituted four (4) actions for the same purpose on one ground or the other, making each ground the subject of a separate
action. Upon these premises, application of the sanction indicated by law is caned for, i.e., the judgment on the merits in
any one is available as a bar in the others.
only one suit may be instituted for a single cause of action.

44

45

The first judgment-rendered in Civil Case No. 75180 and affirmed by both the Court of Appeals (CA-G.R. No. 51752) and this Court (G.R. No. L-45752) should
therefore have barred all the others, all the requisites of res judicata being present. The judgment was a final and executory judgment; it had been rendered by a
competent court; and there was, between the first and subsequent cases, not only identity of subject-matter and of cause of action, but also of parties. As already
pointed out, the plaintiffs in the first four (4) actions, the Lims, were representing exactly the same claims as those of the partnership, the plaintiff in the fifth and
last action, of which partnership they were the only members, and there was hence no substantial difference as regards the parties plaintiff in all the actions. Under
the doctrine of res judicata, the judgment in the first was and should have been regarded as conclusive in all other, actions not only "with respect to the matter

It being indisputable that the matter of the


partnership's being the owner of the mortgaged properties "could have been raised in relation" to those expressly made
issuable in the first action, it follows that that matter could not be re-litigated in the last action, the fifth.
directly adjudged," but also "as to any other matter that could have been raised in relation thereto. "

46

Though confronted with the facts thus precluding the respondent partnership's claim to the property under both the principle of estoppel and the provisions of
Article 1819, last paragraph, of the Civil Code, as well as the familiar doctrine of res judicata, the respondent Judge refused to act on Syjuco's motions on the
ground that he no longer had jurisdiction to do so because they were filed after judgment by default against Syjuco, which failed to answer the complaint despite
valid service of summons, had been rendered and become final. The sheriffs return, however, creates grave doubts about the correctness of the Judge's basic

is unspecific about where service was effected. No safe


conclusion about the place of service can be made from its reference to a former and a present office of Syjuco in widely
separate locations, with nothing to indicate whether service was effected at one address or the other, or even at both. A
more serious defect is the failure to name the person served who is, with equal ambiguity, identified only as "the Manager"
of the defendant corporation (petitioner herein). Since the sheriffs return constitutes primary evidence of the manner and
incidents of personal service of a summons, the Rules are quite specific about what such a document should contain:
premise that summons had been validly served on Syjuco. For one thing, the return

47

SEC. 20. Proof of service. The proof of service of a summons shall be made in writing by the server and shall set forth the manner, place
and date of service; shall specify any papers which have been served with the process and the name of the person who received the same;
and shall be sworn to when made by a person other than a sheriff or his deputy. 48
In the case of Delta Motor Sales Corporation vs. Mangosing

49

it was held that:"

(a) strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made must be
one who is named in the statute; otherwise the service is insufficient. So, where the statute requires that in the case of a domestic corporation summons should be
served on 'the president or head of the corporation, secretary, treasurer, cashier or managing agent thereof, service of summons on the secretary's wife did not
confer jurisdiction over the corporation in the foreclosure proceeding against it. Hence, the decree of foreclosure and the deficiency judgment were void and should
be vacated (Reader vs. District Court, 94 Pacific 2nd 858).

The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure
that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal
papers served on him. In other words, 'to bring home to the corporation notice of the filing of the action'. (35 A C.J.S. 288 citing Jenkins vs.
Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston, D.C. Fla., 23 F.R.D. 249).
The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in which
summons should be served on a domestic corporation (U.S. vs. Mollenhauer Laboratories, Inc., 267 Fed. Rep. 2nd 260).'
The rule cannot be any less exacting as regards adherence to the requirements of proof of service, it being usually by such proof that sufficiency of compliance
with the prescribed mode of service is measured. Here the only proof of service of summons is the questioned sheriff's return which, as already pointed out, is not
only vague and unspecific as to the place of service, but also neglects to Identify by name the recipient of the summons as required by Rule 20, Section 14, of the

The defective
sheriffs return thus being insufficient and incompetent to prove that summons was served in the manner prescribed for
service upon corporations, there is no alternative to affirming the petitioner's claim that it had not been validly summoned
in Civil Case No. Q-36485. It goes without saying that lacking such valid service, the Trial Court did not acquire jurisdiction
over the petitioner Syjuco, rendering null and void all subsequent proceedings and issuances in the action from the order
of default up to and including the judgment by default and the order for its execution.
Rules of Court. Where the sheriffs return is defective the presumption of regularity in the performance of official functions will not lie.

50

51

The respondents' contention that the petition is in effect an action to annul a judgment which is within the exclusive original jurisdiction of the Court of

has already been answered in Matanguihan vs. Tengco where, by declaring that an action for annulment of
judgment is not a plain, speedy and adequate remedy, this Court in effect affirmed that certiorari is an appropriate remedy
against judgments or proceedings alleged to have been rendered or had without valid service of summons.
Appeals 52

53

54

Respondent Judge Castro begged the question when, instead of resolving on the merits the issue of the invalidity of his default judgment and of the proceedings
leading thereto because of absence of valid service of summons on the defendant, which had been expressly raised in the defendant's motion for reconsideration,
he simply refused to do so on the excuse that he had lost jurisdiction over the case. This refusal was, in the premises, a grave abuse of judicial discretion which
must be rectified.
What has been said makes unnecessary any further proceedings in the Court below, which might otherwise be indicated by the consideration that two of the
postulates of petitioner's unresolved motions which the Court considers equally as decisive as res judicata, to wit: estoppel by silence and Article 1819, last
paragraph, of the Civil Code, do not constitute grounds for a motion to dismiss under rule 16, of the Rules of Court. Such a step would only cause further delay.
And delay has been the bane of petitioner's cause, defying through all these years all its efforts to collect on a just debt.
The undenied and undisputable facts make it perfectly clear that the claim to the mortgaged property belatedly and in apparent bad faith pressed by the
respondent partnership is foreclosed by both law and equity. Further proceedings will not make this any clearer than it already is. The Court is clothed with ample
authority, in such a case, to call a halt to all further proceedings and pronounce judgment on the basis of what is already manifestly of record.
So much for the merits; the consequences that should attend the inexcusable and indefensible conduct of the respondents Lims, the respondent partnership and
their counsel, Atty. Paterno R. Canlas, should now be addressed. That the Lims and their partnership acted in bad faith and with intent to defraud is manifest in the
record of their actuations, presenting as they did, piecemeal and in one case after another, defenses to the foreclosure or claims in derogation thereof that were
available to them from the very beginning actuations that were to stave off the liquidation of an undenied debt for more than twenty years and culminated in the
clandestine filing and prosecution of the action subject of the present petition.
What has happened here, it bears repeating, is nothing less than an abuse of process, a trifling with the courts and with the rights of access thereto, for which Atty.
Canlas must share responsibility equally with his clients. The latter could not have succeeded so well in obstructing the course of justice without his aid and advice
and his tireless espousal of their claims and pretensions made in the various cases chronicled here. That the cause to which he lent his advocacy was less than
just or worthy could not have escaped him, if not at the start of his engagement, in the years that followed when with his willing assistance, if not instigation, it was
shuttled from one forum to another after each setback. This Court merely stated what is obvious and cannot be gainsaid when, inSurigao Mineral Reservation

it held that a party's lawyer of record has control of the proceedings and that '(w)hatever steps his client
takes should be within his knowledge and responsibility."
Board vs. Cloribel, 55

strikingly similar actuations in a case, which are described in the following paragraph taken from
this Court's decision therein:
In Prudential Bank vs. Castro, 56

Respondents' foregoing actuations reveal an 'unholy alliance' between them and a clear indication of partiality for the party represented by
the other to the detriment of the objective dispensation of justice. Writs of Attachment and Execution were issued and implemented with
lightning speed; the case itself was railroaded to a swift conclusion through a similar judgment; astronomical sums were awarded as
damages and attorney's fees; and topping it all, the right to appeal was foreclosed by clever maneuvers," and which, the Court found,
followed a pattern of conduct in other cases of which judicial notice was taken, were deemed sufficient cause for disbarment.

when the record indubitably shows that he


has represented them since September 9, 1972 when he first appeared for them to prosecute their appeal in Civil Case
Atty. Canlas even tried to mislead this Court by claiming that he became the Lims' lawyer only in 1977,

57

No. 75180. He has also quite impenitently disclaimed a duty to inform opposing counsel in Civil Case No. Q-39294 of
the existence of Civil Case No. Q-36485, as plaintiffs' counsel in both actions, even while the former, which involved the
same mortgage, was already being litigated when the latter was filed, although in the circumstances such disclosure was
required by the ethics of his profession, if not indeed by his lawyer's oath.
58

A clear case also exists for awarding at least nominal damages to petitioner, though damages are not expressly prayed for, under the general prayer of the petition
for "such other reliefs as may be just and equitable under the premises," and the action being not only of certiorari and prohibition, but also of mandamus-in which
the payment of "damages sustained by the petitioner by reason of the wrongful acts of the defendant' is expressly authorized. 59
There is no question in the Court's mind that such interests as may have accumulated on the mortgage loan will not offset the prejudice visited upon the petitioner
by the excruciatingly long delay in the satisfaction of said debt that the private respondents have engineered and fomented.
These very same considerations dictate the imposition of exemplary damages in accordance with Art. 2229 of the Civil Code.
WHEREFORE, so that complete justice may be dispensed here and, as far as consistent with that end, all the matters and incidents with which these proceedings
are concerned may be brought to a swift conclusion:
(1) the assailed judgment by default in Civil Case No.Q-36485, the writ of execution and all other orders issued in implementation thereof,
and all proceedings in the case leading to said judgment after the filing of the complaint are DECLARED null and void and are hereby SET
ASIDE; and the complaint in said case is DISMISSED for being barred by prior judgment and estoppel, and for lack of merit;
(2) the City Sheriff of Manila is ORDERED, upon receipt of this Decision, to schedule forthwith and thereafter conduct with all due dispatch
the sale at public auction of the mortgaged property in question for the satisfaction of the mortgage debt of the respondents Lims to
petitioner, in the principal amount of P2,460,000.00 as found in the amended decision in Civil Case No. 75180 of the Court of First Instance
of Manila, interests thereon at the rate of twelve (12%) percent per annum from November 8, 1967 until the date of sale, plus such other and
additional sums for commissions, expenses, fees, etc. as may be lawfully chargeable in extrajudicial foreclosure and sale proceedings;
(3) the private respondents, their successors and assigns, are PERPETUALLY ENJOINED from taking any action whatsoever to obstruct,
delay or prevent said auction sale;
(4) the private respondents (the Lims, the Partnership of the Heirs of Hugo Lim and Atty. Paterno R. Canlas) are sentenced, jointly and
severally, to pay the petitioner P25,000.00 as nominal damages and P100,000.00 as exemplary damages, as well as treble costs; and
(5) let this matter be referred to the Integrated Bar of the Philippines for investigation, report, and recommendation insofar as the conduct of
Atty. Canlas as counsel in this case and in the other cases hereinabove referred to is concerned.
SO ORDERED.

SEE Lim Tong Lim vs. Phil. Fishing Gear Industries, G.R. No. 136448, November 3, 1999
Dissolution and Winding Up - Articles 1828-1842
A. Causes of Dissolution (Articles 1828-1831)

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

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.

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

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.
spouses in February of 1988. 2

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 affected 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

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. 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:
Mill, et al, 8

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 businessunder the provisions of article 1837,
second paragraph, No. 2, either alone or with others, andwithout 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 creditors 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-visany 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. 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.
11

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 services. 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 fees 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.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 109248 July 3, 1995


GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T. BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and JOAQUIN L. MISA,respondents.

VITUG, J.:
The instant petition seeks a review of the decision rendered by the Court of Appeals, dated 26 February 1993, in CA-G.R. SP No. 24638 and No. 24648
affirming in toto that of the Securities and Exchange Commission ("SEC") in SEC AC 254.
The antecedents of the controversy, summarized by respondent Commission and quoted at length by the appellate court in its decision, are hereunder restated.
The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly registered in the Mercantile Registry on 4 January 1937 and reconstituted
with the Securities and Exchange Commission on 4 August 1948. The SEC records show that there were several subsequent amendments to the
articles of partnership on 18 September 1958, to change the firm [name] to ROSS, SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS, SELPH,
SALCEDO, DEL ROSARIO, BITO & MISA; on 18 April 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 4 December 1972 to
SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 11 March 1977 to DEL ROSARIO, BITO, MISA & LOZADA; on 7 June 1977 to BITO, MISA &
LOZADA; on 19 December 1980, [Joaquin L. Misa] appellees Jesus B. Bito and Mariano M. Lozada associated themselves together, as senior partners
with respondents-appellees Gregorio F. Ortega, Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior partners.
On February 17, 1988, petitioner-appellant wrote the respondents-appellees a letter stating:
I am withdrawing and retiring from the firm of Bito, Misa and Lozada, effective at the end of this month.
"I trust that the accountants will be instructed to make the proper liquidation of my participation in the firm."
On the same day, petitioner-appellant wrote respondents-appellees another letter stating:
"Further to my letter to you today, I would like to have a meeting with all of you with regard to the mechanics of liquidation, and
more particularly, my interest in the two floors of this building. I would like to have this resolved soon because it has to do with my
own plans."
On 19 February 1988, petitioner-appellant wrote respondents-appellees another letter stating:
"The partnership has ceased to be mutually satisfactory because of the working conditions of our employees including the
assistant attorneys. All my efforts to ameliorate the below subsistence level of the pay scale of our employees have been thwarted
by the other partners. Not only have they refused to give meaningful increases to the employees, even attorneys, are dressed
down publicly in a loud voice in a manner that deprived them of their self-respect. The result of such policies is the formation of
the union, including the assistant attorneys."
On 30 June 1988, petitioner filed with this Commission's Securities Investigation and Clearing Department (SICD) a petition for dissolution and
liquidation of partnership, docketed as SEC Case No. 3384 praying that the Commission:

"1. Decree the formal dissolution and order the immediate liquidation of (the partnership of) Bito, Misa & Lozada;
"2. Order the respondents to deliver or pay for petitioner's share in the partnership assets plus the profits, rent or interest
attributable to the use of his right in the assets of the dissolved partnership;
"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada in any of their correspondence, checks and pleadings and
to pay petitioners damages for the use thereof despite the dissolution of the partnership in the amount of at least P50,000.00;
"4. Order respondents jointly and severally to pay petitioner attorney's fees and expense of litigation in such amounts as maybe
proven during the trial and which the Commission may deem just and equitable under the premises but in no case less than ten
(10%) per cent of the value of the shares of petitioner or P100,000.00;
"5. Order the respondents to pay petitioner moral damages with the amount of P500,000.00 and exemplary damages in the
amount of P200,000.00.
"Petitioner likewise prayed for such other and further reliefs that the Commission may deem just and equitable under the
premises."
On 13 July 1988, respondents-appellees filed their opposition to the petition.
On 13 July 1988, petitioner filed his Reply to the Opposition.
On 31 March 1989, the hearing officer rendered a decision ruling that:
"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not dissolve the said law partnership. Accordingly, the
petitioner and respondents are hereby enjoined to abide by the provisions of the Agreement relative to the matter governing the
liquidation of the shares of any retiring or withdrawing partner in the partnership interest." 1
On appeal, the SEC en banc reversed the decision of the Hearing Officer and held that the withdrawal of Attorney Joaquin L. Misa had dissolved the partnership of
"Bito, Misa & Lozada." The Commission ruled that, being a partnership at will, the law firm could be dissolved by any partner at anytime, such as by his withdrawal
therefrom, regardless of good faith or bad faith, since no partner can be forced to continue in the partnership against his will. In its decision, dated 17 January
1990, the SEC held:
WHEREFORE, premises considered the appealed order of 31 March 1989 is hereby REVERSED insofar as it concludes that the partnership of Bito,
Misa & Lozada has not been dissolved. The case is hereby REMANDED to the Hearing Officer for determination of the respective rights and obligations
of the parties. 2
The parties sought a reconsideration of the above decision. Attorney Misa, in addition, asked for an appointment of a receiver to take over the assets of the
dissolved partnership and to take charge of the winding up of its affairs. On 4 April 1991, respondent SEC issued an order denying reconsideration, as well as
rejecting the petition for receivership, and reiterating the remand of the case to the Hearing Officer.
The parties filed with the appellate court separate appeals (docketed CA-G.R. SP No. 24638 and CA-G.R. SP No. 24648).
During the pendency of the case with the Court of Appeals, Attorney Jesus Bito and Attorney Mariano Lozada both died on, respectively, 05 September 1991 and
21 December 1991. The death of the two partners, as well as the admission of new partners, in the law firm prompted Attorney Misa to renew his application for
receivership (in CA G.R. SP No. 24648). He expressed concern over the need to preserve and care for the partnership assets. The other partners opposed the
prayer.
The Court of Appeals, finding no reversible error on the part of respondent Commission, AFFIRMED in toto the SEC decision and order appealed from. In fine, the
appellate court held, per its decision of 26 February 1993, (a) that Atty. Misa's withdrawal from the partnership had changed the relation of the parties and
inevitably caused the dissolution of the partnership; (b) that such withdrawal was not in bad faith; (c) that the liquidation should be to the extent of Attorney Misa's
interest or participation in the partnership which could be computed and paid in the manner stipulated in the partnership agreement; (d) that the case should be
remanded to the SEC Hearing Officer for the corresponding determination of the value of Attorney Misa's share in the partnership assets; and (e) that the
appointment of a receiver was unnecessary as no sufficient proof had been shown to indicate that the partnership assets were in any such danger of being lost,
removed or materially impaired.
In this petition for review under Rule 45 of the Rules of Court, petitioners confine themselves to the following issues:
1. Whether or not the Court of Appeals has erred in holding that the partnership of Bito, Misa & Lozada (now Bito, Lozada, Ortega & Castillo) is a
partnership at will;
2. Whether or not the Court of Appeals has erred in holding that the withdrawal of private respondent dissolved the partnership regardless of his good or
bad faith; and

3. Whether or not the Court of Appeals has erred in holding that private respondent's demand for the dissolution of the partnership so that he can get a
physical partition of partnership was not made in bad faith;
to which matters we shall, accordingly, likewise limit ourselves.
A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa & Lozada," and now "Bito, Lozada, Ortega and Castillo," is indeed such
a partnership need not be unduly belabored. We quote, with approval, like did the appellate court, the findings and disquisition of respondent SEC on this
matter; viz:
The partnership agreement (amended articles of 19 August 1948) does not provide for a specified period or undertaking. The "DURATION" clause
simply states:
"5. DURATION. The partnership shall continue so long as mutually satisfactory and upon the death or legal incapacity of one of
the partners, shall be continued by the surviving partners."
The hearing officer however opined that the partnership is one for a specific undertaking and hence not a partnership at will, citing paragraph 2 of the
Amended Articles of Partnership (19 August 1948):
"2. Purpose. The purpose for which the partnership is formed, is to act as legal adviser and representative of any individual, firm
and corporation engaged in commercial, industrial or other lawful businesses and occupations; to counsel and advise such
persons and entities with respect to their legal and other affairs; and to appear for and represent their principals and client in all
courts of justice and government departments and offices in the Philippines, and elsewhere when legally authorized to do so."
The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, all partnerships, which necessarily must have a
purpose, would all be considered as partnerships for a definite undertaking. There would therefore be no need to provide for articles on partnership at
will as none would so exist. Apparently what the law contemplates, is a specific undertaking or "project" which has a definite or definable period of
completion. 3
The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to
associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve,
along with each partner's capability to give it, and the absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole
pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the
partnership 4

but that it can result in a liability for damages.

In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose for its creation prevent the dissolution of any

Among partners, mutual agency arises and the doctrine of delectus personae allows them
to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner
can subject him to a possible action for damages.
partnership by an act or will of a partner. 6

The dissolution of a partnership is the change in the relation of the parties caused by any partner ceasing to be associated in the carrying on, as might be

Upon its dissolution, the partnership continues and its legal personality is retained
until the complete winding up of its business culminating in its termination.
distinguished from the winding up of, the business. 8

however, an agreement of
the partners, like any other contract, is binding among them and normally takes precedence to the extent applicable over
the Code's general provisions. We here take note of paragraph 8 of the "Amendment to Articles of Partnership" reading
thusly:
The liquidation of the assets of the partnership following its dissolution is governed by various provisions of the Civil Code;

10

. . . In the event of the death or retirement of any partner, his interest in the partnership shall be liquidated and paid in accordance with the existing
agreements and his partnership participation shall revert to the Senior Partners for allocation as the Senior Partners may determine; provided, however,
that with respect to the two (2) floors of office condominium which the partnership is now acquiring, consisting of the 5th and the 6th floors of the Alpap
Building, 140 Alfaro Street, Salcedo Village, Makati, Metro Manila, their true value at the time of such death or retirement shall be determined by two (2)
independent appraisers, one to be appointed (by the partnership and the other by the) retiring partner or the heirs of a deceased partner, as the case
may be. In the event of any disagreement between the said appraisers a third appraiser will be appointed by them whose decision shall be final. The
share of the retiring or deceased partner in the aforementioned two (2) floor office condominium shall be determined upon the basis of the valuation
above mentioned which shall be paid monthly within the first ten (10) days of every month in installments of not less than P20,000.00 for the Senior
Partners, P10,000.00 in the case of two (2) existing Junior Partners and P5,000.00 in the case of the new Junior Partner. 11
The term "retirement" must have been used in the articles, as we so hold, in a generic sense to mean the dissociation by a partner, inclusive of resignation or
withdrawal, from the partnership that thereby dissolves it.
On the third and final issue, we accord due respect to the appellate court and respondent Commission on their common factual finding, i.e., that Attorney Misa did
not act in bad faith. Public respondents viewed his withdrawal to have been spurred by "interpersonal conflict" among the partners. It would not be right, we agree,

Indeed, for as long as the


reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly
visiting harm and damage upon the partnership, bad faith cannot be said to characterize the act. Bad faith, in the context
here used, is no different from its normal concept of a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.
to let any of the partners remain in the partnership under such an atmosphere of animosity; certainly, not against their will.

12

WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on costs.


SO ORDERED.

[G.R. No. 110782. September 25, 1998]


IRMA IDOS, petitioner, vs. COURT
PHILIPPINES, respondents.

OF

APPEALS

and

PEOPLE

OF

THE

DECISION
QUISUMBING, J.:

Before this Court is the petition for review of the Decision of respondent Court of Appeals [1] dismissing
petitioners 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 Division [3] 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 petitioners 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--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 latters business of manufacturing leather. In 1985, he joined the
accused-appellants 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 complainants 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 accusedappellant 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 accusedappellant.
Complainant denied 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 accusedappellant 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-appellants motion for annulment of the decision
and for reconsideration was denied by the trial court in its order dated April 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 resolution [8] 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 Agreement [9]filed on August 5, 1993. After
submission of the Comment[10] by the Solicitor General, and the Reply[11] by petitioner, this case was deemed
submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial courts 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 complainants 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 petitioners 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 complainants
interest in the partnership, and not merely as a commitment on petitioners 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 courts
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 statute.[13] Otherwise, the act has to be declared outside the laws ambit and a plea of
innocence by the accused must be sustained.
The relevant provisions of B.P. 22 state that:

SECTION 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.
SECTION 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. (Underscoring 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 complainants 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 petitioners and complainant had agreed to dissolve the
partnership, such agreement 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 partners cease to carry on the business together. [Citation
omitted]
(2) Winding Up Defined
Winding up is the process of settling business affairs after 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] (Underscoring 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. (Underscoring 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
complainants 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 consideration 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 suggests 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 complainants 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 complainants 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, petitioners 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 makers
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
faciepresumption. 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.
Section 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
complainants 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 x x x.
[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 petitioners evidence.
Further, we find that the prosecution also failed to prove adequate notice of dishonor of the subject check
on petitioners 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][Underscoring 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. 22. [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 x x x 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 of 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 partnerships 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-togoodness transactions with some color of get-rich scheme to the prejudice of well-meaning
businessmen who are the pillars of society.
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 petitioners 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 petitioners 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