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 copartners, 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.
Teehankee (Chairman), Melencio-Herrera, De la Fuente and Patajo, JJ., concur.
Plana, J., took no part.
G.R. No. L-27343 February 28, 1979
MANUEL G. SINGSONG, JOSE BELZUNCE, AGUSTIN E. TONSAY, JOSE L. ESPINOS,
BACOLOD SOUTHERN LUMBER YARD, and OPPEN, ESTEBAN, INC., plaintiffsappellees,
vs.
ISABELA SAWMILL, MARGARITA G. SALDAJENO and her husband CECILIO SALDAJENO
LEON GARIBAY, TIMOTEO TUBUNGBANUA, and THE PROVINCIAL SHERIFF OF
NEGROS OCCIDENTAL, defendants, MARGARITA G. SALDAJENO and her husband
CECILIO SALDAJENO, defendants-appellants.

FERNANDEZ, J.:
This is an appeal to the Court of Appeals from the judgment of the Court of First
Instance of Negros Occidental in Civil Cage No. 5343, entitled "Manuel G. Singson,
et all vs. Isabela Sawmill, et al.,", the dispositive portion of which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, it is hereby held. (1) that the
contract, Appendix "F", of the Partial Stipulation of Facts, Exh. "A", has not created a
chattel mortgage lien on the machineries and other chattels mentioned therein, all
of which are property of the defendant partnership "Isabela Sawmill", (2) that the
plaintiffs, as creditors of the defendant partnership, have a preferred right over the
assets of the said partnership and over the proceeds of their sale at public auction,
superior to the right of the defendant Margarita G. Saldajeno, as creditor of the
partners Leon Garibay and Timoteo Tubungbanua; (3) that the defendant Isabela
Sawmill' is indebted to the plaintiff Oppen, Esteban, Inc. in the amount of P1,288.89,
with legal interest thereon from the filing of the complaint on June 5, 1959; (4) that
the same defendant is indebted to the plaintiff Manuel G. Singsong in the total
amount of P5,723.50, with interest thereon at the rate of 1 % per month from May
6, 1959, (the date of the statements of account, Exhs. "L" and "M"), and 25% of the
total indebtedness at the time of payment, for attorneys' fees, both interest and
attorneys fees being stipulated in Exhs. "I" to "17", inclusive; (5) that the same
defendant is indebted to the plaintiff Agustin E. Tonsay in the amount of P933.73,
with legal interest thereon from the filing of the complaint on June 5, 1959; (6) that
the same defendant is indebted to the plaintiff Jose L. Espinos in the amount of
P1,579.44, with legal interest thereon from the filing of the complaint on June 5,
1959; (7) that the same defendant is indebted to the plaintiff Bacolod Southern
Lumber Yard in the amount of Pl,048.78, with legal interest thereon from the filing of
the complaint on June 5, 1959; (8) that the same defendant is indebted to the
plaintiff Jose Belzunce in the amount of P2,052.10, with legal interest thereon from
the filing of the complaint on June 5. 1959; (9) that the defendant Margarita G.
Saldajeno, having purchased at public auction the assets of the defendant
partnership over which the plaintiffs have a preferred right, and having sold said
assets for P 45,000.00, is bound to pay to each of the plaintiffs the respective
amounts for which the defendant partnership is held indebted to, them, as above
indicated and she is hereby ordered to pay the said amounts, plus attorneys fees
equivalent to 25% of the judgment in favor of the plaintiff Manuel G. Singson, as
stipulated in Exhs. "I" "to I-17", inclusive, and 20% of the respective judgments in
favor of the other plaintiffs, pursuant to. Art. 2208, pars. (5) and (11), of the Civil
Code of the Philippines; (10) The defendants Leon Garibay and Timoteo
Tibungbanua are hereby ordered to pay to the plaintiffs the respective amounts
adjudged in their favor in the event that said plaintiffs cannot recover them from
the defendant Margarita G. Saldajeno and the surety on the bond that she has filed
for the lifting of the injunction ordered by this court upon the commencement of this
case.
The cross-claim cf the defendant Margarita G. Saldajeno against the defendants
Leon Garibay arid Timoteo Tubungbanua is hereby discussed Margarita G. Saldajeno
shall pay the costs.
SO ORDERED. 1

In a resolution promulgated on February 3, 1967, the Court of Appeals certified the

records of this case to the Supreme Court "considering that the resolution of this
appeal involves purely questions or question of law over which this Court has no
jurisdiction ... 2
On June 5. 1959, Manuel G. Singsong, Jose Belzunce, Agustin E. Tonsay, Jose L.
Espinos, Bacolod Southern Lumber Yard, and Oppen, Esteban, Inc. filed in the Court
of first Instance of Negros Occidental, Branch I, against "Isabela Sawmill", Margarita
G. Saldajeno and her husband Cecilio Saldajeno, Leon Garibay, Timoteo
Tubungbanua and the Provincial Sheriff of Negros Occidental a complaint the prayer
of which reads:
WHEREFORE, the plaintiffs respectfully pray:
(1)
That a writ of preliminary injunction be issued restraining the defendant
Provincial Sheriff of Negros Occidental from proceeding with the sales at public
auction that he advertised in two notices issued by him on May 18, 1959 in
connection with Civil Case No. 5223 of this Honorable Court, until further orders of
this Court; and to make said injunction permanent after hearing on the merits:
(2)
That after hearing, the defendant partnership be ordered; to pay to the
plaintiff Manuel G. Singson the sum of P3,723.50 plus 1% monthly interest thereon
and 25% attorney's fees, and costs; to pay to the plaintiff JoseBelzunce the sum of
P2,052.10, plus 6% annual interest thereon and 25% for attorney's fees, and
costs;to pay to the plaintiff Agustin E. Tonsay the sum of P993.73 plus 6% annual
interest thereon and 25% attorney's fees, and costs; to pay to the plaintiff Bacolod
Southern Lumber Yard the sum of P1,048.78, plus 6% annual interest thereon and
25% attorney's fees, and costs; and to pay to the plaintiff Oppen, Esteban, Inc. the
sum of P1,350.89, plus 6% annual interest thereon and 25% attorney's fees and
costs:
(3)
That the so-called Chattel Mortgage executed by the defendant Leon Garibay
and Timoteo Tubungbanua in favor of the defendant Margarita G. Saldajeno on May
26, 1958 be declared null and void being in fraud of creditors of the defendant
partnership and without valuable consideration insofar as the said defendant is
concerned:
(4)
That the Honorable Court order the sale of public auction of the assets of the
defendnat partnership in case the latter fails to pay the judgment that the plaintiffs
may recover in the action, with instructions that the proceeds of the sale b e applied
in payment of said judgment before any part of saod proceeds is paid to the
defendant Margarita G. Saldajeno;
(5)
That the defendant Leon Garibay, Timoteo Tubungbanua, and Margarita G.
Saldajeno be declared jointly liable to the plaintifs for whatever deficiency may
remain unpaid after the proceeds of the sale of the assets of the defendnt
partnership are supplied in payment of the judgment that said plaintiffs may
recover in this action;

(6)
The plaintiffs further pray for all other remedies to which the Honorable Court
will find them entitled to, with costs to the defendants.
Bacolod City, June 4, 1959. 3
The action was docketed as Civil Case No. 5343 of said court.
In their amended answer, the defendants Margarita G. Saldajeno and her husband,
Cecilio Saldajeno, alleged the following special and affirmative defenses:
xxx xxx

xxx

2.
That the defendant Isabela Sawmill has been dissolved by virtue of an action
entitled "In the matter of: Dissolution of Isabela Sawmill as partnership, etc.
Margarita G. Saldajeno et al. vs. Isabela Sawmill, et al., Civil Case No. 4787, Court of
First Instance of Negros Occidental;
3.
That as a result of the said dissolution and the decision of the Court of First
Instance of Negros Occidental in the aforesaid case, the other defendants herein
Messrs. Leon Garibay and Timoteo Tubungbanua became the successors-in-interest
to the said defunct partnership and have bound themselves to answere for any and
all obligations of the defunct partnership to its creditors and third persons;
4.
That to secure the performance of the obligations of the other defendants
Leon Garibay and Timoteo Tubungbanua to the answering defendant herein, the
former have constituted a chattel mortgage over the properties mentioned in the
annexes to that instrument entitled "Assignment of Rights with Chattel Mortgage"
entered into on May 26, 1968 and duly registered in the Register of Deeds of Negros
Occidental on the same date:
5.
That all the plaintiffs herein, with the exceptionof the plaintiff Oppen,
Esteban, Inc. are creditors of Messrs. Leon Garibay and Timoteo Tubungbanua and
not of the defunct Isabela Sawmill and as such they have no cause of action against
answering defendant herein and the defendant Isabela Sawmill;
6.
That all the plaintiffs herein, except for the plaintiff Oppen, Esteban, Inc.
granted cash advances, gasoline, crude oil, motor oil, grease, rice and nipa to the
defendants Leon Garibay and Timoteo Tubungbanua with the knowledge and notice
that the Isabela Sawmill as a former partnership of defendants Margarita G. Isabela
Sawmill as a former partnership of defendants Margarita G. Saldajeno, Leon Garibay
and Timoteo Tubungbanua, has already been dissolved;
7.
That this Honorable Court has no jurisdictionover the claims of the plaintiffs
Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos, and the Bacolod Southern
Lumber Yard, it appearing that the amounts sought to be recovered by them in this
action is less than P2,000.00 each, exclusive of interests;
8.
That in so far as the claims of these alleged creditors plaintiffs are concerned,
there is a misjoinder of parties because this is not a class suit, and therefore this
Honorable Court cannot take jurisdictionof the claims for payment;

9.
That the claims of plaintiffs-creditors, except Oppen, Esteban, Inc. go beyond
the limit mentioned inthe statute of frauds, Art. 1403 of the Civil Code, and are
therefor unenforceable, even assuming that there were such credits and claims;
10.
That this Honorable Court has no jurisdiction in this case for it is well settled
in law and in jurisprudence that a court of first instance has no power or jurisdiction
to annul judgments or decrees of a coordinate court because other function
devolves upon the proper appellate court; (Lacuna, et al. vs. Ofilada, et al., G.R. No.
L-13548, September 30, 1959; Cabigao vs. del Rosario, 44 Phil. 182; PNB vs.
Javellana, 49 O.G. No. 1, p.124), as it appears from the complaint in this case to
annul the decision of this same court, but of another branch (Branch II, Judge
Querubin presiding). 4
Said defendants interposed a cross-claim against the defendsants Leon Garibay and
Timoteo Tubungbanua praying "that in the event that judgment be rendered
ordering defendant cross claimant to pay to the plaintiffs the amount claimed in the
latter's complaint, that the cross claimant whatever amount is paid by the latter to
the plaintiff in accordance to the said judgment. ... 5
After trial, judgment was rendered in favor of the plaintiffs and against the
defendants.
The defendants, Margarita G. Saldajeno and her husband Cecilio Saldajeno,
appealed to the Court of Appeals assigning the following errors:
I
THE COURT A QUO ERRED IN ASSUMING JURISDICTION OVER THE CASE.
II
THE COURT A QUO ERRED IN HOLDING THAT THE ISSUE WITH REFERENCE TO THE
WITHDRAWAL OF DEFENDANT-APPELLANT MARGARITA G. SALDAJENO FROM THE
PARTNERSHIP "SABELA SAWMILL" WAS WHETHER OR NOT SUCH WITHDRAWAL
CAUSED THE "COMPLETE DISAPPEARANCE" OR "EXTINCTION" OF SAID
PARTNERSHIP.
III
THE COURT A QUO ERRED IN OT HOLDING THAT THE WITHDRAWAL OF DEFENDANTAPPELLANT MARGARITA G. SALDAJENO AS A PARTNER THEREIN DISSOLVED THE
PARTNERSHIP "ISABELA SAWMILL" (FORMED ON JAN. 30, 1951 AMONG LEON
GARIBAY, TIMOTEO TUBUNGBANUA AND SAID MARGARITA G. SALDAJENO).
IV
THE COURT A QUO ERRED IN ISSUING THE WRIT OF PRELIMINARY INJUNCTION.
V

THE COURT A QUO ERRED IN HOLDING THAT THE CHATTEL MORTGAGE DATED MAY
26, 1958, WHICH CONSTITUTED THE JUDGMENT IN CIVIL CASE NO. 4797 AND
WHICH WAS FORECLOSED IN CIVIL CASE NO. 5223 (BOTH OF THE COURT OF FIRST
INSTANCE OF NEGROS OCCIDENTAL) WAS NULL AND VOID.
VI
THE COURT A QUO ERRED IN HOLDING THAT THE CHATTLES ACQUIRED BY
DEFENDANT-APPELLANT MARGARITA G. SALDAJENO IN THE FORECLOSURE SALE IN
CIVIL CASE NO. 5223 CONSTITUTED 'ALL THE ASSETS OF THE DEFENDNAT
PARTNERSHIP.
VII
THE COURT A QUO ERRED IN HOLDING THAT DEFENDANT-APPELLANT MARGARITA G.
SALDAJENO BECAME PRIMARILY LIABLE TO THE PLAINTFFS-APPELLEES FOR HAVING
ACQUIRED THE MORTGAGED CHATTLES IN THE FORECLOSURE SALE CONDUCTED IN
CONNECTION WITH CIVIL CASE NO. 5223.
VIII
THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G.
SALDAJENO LIABLE FOR THE OBLIGATIONS OF MESSRS. LEON GARIBAY AND
TIMOTEO TUBUNGBANUA, INCURRED BY THE LATTER AS PARTNERS IN THE NEW
'ISABELA SAWMILL', AFTER THE DISSOLUTION OF THE OLD PARTNERSHIP IN WHICH
SAID MARGARITA G. SALDAJENO WAS A PARTNER.
IX
THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G.
SALDAJENO LIABLE TO THE PLAINTIFFS-APPELLEES FOR ATTORNEY'S FEES.
X
THE COURT A QUO ERRED IN NOT DISMISSING THE COMPLAINT OF THE PLAINTIFFSAPPELLEES.
XI
THE COURT A QUO ERRED IN DISMISSING THE CROSS-CLAIM OF DEFENDANTAPPELLANT MARGARITA G. SALDAJENO AGAINST CROSS-DEFENDANTS LEON
GARIBAY AND TIMOTEO TUBUNGBANUA. 6
The facts, as found by the trial court, are:
At the commencement of the hearing of the case on the merits the plaintiffs and the
defendant Cecilio and Margarita g. Saldajeno submittee a Partial Stipulation of Facts
that was marked as Exh. "A". Said stipulation reads as folows:

1.
That on January 30, 1951 the defendants Leon Garibay, Margarita G.
Saldejeno, and Timoteo Tubungbanua entered into a Contract of Partnership under
the firm name "Isabela Sawmill", a copy of which is hereto attached Appendix "A".
2.
That on February 3, 1956 the plaintiff Oppen, Esteban, Inc. sold a Motor Truck
and two Tractors to the partnership Isabela Sawmill for the sum of P20,500.00. In
order to pay the said purcahse price, the said partnership agreed to make
arrangements with the International Harvester Company at Bacolod City so that the
latter would sell farm machinery to Oppen, Esteban, Inc. with the understanding
that the price was to be paid by the partnership. A copy of the corresponding
contract of sle is attached hereto as Appendix "B".
3.
That through the method of payment stipulated in the contract marked as
Appendix "B" herein, the International Harvester Company has been paid a total of
P19,211.11, leaving an unpaid balance of P1,288.89 as shown in the statements
hereto attached as Appendices "C", "C-1", and "C-2".
4.
That on April 25, 1958 Civil Case No. 4797 was filed by the spouses Cecilio
Saldajeno and Margarita G. Saldajeno against the Isabela Sawmill, Leon Garibay,
and Timoteo Tubungbanua, a copy of which Complaint is attached as Appendix 'D'.
5.
That on April 27, 1958 the defendants LeonGaribay, Timoteo Tubungbanua
and Margarita G. Saldajeno entered into a "Memorandum Agreement", a copy of
which is hereto attached as Appendix 'E' in Civil Case 4797 of the Court of First
Instance of Negros Occidental.
6.
That on May 26, 1958 the defendants Leon Garibay, Timoteo Tubungbanua
and Margarita G. Saldajeno executed a document entitled "Assignment of Rights
with Chattel Mortgage", a copy of which documents and its Annexes "A" to "A-5"
forming a part of the record of the above mentioned Civil Case No. 4797, which
deed was referred to in the Decision of the Court ofFirst Instance of Negros
Occidental in Civil Case No. 4797 dated May 29, 1958, a copy of which is hereto
attached as Appendix "F" and "F-1" respectively.
7.
That thereafter the defendants Leon Garibay and Timoteo Tubungbanua did
not divide the assets and properties of the "Isabela Sawmill" between them, but
they continued the business of said partnership under the same firm name "Isabela
Sawmill".
8.
That on May 18, 1959 the Provincial Sheriff of Negros Occidental published
two (2) notices that he would sell at public auction on June 5, 1959 at Isabela,
Negros Occidental certain trucks, tractors, machinery, officeequipment and other
things that were involved in Civil Case No. 5223 of the Court of First Instance of
Negros Occidental, entitled "Margarita G. Saldajeno vs. Leon Garibay, et al." See
Appendices "G" and "G-1".
9.
That on October 15, 1969 the Provincial Sheriff of Negros Occidental executed
a Certificate ofSale in favor of the defendant Margarita G. Saldajeno, as a result of
the sale conducted by him on October 14 and 15, 1959 for the enforcement of the
judgment rendered in Civil Case No. 5223 of the Court of First Instance of Negros

Occidental, a certified copy of which certificte of sale is hereto attached as

Appendix "H".
10.
That on October 20, 1959 the defendant Margarita G. Saldajeno executed a
deed of sale in favor of the Pan Oriental Lumber Company transfering to the latter
for the sum of P45,000.00 the trucks, tractors, machinery, and other things that she
had purchashed at a public auction referred to in the foregoing paragraph, a
certified true copy of which Deed of Sale is hereto attached as Appendix "I".
11.
The plaintiffs and the defendants Cecilio Saldajeno and Margarita G.
Saldajeno reserve the right to present additional evidence at the hearing of this
case.
Forming parts of the above copied stipulation are documents that were marked as
Appendices "A", "B", "C", "C-1", "C-2", "D", "E", "F", "F-1", "G", "G-1", "H", and "I".
The plaintiffs and the defendants Cecilio and Margarita G. Saldajeno presented
additional evidence, mostly documentary, while the cross-defendants did not
present any evidence. The case hardly involves quetions of fact at all, but only
questions of law.
The fact that the defendnat 'Isabela Sawmill' is indebted to theplaintiff Oppen,
Esteban, Inc. in the amount of P1,288.89 as the unpaid balance of an obligation of
P20,500.00 contracted on February 3, 10956 is expressly admitted in paragraph 2
and 3 of the Stipulation, Exh. "A" and its Appendices "B", "C", "C-1", and "C-2".
The plaintiff Agustin E. Tonssay proved by his own testimony and his Exhs. "B" to"G"
that from October 6, 1958 to November 8, 1958 he advanced a total of P4,200.00 to
the defendant 'Isabela Sawmill'. Agaist the said advances said defendant delivered
to Tonsay P3,266.27 worth of lumber, leavng an unpaid balance of P933.73, which
balance was confirmed on May 15, 1959 by the defendant Leon Garibay, as
Manager of the defendant partnership.
The plaintiff Manuel G. Singsong proved by his own testimony and by his Exhs. "J" to
"L" that from May 25, 1988 to January 13, 1959 he sold on credit to the defendnat
"Isabela Sawmill" rice and bran, on account of which business transaction there
remains an unpaid balance of P3,580.50. The same plaintiff also proved that the
partnership ownes him the sum of P143.00 for nipa shingles bought from him on
credit and unpaid for.
The plaintiff Jose L. Espinos proved through the testimony of his witness Cayetano
Palmares and his Exhs. "N" to "O-3" that he owns the "Guia Lumber Yard", that on
October 11, 1958 said lumber yard advanced the sum of P2,500.00 to the
defendant "Isabela Sawmill", that against the said cash advance, the defendant
partnership delivered to Guia Lumber Yard P920.56 worth of lumber, leaving an
outstanding balance of P1,579.44.
The plaintiff Bacolod Southern Lumber Yard proved through the testimony of the
witness Cayetano Palmares an its Exhs. "P" to "Q-1" that on October 11, 1958 said
plaintiff advanced the sum of P1,500.00 to the defendsant 'Isabela Sawmill', that

against the said cash advance, the defendant partnership delivered to the said
plaintiff on November 19, 1958 P377.72 worth of lumber, and P73.54 worth of
lumber on January 27, 1959, leaving an outstanding balance of P1,048.78.
The plaintiff Jose Balzunce proved through the testimony of Leon Garibay whom he
called as his witness, and through the Exhs. "R" to "E" that from September 14,
1958 to November 27, 1958 he sold to the defedant "Isabela Sawmill" gasoline,
motor fuel, and lubricating oils, and that on account of said transactions, the
defendant partnersip ownes him an unpaid balance of P2,052.10.
Appendix "H" of the stipulation Exh. "A" shows that on October 13 and 14, 1959 the
Provincial Sheriff sold to the defendant Margrita G. Saldajeno for P38,040.00 the
assets of the defendsant "Isabela Sawmill" which the defendants Leon G. Garibay
and Timoteo Tubungbanua had mortgaged to her, and said purchase price was
applied to the judgment that she has obtained against he said mortgagors in Civil
Case No. 5223 of this Court.
Appendix "I" of the same stipulation Exh. "A" shows that on October 20, 1959 the
defendant Margarita G. Saldajeno sold to the PAN ORIENTAL LUMBER COMPANY for
P45,000.00 part of the said properties that she had bought at public aucton one
week before.
xxx xxx xxx 7
It is contended by the appellants that the Court of First Instance of Negros
Occidental had no jurisdiction over Civil Case No. 5343 because the plaintiffs
Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos and the Bacolod Southern
Lumber Yard sought to collect sums of moeny, the biggest amount of which was less
than P2,000.00 and, therefore, within the jurisdiction of the municipal court.
This contention is devoid of merit because all the plaintiffs also asked for the nullity
of the assignment of right with chattel mortgage entered into by and between
Margarita G. Saldajeno and her former partners Leon Garibay and Timoteo
Tubungbanua. This cause of action is not capable of pecuniary estimation and falls
under the jurisdiction of the Court of First Instnace. Where the basic issue is
something more than the right to recover a sum of money and where the money
claim is purely incidental to or a consequence of the principal relief sought, the
action is as a case where the subject of the litigation is not capable of pecuniary
estimation and is cognizable exclusively by the Court of First Instance.
The jurisdiction of all courts in the Philippines, in so far as the authority thereof
depends upon the nature of litigation, is defined in the amended Judiciary Act,
pursuant to which courts of first instance shall have exclusive original jurisdiction
over any case the subject matter of which is not capable of pecuniary estimation.
An action for the annulment of a judgment and an order of a court of justice belongs
to th category. 8
In determining whether an action is one the subject matter of which is not capable
of pecuniary estimation this Court has adopted the criterion of first ascertaining the
nature of the principal action or remedy sought. If it is primarily for the recovery of a

sum of money, the cliam is considered capable of pecuniary estimation, and

whether jurisdiciton is in the municipal courts or in the courts of first instance would
depend on the amount of the claim. However, where the basic issue is something
other than the right to recover a sum of money, where the money claim is purely
incidental to, or a consequence of, the principal relief sought, this Court has
considered such actions as cases where the subject ogf the litigation may not be
estimated in terms of money, and are cognizable exclusively by courts of first
instance.
In Andres Lapitan vs. SCANDIA, Inc., et al., 9 this Court held:
Actions for specific performance of contracts have been expressly prounounced to
be exclusively cognizable by courts of first instance: De Jesus vs. Judge Garcia, L26816, February 28, 1967; Manufacturers' Distributors, Inc. vs. Yu Siu Liong, L21285, April 29, 1966. And no cogent reason appears, and none is here advanced
by the parties, why an actin for rescission (or resolution) should be differently
treated, a "rescission" being a counterpart, so to speak, of "specific performance'. In
both cases, the court would certainly have to undertake an investigation into facts
that would justify one act of the other. No award for damages may be had in an
action for resicssion without first conducting an inquiry into matters which would
justify the setting aside of a contract, in the same manner that courts of first
instance would have to make findings of fact and law in actions not capable of
pecuniary estimnation espressly held to be so by this Court, arising from issues like
those arised in Arroz v. Alojado, et al., L-22153, March 31, 1967 (the legality or
illegality of the conveyance sought for and the determination of the validity of the
money deposit made); De Ursua v. Pelayo, L-13285, April 18, 1950 (validity of a
judgment); Bunayog v. Tunas, L-12707, December 23, 1959 (validity of a mortgage);
Baito v. Sarmiento, L-13105, August 25, 1960 (the relations of the parties, the right
to support created by the relation, etc., in actions for support); De Rivera, et al. v.
Halili, L-15159, September 30, 1963 (the validity or nullity of documents upon which
claims are predicated). Issues of the same nature may be raised by a party against
whom an action for rescission has been brought, or by the plaintiff himself. It is,
therefore, difficult to see why a prayer for damages in an action for rescission
should be taken as the basis for concluding such action for resiccison should be
taken as the basis for concluding such action as one cpable of pecuniary estimation
- a prayer which must be included in the main action if plaintiff is to be
compensated for what he may have suffered as a result of the breach committed by
defendant, and not later on precluded from recovering damages by the rule against
splitting a cause of action and discouraging multiplicitly of suits.
The foregoing doctrine was reiterated in The Good Development Corporation vs.
Tutaan, 10 where this Court held:
On the issue of which court has jurisdiction, the case of SENO vs. Pastolante, et al.,
is in point. It was ruled therein that although the purposes of an action is to recover
an amount plus interest which comes within the original jurisidction of the Justice of
the Peace Court, yet when said action involves the foreclosure of a chattel mortgage
covering personal properties valued at more than P2,000, (now P10,000.00) the
action should be instituted before the Court of First Instance.

In the instanct, case, the action is to recover the amount of P1,520.00 plus interest
and costs, and involves the foreclosure of a chattel mortgage of personal properties
valued at P15,340.00, so that it is clearly within the competence of the respondent
court to try and resolve.
In the light of the foregoing recent rulings, the Court of First Instance of Negros
Occidental did no err in exercising jurisidction over Civil Case No. 5343.
The appellants also contend that the chattel mortgage may no longer be annulled
because it had been judicially approved in Civil Case No. 4797 of the Court of First
Instance of Negros Occidental and said chattel mortgage had been ordered
foreclosed in Civil Case No. 5223 of the same court.
On the question of whether a court may nullify a final judgment of another court of
co-equal, concurrent and coordinate jusridiction, this Court originally ruled that:
A court has no power to interfere with the judgments or decrees of a court of
concurrent or coordinate jurisdiction having equal power to grant the relief sought
by the injunction.
The various branches of the Court of First Instance of Manila are in a sense
coordinate courts and cannot be allowed to interfere with each others' judgments or
decrees. 11
The foregoing doctrine was reiterated in a 1953 case 12 where this Court said:
The rule which prohibits a Judge from intertering with the actuations of the Judge of
another branch of the same court is not infringed when the Judge who modifies or
annuls the order isued by the other Judge acts in the same case and belongs to the
same court (Eleazar vs. Zandueta, 48 Phil. 193. But the rule is infringed when the
Judge of a branch of the court issues a writ of preliminary injunction in a case to
enjoint the sheriff from carrying out an order by execution issued in another case by
the Judge of another branch of the same court. (Cabigao and Izquierdo vs. Del
Rosario et al., 44 Phil. 182).
This ruling was maintained in 1967. In Mas vs. Dumaraog, 13 the judgment sought
to be annulled was rendered by the Court of First Instance of Iloilo and the action for
annullment was filed with the Court of First Instance of Antique, both courts
belonging to the same Judicial District. This Court held that:
The power to open, modify or vacant a judgment is not only possessed by but
restricted to the court in which the judgment was rendered.
The reason of this Court was:
Pursuant to the policy of judicial stability, the judgment of a court of competent
jurisdiction may not be interfered with by any court concurrrent jurisdiction.

Again, in 1967 this Court ruled that the jurisdiction to annul a judgement of a
branch of the court of First Instance belongs solely to the very same branch which
rendered the judgement. 14
Two years later, the same doctrine was laid down in the Sterling Investment case.
15
In December 1971, however, this court re-examined and reversed its earlier
doctrine on the matter. In Dupla v. Court of Appeals, 16 this Tribunal, speaking
through Mr. Justice Villamor declared:
... the underlying philosophy expressed in the Dumara-og case, the policy of judicial
stability, to the end that the judgment of a court of competent jurisdiction may not
be interfered with by any court of concurrent jurisdiction may not be interfered with
by any court of concurrent jurisdiciton, this Court feels that this is as good an
occasion as any to re-examine the doctrine laid down ...
In an action to annul the judgment of a court, the plaintiff's cause of action springs
from the alleged nullity of the judgment based on one ground or another,
particularly fraud, which fact affords the plaintiff a right to judicial interference in his
behalf. In such a suit the cause of action is entirely different from that in the actgion
which grave rise to the judgment sought to be annulled, for a direct attack against a
final and executory judgment is not a incidental to, but is the main object of the
proceeding. The cause of action in the two cases being distinct and separate from
each other, there is no plausible reason why the venue of the action to annul the
judgment should necessarily follow the venue of the previous action ...
The present doctrine which postulate that one court or one branch of a court may
not annul the judgment of another court or branch, not only opens the door to a
violation of Section 2 of Rule 4, (of the Rules of Court) but also limit the opportunity
for the application of said rule.
Our conclusion must therefore be that a court of first instance or a branch thereof
has the authority and jurisdiction to take cognizance of, and to act in, suit to annul
final and executory judgment or order rendered by another court of first instance or
by another branch of the same court...
In February 1974 this Court reiterated the ruling in the Dulap case. 17
In the light of the latest ruling of the Supreme Court, there is no doubt that one
branch of the Court of First Instance of Negros Occidental can take cognizance of an
action to nullify a final judgment of the other two branches of the same court.
It is true that the dissolution of a partnership is caused by any partner ceasing to be
associated in the carrying on of the business. 18 However, on dissolution, the
partnershop is not terminated but continuous until the winding up to the business.
19
The remaining partners did not terminate the business of the partnership "Isabela
Sawmill". Instead of winding up the business of the partnership, they continued the

business still in the name of said partnership. It is expressly stipulated in the

memorandum-agreement that the remaining partners had constituted themselves
as the partnership entity, the "Isabela Sawmill". 20
There was no liquidation of the assets of the partnership. The remaining partners,
Leon Garibay and Timoteo Tubungbanua, continued doing the business of the
partnership in the name of "Isabela Sawmill". They used the properties of said
partnership.
The properties mortgaged to Margarita G. Saldajeno by the remaining partners,
Leon Garibay and Timoteo Tubungbanua, belonged to the partnership "Isabela
Sawmill." The appellant, Margarita G. Saldajeno, was correctly held liable by the trial
court because she purchased at public auction the properties of the partnership
which were mortgaged to her.
It does not appear that the withdrawal of Margarita G. Saldajeno from the
partnership was published in the newspapers. The appellees and the public in
general had a right to expect that whatever, credit they extended to Leon Garibay
and Timoteo Tubungbanua doing the business in the name of the partnership
"Isabela Sawmill" could be enforced against the proeprties of said partnership. The
judicial foreclosure of the chattel mortgage executed in favor of Margarita G.
Saldajeno did not relieve her from liability to the creditors of the partnership.
The appellant, margrita G. Saldajeno, cannot complain. She is partly to blame for
not insisting on the liquidaiton of the assets of the partnership. She even agreed to
let Leon Garibay and Timoteo Tubungbanua continue doing the business of the
partnership "Isabela Sawmill" by entering into the memorandum-agreement with
them.
Although it may be presumed that Margarita G. Saldajeno had action in good faith,
the appellees aslo acted in good faith in extending credit to the partnership. Where
one of two innocent persons must suffer, that person who gave occasion for the
damages to be caused must bear the consequences. Had Margarita G. Saldajeno
not entered into the memorandum-agreement allowing Leon Garibay and Timoteo
Tubungbanua to continue doing the business of the aprtnership, the applees would
not have been misled into thinking that they were still dealing with the partnership
"Isabela Sawmill". Under the facts, it is of no moment that technically speaking the
partnership "Isabela Sawmill" was dissolved by the withdrawal therefrom of
Margarita G. Saldajeno. The partnership was not terminated and it continued doping
business through the two remaining partners.
The contention of the appellant that the appleees cannot bring an action to annul
the chattel mortgage of the propertiesof the partnership executed by Leon Garibay
and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit.
As a rule, a contract cannot be assailed by one who is not a party thereto. However,
when a contract prejudices the rights of a third person, he may file an action to
annul the contract.

This Court has held that a person, who is not a party obliged principally or
subsidiarily under a contract, may exercised an action for nullity of the contract if he
is prejudiced in his rights with respect to one of the contracting parties, and can
show detriment which would positively result to him from the contract in which he
has no intervention. 21
The plaintiffs-appellees were prejudiced in their rights by the execution of the
chattel mortgage over the properties of the partnership "Isabela Sawmill" in favopr
of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo
Tubungbanua. Hence, said appelees have a right to file the action to nullify the
chattel mortgage in question.
The portion of the decision appealed from ordering the appellants to pay attorney's
fees to the plaintiffs-appellees cannot be sustained. There is no showing that the
appellants displayed a wanton disregard of the rights of the plaintiffs. Indeed, the
appellants believed in good faith, albeit erroneously, that they are not liable to pay
the claims.
The defendants-appellants have a right to be reimbursed whatever amounts they
shall pay the appellees by their co-defendants Leon Garibay and Timoteo
Tubungbanua. In the memorandum-agreement, Leon Garibay and Timoteo
Tubungbaun undertook to release Margarita G. Saldajeno from any obligation of
"Isabela Sawmill" to third persons. 22
WHEREFORE, the decision appealed from is hereby affirmed with the elimination of
the portion ordering appellants to pay attorney's fees and with the modification that
the defendsants, Leon Garibay and Timoteo Tubungbanua, should reimburse the
defendants-appellants, Margarita G. Saldajeno and her husband Cecilio Saldajeno,
whatever they shall pay to the plaintiffs-appellees, without pronouncement as to
costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Guerrero, De Castro and Melencio-Herrera, JJ.,
concur.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General
Felicisimo R. Rosete and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for
petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30
September 1947 by herein respondent William J. Suter as the general partner, and
Julia Spirig and Gustav Carlson, as the limited partners. The partners contributed,
respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1
October 1947, the limited partnership was registered with the Securities and
Exchange Commission. The firm engaged, among other activities, in the
importation, marketing, distribution and operation of automatic phonographs,
radios, television sets and amusement machines, their parts and accessories. It had
an office and held itself out as a limited partnership, handling and carrying
merchandise, using invoices, bills and letterheads bearing its trade-name,
maintaining its own books of accounts and bank accounts, and had a quota
allocation with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and,
thereafter, on 18 December 1948, limited partner Carlson sold his share in the
partnership to Suter and his wife. The sale was duly recorded with the Securities
and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation,
without objection by the herein petitioner, Commissioner of Internal Revenue, until
in 1959 when the latter, in an assessment, consolidated the income of the firm and
the individual incomes of the partners-spouses Suter and Spirig resulting in a
determination of a deficiency income tax against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and
withdrawal, as not in accordance with law, but his request was denied. Unable to
secure a reconsideration, he appealed to the Court of Tax Appeals, which court,
after trial, rendered a decision, on 11 November 1965, reversing that of the
Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal
Revenue, of the tax court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co.,
Ltd. should be disregarded for income tax purposes, considering that respondent
William J. Suter and his wife, Julia Spirig Suter actually formed a single taxable unit;
and

(b) Whether or not the partnership was dissolved after the marriage of the partners,
respondent William J. Suter and Julia Spirig Suter and the subsequent sale to them
by the remaining partner, Gustav Carlson, of his participation of P2,000.00 in the
partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage
of Suter and Spirig and their subsequent acquisition of the interests of remaining
partner Carlson in the partnership dissolved the limited partnership, and if they did
not, the fiction of juridical personality of the partnership should be disregarded for
income tax purposes because the spouses have exclusive ownership and control of
the business; consequently the income tax return of respondent Suter for the years
in question should have included his and his wife's individual incomes and that of
the limited partnership, in accordance with Section 45 (d) of the National Internal
Revenue Code, which provides as follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents
or non-residents, only one consolidated return for the taxable year shall be filed by
either spouse to cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax
Appeals held, that his marriage with limited partner Spirig and their acquisition of
Carlson's interests in the partnership in 1948 is not a ground for dissolution of the
partnership, either in the Code of Commerce or in the New Civil Code, and that
since its juridical personality had not been affected and since, as a limited
partnership, as contra distinguished from a duly registered general partnership, it is
taxable on its income similarly with corporations, Suter was not bound to include in
his individual return the income of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been
dissolved by operation of law because of the marriage of the only general partner,
William J. Suter to the originally limited partner, Julia Spirig one year after the
partnership was organized is rested by the appellant upon the opinion of now
Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership,
because under the Civil Code, which applies in the absence of express provision in
the Code of Commerce, persons prohibited from making donations to each other are
prohibited from entering into universal partnerships. (2 Echaverri 196) It follows that
the marriage of partners necessarily brings about the dissolution of a pre-existing
partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter
"Morcoin" Co., Ltd. was not a universal partnership, but a particular one. As appears
from Articles 1674 and 1675 of the Spanish Civil Code, of 1889 (which was the law
in force when the subject firm was organized in 1947), a universal partnership
requires either that the object of the association be all the present property of the
partners, as contributed by them to the common fund, or else "all that the partners

may acquire by their industry or work during the existence of the partnership".
William J. Suter "Morcoin" Co., Ltd. was not such a universal partnership, since the
contributions of the partners were fixed sums of money, P20,000.00 by William
Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that
spouses were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his
Derecho Civil, 7th Edition, 1952, Volume 4, page 546, footnote 1, says with regard
to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad
universal, pero o podran constituir sociedad particular? Aunque el punto ha sido
muy debatido, nos inclinamos a la tesis permisiva de los contratos de sociedad
particular entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y
hay que estar a la norma general segun la que toda persona es capaz para
contratar mientras no sea declarado incapaz por la ley. La jurisprudencia de la
Direccion de los Registros fue favorable a esta misma tesis en su resolution de 3 de
febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such
marriage not being one of the causes provided for that purpose either by the
Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a
single proprietorship, is equally erroneous. The capital contributions of partners
William J. Suter and Julia Spirig were separately owned and contributed by them
before their marriage; and after they were joined in wedlock, such contributions
remained their respective separate property under the Spanish Civil Code (Article
1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd.
did not become common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a
juridical personality of its own, distinct and separate from that of its partners (unlike
American and English law that does not recognize such separate juridical
personality), the bypassing of the existence of the limited partnership as a taxpayer
can only be done by ignoring or disregarding clear statutory mandates and basic
principles of our law. The limited partnership's separate individuality makes it
impossible to equate its income with that of the component members. True, section
24 of the Internal Revenue Code merges registered general co-partnerships
(compaias colectivas) with the personality of the individual partners for income tax
purposes. But this rule is exceptional in its disregard of a cardinal tenet of our
partnership laws, and can not be extended by mere implication to limited
partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of
the Visayas, L-13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs.
Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal personality of
the corporations involved therein are not applicable to the present case. In the cited
cases, the corporations were already subject to tax when the fiction of their
corporate personality was pierced; in the present case, to do so would exempt the
limited partnership from income taxation but would throw the tax burden upon the
partners-spouses in their individual capacities. The corporations, in the cases cited,
merely served as business conduits or alter egos of the stockholders, a factor that
justified a disregard of their corporate personalities for tax purposes. This is not true
in the present case. Here, the limited partnership is not a mere business conduit of
the partner-spouses; it was organized for legitimate business purposes; it conducted
its own dealings with its customers prior to appellee's marriage, and had been filing
its own income tax returns as such independent entity. The change in its
membership, brought about by the marriage of the partners and their subsequent
acquisition of all interest therein, is no ground for withdrawing the partnership from
the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as
the records show, the partners did not enter into matrimony and thereafter buy the
interests of the remaining partner with the premeditated scheme or design to use
the partnership as a business conduit to dodge the tax laws. Regularity, not
otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require
that income to be included in the individual tax return of respondent Suter is to
overstretch the letter and intent of the law. In fact, it would even conflict with what
it specifically provides in its Section 24: for the appellant Commissioner's stand
results in equal treatment, tax wise, of a general copartnership (compaia colectiva)
and a limited partnership, when the code plainly differentiates the two. Thus, the
code taxes the latter on its income, but not the former, because it is in the case of
compaias colectivas that the members, and not the firm, are taxable in their
individual capacities for any dividend or share of the profit derived from the duly
registered general partnership (Section 26, N.I.R.C.; Araas, Anno. & Juris. on the
N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nt
But it is argued that the income of the limited partnership is actually or
constructively the income of the spouses and forms part of the conjugal partnership
of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil. 779,
and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the
wife's parapherna become conjugal only when no longer needed to defray the
expenses for the administration and preservation of the paraphernal capital of the
wife. Then again, the appellant's argument erroneously confines itself to the
question of the legal personality of the limited partnership, which is not essential to
the income taxability of the partnership since the law taxes the income of even joint
accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in
that it assumes that the conjugal partnership of gains is a taxable unit, which it is
not. What is taxable is the "income of both spouses" (Section 45 [d] in their
individual capacities. Though the amount of income (income of the conjugal
partnership vis-a-vis the joint income of husband and wife) may be the same for a

given taxable year, their consequences would be different, as their contributions in

the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being
consolidated with, and when split from the income of the spouses, is not a
justification for requiring consolidation; the revenue code, as it presently stands,
does not authorize it, and even bars it by requiring the limited partnership to pay
tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No
costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano
and Teehankee, JJ., concur.
Barredo, J., took no part.

TECK SEING AND CO., LTD., petitioner-appellee.

SANTIAGO JO CHUNG, ET AL., partners,
vs.
PACIFIC COMMERCIAL COMPANY, ET AL., creditors-appellants.
Del Rosario & Del Rosario and Block, Johnston and Greenbaum for appellants.
F. V. Arias for appellants Jo Ibec and Go Tayco.
No appearance for petitioner and appellee.
Jose A. Espiritu and Felipe Ysmael as amici curiae.
MALCOLM, J.:
Following the presentation of an application to be adjudged an insolvent by the
"Sociedad Mercantil, Teck Seing & Co., Ltd.," the creditors, the Pacific Commercial
Company, Piol & Company, Riu Hermanos, and W. H. Anderson & Company, filed a
motion in which the Court was prayed to enter an order: "(A) Declaring the
individual partners as described in paragraph 5 parties to this proceeding; (B) to
require each of said partners to file an inventory of his property in the manner
required by section 51 of Act No. 1956; and (C) that each of said partners be
adjudicated insolvent debtors in this proceeding." The trial judge first granted the
motion, but, subsequently, on opposition being renewed, denied it. It is from this
last order that an appeal was taken in accordance with section 82 of the Insolvency
Law.
There has been laid before us for consideration and decision a question of some
importance and of some intricacy. The issue in the case relates to a determination
of the nature of the mercantile establishment which operated under the name of
Teck Seing & co., Ltd., and this issue requires us to look into, and analyze, the
document constituting Teck Seing & Co., Ltd. It reads:
ESCRITURA DE SOCIEDAD MERCANTIL LIMITADA
Sepan todos por la presente:
Que nosotros, Santiago Jo Chung Cang, mayor de edad comerciante, vecino y
residente del municipio de Tabogon Provincia de Cebu, Islas Filipinas, Go Tayco,
mayor de edad, comerciante, vecino y residente del municipio de Cebu Provincia de
Cebu, Islas Filipinas, Yap Gueco, mayor de edad, comerciante, vecino y residente del
municipio y Provincia de Cebu, Islas Filipinas, Lim Yogsing, mayor de edad
comerciante, vecino y residente del municipio de Cebu, Provincia de Cebu, Islas
Filipinas, y Jo Ybec, mayor de edad, comerciante, vecino y residente del municipio
de Jagna, Provincia de Bohol, Islas Filipinas, hacemos constar por la presente, que
constituimos y formamos una sociedad mercantil limitada, bajo las leyes vigentes
en las Islas Filipinas y para ser registrada de acuerdo con los reglamentos vigentes
del Codigo de Comercio en Filipinas.
Que la razon social se denominara "Teck Seing & Co., Ltd." y tendra su domicilio
principal en la Calle Magallanes No. 94, de la Ciudad de Cebu, Provincia de Cebu,
Islas Filipinas.

Que el capital social sera de treinta mil pesos (P30,000) moneda legal de las Islas
Filipinas, dividido en cinco acciones de a P6,000 como sigue:
Santiago Jo Chung Cang . . . . . . . . . . . . .
P6,000.00
Go Tayco . . . . . . . . . . . . . . . . . . . . . . . . . .
6,000.00
Yap Gueco . . . . . . . . . . . . . . . . . . . . . . . .
6,000.00
Jo Ybec . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,000.00
Lim Yogsing . . . . . . . . . . . . . . . . . . . . . . .
6,000.00
Total . . . . . . . . . . . . . . . . . . . . . .
30,000.00
Que la duracion de la sociedad sera la de seis aos, a contar de la fecha de esta
escritura, pudiendo prorrogarse este tiempo a discrecion unanime de todos los
accionistas.
El objeto de la sociedad sera la compra y venta de mercaderias en general.
El administrador o administradores de la sociedad podran, previa conformidad de
los accionistas, establecer cuantas sucursales o establecimientos considere
necesarios para facilitar sus negocios y el mayor desarrollo del comercio a que se
dedica la sociedad, verificando todas las operaciones que crean convenientes para
el fomento de su capital.
Las ganancias o perdidas que resultaren durante cada ao comercial, se distribuiran
proporcionalmente entre los accionistas, de acuerdo con el capital aportado por
cada uno de los mismos.
Las ganancias que resultaren en cada ao comercial, si resultaren algunas
ganancias, no podran ser retiradas pors los accionistas hasta dentro del termino de
tres aos a contar de la fecha del primer balance anual del negocio, quedadno por
tanto estas ganancias en reserva, para ampliar el capital aportado opor los
accionistas y ampliar por tanto la esfera de accion emprendida por la misma
sociedad. Al pasar o expirar el termino de tres aos, cada accionista podra retirar o

depositar en poder de la sociedad, las ganancias que le debiera corresponder

durante dicho termino de tres aos.
Que los accionistas no podran extraer ni disponer en ningun tiempo cualesquiera
cantidad o cantidades de la sociedad, que haya sido aportado por los mismos, para
atender sus gastos particulares ni aun pagando redito alguno sobre la cantidad que
intenen disponer o extraer de dicha sociedad.
El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr. Vicente Jocson Jo, la
administracion de la Compaia, quienes podran usar indistintamente la firma social,
quedando por consiguiente autorizados amobs para hacer en nombre de ella toda
calse de operaciones, negocios y especulaciones mercantiles, practicando judicial y
extra-judicialment cuantos actos se requieran para el bien de la sociedad, nombrar
procuradores o abogados para reclamaciones y cobro de creditos y proponer ante
los tribunales las demandas, convenios, transacciones y excepciones procdentes. En
caso de ausencia, enfermedad o cualquier otro impedimento del accionista
administrador Sr. Lim Yogsing, este podra conferir poder general o especial al
accionista que crea conveniente para que en union del administrador auxiliar Sr.
Vicente Jocson Jo, pudieran ambos administrar convenientemente los negocios de la
sociedad. Que los administradores podran tener los empleados necesarios para el
mejor que debieran percibir dichos empleados por servicios rendidos a la sociedad.
Que ambos administradores podran disponer de mil discientos pesos (P1,200)
moneda filipina, anualmente, para sus gastos particulares, siendo dicha cantidad de
P1,200 la que corresponde a cada uno de dichos administradores, como
emolumentos o salarios que se les asigna a cas uno, por sus trabajos en la
administracion de la sociedad. Entendiendose, que, los accionistas podran disponer
cada fin de aola gratificacion quese concedera a cada administrador, si los
negocios del ao fueran boyantes y justifiquen la concesion de una gratificacion
especial, aparte del salario aqui dispuesto y especificado.
Que pasado el termino de seis aos, y es de la conveniencia de los accionistas la
continuacion del negocio de esta sociedad, dicho termino sera prorrogado por igual
numero de aos, sin necesidas del otorgamiento de ulteriores escrituras, quedando
la presente en vigor hasta el termino dispuesto por todos los accionistas.
Que las diferencias que pudieran suscitarse entre los accionistas, bien sea por razon
de lo estipulado en esta en ella comprendidos, se procurara arreglar entre los
mismos amistosa y extrajudicialmente, y si no se consiguiere un arreglo de este
modo, dichos accionistas nombraran un arbitro, cuya resolucion estan todos
obligados y por la presente se comprometen y se obligan a acatarla en todas sus
partes, renunciando ulteriores recursos.
En cuyos terminos dejamos formalizada esta escritura de sociedad
mercantillimitada, y prometemos cumplirla fiel y estrictamente segun los pactos
que hemos establecido.
En testimonio de todo lo cual, firmamos en la Ciudad de Cebu, Provincia de Cebu,
Islas Filipinas, hoy 31 de octubre de mil novecientos diez y nueve.

(Fdos.) "LIM YOGSING

"Jo YBec por Ho Seng Sian
"SANTIAGO JO CHUNG CANG
"GO TAYCO
"YAP GUECO
Firnando en presencia de:
(Fdos.) "ATILANO LEYSON
"JULIO DIAZ
"ESTADOS UNIDOS DE AMERCA
"ISLAS FILIPINAS
"PROVINCIA DE CEBU
En el Municipio de Cebu, de la Provincia antes mencionada, I.F., hoy 31 de octubre
de 1919, A.D., ante mi, Notario Publico que subscribe, comprecieron personalmente
Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing y Jo Ybec, representado
este ultimo por Ho Seng Sian, segun autorizacion hecha en telegrama de fecha 27
de septiembre de 1919 que se me ha presentado en este mismo acto, de quienes
doy fe de que les conozco por ser las mismas personas que otorgaron el preinserto
documento, ratificando ant emi su contenido y manifestando ser el mismo un acto
de su libre y voluntario otorgamiento. El Sr. Santiago Jo Chung Cang me exhibio su
cedula personal expedida en Cebu, Cebu, I.F. el dia 19 de septiembre de 1919 bajo
el No. H77742, Go Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I.F.,
el dia 9 de octubre de 1919 bajo el No. G2042490, Yap Gueco tambien me exhibio la
suya expedida en Cebu, Cebu, I.F. el dia 20 de enero de 1919 bajo el No. F1452296,
Lim Yogsing tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 26 de
febrero de 1919 bajo el No. F1455662, y Ho Seng Sian representante de Jo Ybec, me
exhibio su cedula personal expedida en Cebu, Cebu, I.f. el dia 4 de febrero de 1919
bajo el No. F1453733.
Ante mi,
(Fdo.) "F.V.ARIAS
"Notario Publico
"Hasta el 1. de enero de 1920
"Asiento No. 157
Pagina No. 95 de mi
Registro Notarial
Serie 1919
Libro 2.
Presentado a las diez y cuarenta y tres minutos de la maana de hoy, segun el
asiento No. 125, pagina 9 del Tomo 1. del Libro Diario. Cebu, 11 de febrero de
1920.
(Fdo.) "QUIRICO ABETO
[SELLO]
"Registrador Mercantil Ex-Officio"

Inscrito el documento que preced al folio 84 hoja No. 188, inscripcion 1.a del Tomo
3. del Libro Registro de Sociedades Mercantiles. Cebu, 11 de febrero de 1920.
Honorarios treinta pesos con cincuenta centavos. Art. 197, Ley No. 2711, Codigo
Administrativo.
(Fdo.) "QUIRICO ABETO
[SELLO]
"Registrador Mercantil Ex-Officio"
Proceeding by process of elimination, it is self-evident that Teck Seing & Co., Ltd., is
not a corporation. Neither is it contended by any one that Teck Seing & Co., Ltd., is
accidental partnership denominated cuenta en participacion (joint account
association).
Counsel for the petitioner and appellee described his client in once place in his
opposition to the motion of the creditors as "una verdadera sociedad anonima" (a
true sociedad anonima). The provisions of the Code of Commerce relating to
sociedades anonimas were, however, repealed by section 191 of the Corporation
Law (Act No. 1459), with the exceptions the sociedades anonimas lawfully organized
at the time of the passage of the Corporation Law were recognized, which is not our
case.
The document providing for the partnership contract purported to form "una
sociedad mercantil limitada," and counsel for the petitioner's first contention was
that Teck Seing & Co., Ltd., was not "una sociedad regular colectiva, ni siquiera
comanditaria, sino una sociedad mercantil limitada." Let us see if the partnership
contract created a "sociedad en comandita," or, as it is known in English, and will
hereafter be spoken of, "a limited partnership."
To establish a limited partnership there must be, at least, one general partner and
the name of the least one of the general partners must appear in the firm name.
(Code of Commerce, arts. 122 [2], 146, 148.) But neither of these requirements
have been fulfilled. The general rule is, that those who seek to avail themselves of
the protection of laws permitting the creation of limited partnerships must show a
substantially full compliance with such laws. A limited partnership that has not
complied with the law of its creation is not considered a limited partnership at all,
but a general partnership in which all the members are liable. (Mechem, Elements
of Partnership, p. 412; Gilmore, Partnership, pp. 499, 595; 20 R C. L. 1064.)
The contention of the creditors and appellants is that the partnership contract
established a general partnership.
Article 125 of the Code of Commerce provides that the articles of general
copartnership must estate the names, surnames, and domiciles of the partners; the
firm name; the names, and surnames of the partners to whom the management of
the firm and the use of its signature is instrusted; the capital which each partner
contributes in cash, credits, or property, stating the value given the latter or the
basis on which their appraisement is to be made; the duration of the copartnership;
and the amounts which, in a proper case, are to be given to each managing partner
annually for his private expenses, while the succeeding article of the Code provides
that the general copartnership must transact business under the name of all its

members, of several of them, or of one only. Turning to the document before us, it
will be noted that all of the requirements of the Code have been met, with the sole
exception of that relating to the composition of the firm name. We leave
consideration of this phase of the case for later discussion.
The remaining possibility is the revised contention of counsel for the petitioners to
the effect that Teck Seing & Co., Ltd., is "una sociedad mercantil "de facto"
solamente" (only a de facto commercial association), and that the decision of the
Supreme court in the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng [1906], 6 Phil.,
498), is controlling. It was this argument which convinced the trial judge, who gave
effect to his understanding of the case last cited and which here must be given
serious attention.
The decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, discloses that the firm
Kieng-Chiong-Seng was not organized by means of any public document; that the
partnership had not been recorded in the mercantile registry; and that KiengChiong-Seng was not proven to be the firm name, but rather the designation of the
partnership. The conclusion then was, that the partnership in question was merely
de facto and that, therefore, giving effect to the provisions of article 120 of the Code
of Commerce, the right of action was against the persons in charge of the
management of the association.
Laying the facts of the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, side by
side with the facts before us, a marked difference is at once disclosed. In the cited
case, the organization of the partnership was not evidenced by any public
document; here, it is by a public document. In the cited case, the partnership
naturally could not present a public instrument for record in the mercantile registry;
here, the contract of partnership has been duly registered. But the two cases are
similar in that the firm name failed to include the name of any of the partners.
We come then to the ultimate question, which is, whether we should follow the
decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, or whether we should
differentiate the two cases, holding Teck Seing & Co., Ltd., a general copartnership,
notwithstanding the failure of the firm name to include the name of one of the
partners. Let us now notice this decisive point in the case.
Article 119 of the Code of Commerce requires every commercial association before
beginning its business to state its article, agreements, and conditions in a public
instrument, which shall be presented for record in the mercantile registry. Article
120, next following, provides that the persons in charge of the management of the
association who violate the provisions of the foregoing article shall be responsible in
solidum to the persons not members of the association with whom they may have
transacted business in the name of the association. Applied to the facts before us, it
would seem that Teck Seing & Co., Ltd. has fulfilled the provisions of article 119.
Moreover, to permit the creditors only to look to the person in charge of the
management of the association, the partner Lim Yogsing, would not prove very
helpful to them.
What is said in article 126 of the Code of Commerce relating to the general
copartnership transacting business under the name of all its members or of several

of them or of one only, is wisely included in our commercial law. It would appear,
however, that this provision was inserted more for the protection of the creditors
than of the partners themselves. A distinction could well be drawn between the
right of the alleged partnership to institute action when failing to live up to the
provisions of the law, or even the rights of the partners as among themselves, and
the right of a third person to hold responsible a general copartnership which merely
lacks a legal firm name in order to make it a partnership de jure.
The civil law and the common law alike seem to point to a difference between the
rights of the partners who have failed to comply with the law and the rights of third
persons who have dealt with the partnership.
The supreme court of Spain has repeatedly held that notwithstanding the obligation
of the members to register the articles of association in the commercial registry,
agreements containing all the essential requisites are valid as between the
contracting parties, whatever the form adopted, and that, while the failure to
register in the commercial registry necessarily precludes the members from
enforcing rights acquired by them against third persons, such failure cannot
prejudice the rights of third persons. (See decisions of December 6, 1887, January
25, 1888, November 10, 1890, and January 26, 1900.) The same reasoning would be
applicable to the less formal requisite pertaining to the firm name.
The common law is to the same effect. The State of Michigan had a statute
prohibiting the transaction of business under an assumed name or any other than
the real name of the individual conducting the same, unless such person shall file
with the county clerk a certificate setting forth the name under which the business
is to be conducted and the real name of each of the partners, with their residences
and post-office addresses, and making a violation thereof a misdemeanor. The
supreme Court of Michigan said:
The one object of the act is manifestly to protect the public against imposition and
fraud, prohibiting persons from concealing their identity by doing business under an
assumed name, making it unlawful to use other than their real names in transacting
business without a public record of who they are, available for use in courts, and to
punish those who violate the prohibition. The object of this act is not limited to
facilitating the collection of debts, or the protection of those giving credit to persons
doing business under an assumed name. It is not unilateral in its application. It
applies to debtor and creditor, contractor and contractee, alike. Parties doing
business with those acting under an assumed name, whether they buy or sell, have
a right, under the law, to know who they are, and who to hold responsible, in case
the question of damages for failure to perform or breach of warranty should arise.
The general rule is well settled that, where statutes enacted to protect the public
against fraud or imposition, or to safeguard the public health or morals, contain a
prohibition and impose a penalty, all contracts in violation thereof are void. . . .
As this act involves purely business transactions, and affects only money interests,
we think it should be construed as rendering contracts made in violation of it
unlawful and unforceable at the instance of the offending party only, but not as
designed to take away the rights of innocent parties who may have dealt with the

offenders in ignorance of their having violated the statute. (Cashin vs. Pliter [1912],
168 Mich., 386; Ann. Cas. [1913-C, 697.)
The early decision of our Supreme Court in the case of Prautch Scholes & Co. vs.
Hernandez [1903], 1 Phil., 705), contains the following pertinent observations:
Another case may be supposed. A partnership is organized for commercial
purposes. It fails to comply with the requirements of article 119. A creditor sues the
partnership for a debt contracted by it, claiming to hold the partners severally. They
answer that their failure to comply with the Code of Commerce makes them a civil
partnership and that they are in accordance with article 1698 of the Civil Code only
liable jointly. To allow such liberty of action would be to permit the parties by a
violation of the Code to escape a liability which the law has seen fit to impose upon
persons who organized commercial partnership; "Because it would be contrary to all
legal principles that the nonperformance of a duty should redound to the benefit of
the person in default either intentional or unintentional." (Mercantile Law, Eixala,
fourth ed., p. 145.)" (See also Lichauco vs. Lichauco [1916], 33 Phil., 350, 360.)
Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the following
comment after articles 121 and 126 of the Code:
From the decisions cited in this and in the previous comments, the following is
deduced: 1st. Defects in the organization cannot affect relations with third persons.
2d. Members who contract with other persons before the association is lawfully
organized are liable to these persons. 3d. The intention to form an association is
necessary, so that if the intention of mutual participation in the profits and losses in
a particular business is proved, and there are no articles of association, there is no
association. 4th. An association, the articles of which have not been registered, is
valid in favor of third persons. 5th. The private pact or agreement to form a
commercial association is governed not by the commercial law but by the civil law.
6th. Secret stipulations expressed in a public instrument, but not inserted in the
articles of association, do not affect third persons, but are binding on the parties
themselves. 7th. An agreement made in a public instrument, other than the articles
of association, by means of which one of the partners guarantees to another certain
profits or secures him from losses, is valid between them, without affecting the
association. 8th. Contracts entered into by commercial associations defectively
organized are valid when they are voluntarily executed by the parties, if the only
controversy relates to whether or not they complied with the agreement.
xxx

xxx

xxx

The name of the collective merchant is called firm name. By this name, the new
being is distinguished from others, its sphere of action fixed, and the juridical
personality better determined, without constituting an exclusive character of the
general partnership to such an extent as to serve the purpose of giving a definition
of said kind of a mercantile partnership, as is the case in our Code.
Having in mind that these partnerships are prevailingly of a personal character,
article 126 says that they must transact business under the name of all its

members, of some of them, or of one only, the words "and company" to be added in
the latter two cases.
It is rendered impossible for the general partnership to adopt a firm name
appropriate to its commercial object; the law wants to link, and does link, the
solidary and unlimited responsibility of the members of this partnership with the
formation of its name, and imposes a limitation upon personal liberty in its
selection, not only by prescribing the requisites, but also by prohibiting persons not
members of the company from including their names in its firm name under penalty
of civil solidary responsibility.
Of course, the form required by the Code for the adoption of the firm name does not
prevent the addition thereto of any other title connected with the commercial
purpose of the association. The reader may see our commentaries on the
mercantile registry about the business names and firm names of associations, but it
is proper to establish here that, while the business name may be alienated by any
of the means admitted by the law, it seems impossible to separate the firm names
of general partnerships from the juridical entity for the creation of which it was
formed. (Vol. 2, pp. 197, 213.)
On the question of whether the fact that the firm name "Teck Seing & Co., Ltd." does
not contain the name of all or any of the partners as prescribed by the Code of
Commerce prevents the creation of a general partnership, Professor Jose A. Espiritu,
as amicus curi, states:
My opinion is that such a fact alone cannot and will not be a sufficient cause of
preventing the formation of a general partnership, especially if the other requisites
are present and the requisite regarding registration of the articles of association in
the Commercial Registry has been complied with, as in the present case. I do not
believe that the adoption of a wrong name is a material fact to be taken into
consideration in this case; first, because the mere fact that a person uses a name
not his own does not prevent him from being bound in a contract or an obligation he
voluntarily entered into; second, because such a requirement of the law is merely a
formal and not necessarily an essential one to the existence of the partnership, and
as long as the name adopted sufficiently identity the firm or partnership intended to
use it, the acts and contracts done and entered into under such a name bind the
firm to third persons; and third, because the failure of the partners herein to adopt
the correct name prescribed by law cannot shield them from their personal
liabilities, as neither law nor equity will permit them to utilize their own mistake in
order to put the blame on third persons, and much less, on the firm creditors in
order to avoid their personal possibility.
The legal intention deducible from the acts of the parties controls in determining the
existence of a partnership. If they intend to do a thing which in law constitutes a
partnership, they are partners, although their purpose was to avoid the creation of
such relation. Here, the intention of the persons making up Teck Seing & co., Ltd.
was to establish a partnership which they erroneously denominated a limited
partnership. If this was their purpose, all subterfuges resorted to in order to evade
liability for possible losses, while assuming their enjoyment of the advantages to be
derived from the relation, must be disregarded. The partners who have disguised

their identity under a designation distinct from that of any of the members of the
firm should be penalized, and not the creditors who presumably have dealt with the
partnership in good faith.
Articles 127 and 237 of the Code of Commerce make all the members of the general
copartnership liable personally and in solidum with all their property for the results
of the transactions made in the name and for the account of the partnership.
Section 51 of the Insolvency Law, likewise, makes all the property of the partnership
and also all the separate property of each of the partners liable. In other words, if a
firm be insolvent, but one or more partners thereof are solvent, the creditors may
proceed both against the firm and against the solvent partner or partners, first
exhausting the assets of the firm before seizing the property of the partners.
(Brandenburg of Bankcruptcy, sec. 108; De los Reyes vs. Lukban and Borja [1916],
35 Phil., 757; Involuntary Insolvency of Campos Rueda & Co. vs. Pacific Commercial
Co. [1922], 44 Phil., 916).
We reach the conclusion that the contract of partnership found in the document
hereinbefore quoted established a general partnership or, to be more exact, a
partnership as this word is used in the Insolvency Law.
Wherefore, the order appealed from is reversed, and the record shall be returned to
the court of origin for further proceedings pursuant to the motion presented by the
creditors, in conformity with the provisions of the Insolvency Law. Without special
findings as to the costs in this instance, it is ordered.
Araullo, C.J., Johnson, Street, Avancea, Villamor, Johns and Romualdez, JJ., concur.

G.R. No. 113375

May 5, 1994

KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA,

EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO
SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO,
RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, SEN. FREDDIE WEBB,
SEN. WIGBERTO TAADA, and REP. JOKER P. ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary, Office of the
President; RENATO CORONA, in his capacity as Assistant Executive Secretary and
Chairman of the Presidential review Committee on the Lotto, Office of the President;
PHILIPPINE CHARITY SWEEPSTAKES OFFICE; and PHILIPPINE GAMING MANAGEMENT
CORPORATION, respondents.
Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L. Gozon for
petitioners.
Renato L. Cayetano and Eleazar B. Reyes for PGMC.
Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.

DAVIDE, JR., J.:

This is a special civil action for prohibition and injunction, with a prayer for a
temporary restraining order and preliminary injunction, which seeks to prohibit and
restrain the implementation of the "Contract of Lease" executed by the Philippine
Charity Sweepstakes Office (PCSO) and the Philippine Gaming Management
Corporation (PGMC) in connection with the on- line lottery system, also known as
"lotto."
Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock
domestic corporation composed of civic-spirited citizens, pastors, priests, nuns, and
lay leaders who are committed to the cause of truth, justice, and national renewal.
The rest of the petitioners, except Senators Freddie Webb and Wigberto Taada and
Representative Joker P. Arroyo, are suing in their capacities as members of the
Board of Trustees of KILOSBAYAN and as taxpayers and concerned citizens. Senators
Webb and Taada and Representative Arroyo are suing in their capacities as
members of Congress and as taxpayers and concerned citizens of the Philippines.
The pleadings of the parties disclose the factual antecedents which triggered off the
filing of this petition.
Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P.
Blg. 42) which grants it the authority to hold and conduct "charity sweepstakes
races, lotteries and other similar activities," the PCSO decided to establish an online lottery system for the purpose of increasing its revenue base and diversifying
its sources of funds. Sometime before March 1993, after learning that the PCSO was
interested in operating an on-line lottery system, the Berjaya Group Berhad, "a

multinational company and one of the ten largest public companies in Malaysia,"
long "engaged in, among others, successful lottery operations in Asia, running both
Lotto and Digit games, thru its subsidiary, Sports Toto Malaysia," with its "affiliate,
the International Totalizator Systems, Inc., . . . an American public company
engaged in the international sale or provision of computer systems, softwares,
terminals, training and other technical services to the gaming industry," "became
interested to offer its services and resources to PCSO." As an initial step, Berjaya
Group Berhad (through its individual nominees) organized with some Filipino
investors in March 1993 a Philippine corporation known as the Philippine Gaming
Management Corporation (PGMC), which "was intended to be the medium through
which the technical and management services required for the project would be
offered and delivered to PCSO." 1
Before August 1993, the PCSO formally issued a Request for Proposal (RFP) for the
Lease Contract of an on-line lottery system for the PCSO. 2 Relevant provisions of
the RFP are the following:
1.

EXECUTIVE SUMMARY

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1.2. PCSO is seeking a suitable contractor which shall build, at its own expense, all
the facilities ('Facilities') needed to operate and maintain a nationwide on-line
lottery system. PCSO shall lease the Facilities for a fixed percentage ofquarterly
gross receipts. All receipts from ticket sales shall be turned over directly to PCSO. All
capital, operating expenses and expansion expenses and risks shall be for the
exclusive account of the Lessor.
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1.4.

The lease shall be for a period not exceeding fifteen (15) years.

1.5. The Lessor is expected to submit a comprehensive nationwide lottery

development plan ("Development Plan") which will include the game, the marketing
of the games, and the logistics to introduce the games to all the cities and
municipalities of the country within five (5) years.
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1.7. The Lessor shall be selected based on its technical expertise, hardware and
software capability, maintenance support, and financial resources. The
Development Plan shall have a substantial bearing on the choice of the Lessor. The
Lessor shall be a domestic corporation, with at least sixty percent (60%) of its
shares owned by Filipino shareholders.
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The Office of the President, the National Disaster Control Coordinating Council, the
Philippine National Police, and the National Bureau of Investigation shall be

authorized to use the nationwide telecommunications system of the Facilities Free of

Charge.
1.8. Upon expiration of the lease, the Facilities shall be owned by PCSO without
any additional consideration. 3
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2.2.

OBJECTIVES

The objectives of PCSO in leasing the Facilities from a private entity are as follows:
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2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no expense or

risk to the government.
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2.4.

DUTIES AND RESPONSIBILITIES OF THE LESSOR

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2.4.2. THE LESSOR

The Proponent is expected to furnish and maintain the Facilities, including the
personnel needed to operate the computers, the communications network and sales
offices under a build-lease basis. The printing of tickets shall be undertaken under
the supervision and control of PCSO. The Facilities shall enable PCSO to computerize
the entire gaming system.
The Proponent is expected to formulate and design consumer-oriented Master
Games Plan suited to the marketplace, especially geared to Filipino gaming habits
and preferences. In addition, the Master Games Plan is expected to include a
Product Plan for each game and explain how each will be introduced into the
market. This will be an integral part of the Development Plan which PCSO will
require from the Proponent.
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The Proponent is expected to provide upgrades to modernize the entire gaming

system over the life ofthe lease contract.
The Proponent is expected to provide technology transfer to PCSO technical
personnel. 4
7.

GENERAL GUIDELINES FOR PROPONENTS

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Finally, the Proponent must be able to stand the acid test of proving that it is an
entity able to take on the role of responsible maintainer of the on-line lottery
system, and able to achieve PSCO's goal of formalizing an on-line lottery system to
achieve its mandated objective. 5
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16.

DEFINITION OF TERMS

Facilities: All capital equipment, computers, terminals, software, nationwide

telecommunication network, ticket sales offices, furnishings, and fixtures; printing
costs; cost of salaries and wages; advertising and promotion expenses;
maintenance costs; expansion and replacement costs; security and insurance, and
all other related expenses needed to operate nationwide on-line lottery system. 6
Considering the above citizenship requirement, the PGMC claims that the Berjaya
Group "undertook to reduce its equity stakes in PGMC to 40%," by selling 35% out of
the original 75% foreign stockholdings to local investors.
On 15 August 1993, PGMC submitted its bid to the PCSO. 7
The bids were evaluated by the Special Pre-Qualification Bids and Awards
Committee (SPBAC) for the on-line lottery and its Bid Report was thereafter
submitted to the Office of the President. 8 The submission was preceded by
complaints by the Committee's Chairperson, Dr. Mita Pardo de Tavera. 9
On 21 October 1993, the Office of the President announced that it had given the
respondent PGMC the go-signal to operate the country's on-line lottery system and
that the corresponding implementing contract would be submitted not later than 8
November 1993 "for final clearance and approval by the Chief Executive." 10 This
announcement was published in the Manila Standard, Philippine Daily Inquirer, and
the Manila Times on 29 October 1993. 11
On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel V. Ramos
strongly opposing the setting up to the on-line lottery system on the basis of serious
moral and ethical considerations. 12
At the meeting of the Committee on Games and Amusements of the Senate on 12
November 1993, KILOSBAYAN reiterated its vigorous opposition to the on-line lottery
on account of its immorality and illegality. 13
On 19 November 1993, the media reported that despite the opposition,
"Malacaang will push through with the operation of an on-line lottery system
nationwide" and that it is actually the respondent PCSO which will operate the
lottery while the winning corporate bidders are merely "lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all documents pertaining to
the lottery award from Executive Secretary Teofisto Guingona, Jr. In his answer of 17
December 1993, the Executive Secretary informed KILOSBAYAN that the requested
documents would be duly transmitted before the end of the month. 15. However, on

that same date, an agreement denominated as "Contract of Lease" was finally

executed by respondent PCSO and respondent PGMC. 16 The President, per the
press statement issued by the Office of the President, approved it on 20 December
1993. 17
In view of their materiality and relevance, we quote the following salient provisions
of the Contract of Lease:
1.

DEFINITIONS

The following words and terms shall have the following respective meanings:
1.1
Rental Fee Amount to be paid by PCSO to the LESSOR as compensation for
the fulfillment of the obligations of the LESSOR under this Contract, including, but
not limited to the lease of the Facilities.
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1.3
Facilities All capital equipment, computers, terminals, software (including
source codes for the On-Line Lottery application software for the terminals,
telecommunications and central systems), technology, intellectual property rights,
telecommunications network, and furnishings and fixtures.
1.4
Maintenance and Other Costs All costs and expenses relating to printing,
manpower, salaries and wages, advertising and promotion, maintenance, expansion
and replacement, security and insurance, and all other related expenses needed to
operate an On-Line Lottery System, which shall be for the account of the LESSOR.
All expenses relating to the setting-up, operation and maintenance of ticket sales
offices of dealers and retailers shall be borne by PCSO's dealers and retailers.
1.5
Development Plan The detailed plan of all games, the marketing thereof,
number of players, value of winnings and the logistics required to introduce the
games, including the Master Games Plan as approved by PCSO, attached hereto as
Annex "A", modified as necessary by the provisions of this Contract.
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1.8
Escrow Deposit The proposal deposit in the sum of Three Hundred Million
Pesos (P300,000,000.00) submitted by the LESSOR to PCSO pursuant to the
requirements of the Request for Proposals.
2.

SUBJECT MATTER OF THE LEASE

The LESSOR shall build, furnish and maintain at its own expense and risk the
Facilities for the On-Line Lottery System of PCSO in the Territory on an exclusive
basis. The LESSOR shall bear all Maintenance and Other Costs as defined herein.
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3.

RENTAL FEE

For and in consideration of the performance by the LESSOR of its obligations herein,
PCSO shall pay LESSOR a fixed Rental Fee equal to four point nine percent (4.9%) of
gross receipts from ticket sales, payable net of taxes required by law to be withheld,
on a semi-monthly basis. Goodwill, franchise and similar fees shall belong to PCSO.
4.

LEASE PERIOD

The period of the lease shall commence ninety (90) days from the date of effectivity
of this Contract and shall run for a period of eight (8) years thereafter, unless
sooner terminated in accordance with this Contract.
5.
RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-LINE LOTTERY
SYSTEM
PCSO shall be the sole and individual operator of the On-Line Lottery System.
Consequently:
5.1
PCSO shall have sole responsibility to decide whether to implement, fully or
partially, the Master Games Plan of the LESSOR. PCSO shall have the sole
responsibility to determine the time for introducing new games to the market. The
Master Games Plan included in Annex "A" hereof is hereby approved by PCSO.
5.2
PCSO shall have control over revenues and receipts of whatever nature from
the On-Line Lottery System. After paying the Rental Fee to the LESSOR, PCSO shall
have exclusive responsibility to determine the Revenue Allocation Plan; Provided,
that the same shall be consistent with the requirement of R.A. No. 1169, as
amended, which fixes a prize fund of fifty five percent (55%) on the average.
5.3
PCSO shall have exclusive control over the printing of tickets, including but
not limited to the design, text, and contents thereof.
5.4
PCSO shall have sole responsibility over the appointment of dealers or
retailers throughout the country. PCSO shall appoint the dealers and retailers in a
timely manner with due regard to the implementation timetable of the On-Line
Lottery System. Nothing herein shall preclude the LESSOR from recommending
dealers or retailers for appointment by PCSO, which shall act on said
recommendation within forty-eight (48) hours.
5.5
PCSO shall designate the necessary personnel to monitor and audit the daily
performance of the On-Line Lottery System. For this purpose, PCSO designees shall
be given, free of charge, suitable and adequate space, furniture and fixtures, in all
offices of the LESSOR, including but not limited to its headquarters, alternate site,
regional and area offices.
5.6
PCSO shall have the responsibility to resolve, and exclusive jurisdiction over,
all matters involving the operation of the On-Line Lottery System not otherwise
provided in this Contract.

5.7
PCSO shall promulgate procedural and coordinating rules governing all
activities relating to the On-Line Lottery System.
5.8
PCSO will be responsible for the payment of prize monies, commissions to
agents and dealers, and taxes and levies (if any) chargeable to the operator of the
On-Line Lottery System. The LESSOR will bear all other Maintenance and Other
Costs, except as provided in Section 1.4.
5.9

PCSO shall assist the LESSOR in the following:

5.9.1 Work permits for the LESSOR's staff;

5.9.2 Approvals for importation of the Facilities;
5.9.3 Approvals and consents for the On-Line Lottery System; and
5.9.4 Business and premises licenses for all offices of the LESSOR and licenses for
the telecommunications network.
5.10 In the event that PCSO shall pre-terminate this Contract or suspend the
operation of the On-Line Lottery System, in breach of this Contract and through no
fault of the LESSOR, PCSO shall promptly, and in any event not later than sixty (60)
days, reimburse the LESSOR the amount of its total investment cost associated with
the On-Line Lottery System, including but not limited to the cost of the Facilities,
and further compensate the LESSOR for loss of expected net profit after tax,
computed over the unexpired term of the lease.
6.

DUTIES AND RESPONSIBILITIES OF THE LESSOR

The LESSOR is one of not more than three (3) lessors of similar facilities for the
nationwide On-Line Lottery System of PCSO. It is understood that the rights of the
LESSOR are primarily those of a lessor of the Facilities, and consequently, all rights
involving the business aspects of the use of the Facilities are within the jurisdiction
of PCSO. During the term of the lease, the LESSOR shall.
6.1
Maintain and preserve its corporate existence, rights and privileges, and
conduct its business in an orderly, efficient, and customary manner.
6.2
Maintain insurance coverage with insurers acceptable to PCSO on all
Facilities.
6.3
Comply with all laws, statues, rules and regulations, orders and directives,
obligations and duties by which it is legally bound.
6.4
Duly pay and discharge all taxes, assessments and government charges now
and hereafter imposed of whatever nature that may be legally levied upon it.
6.5
Keep all the Facilities in fail safe condition and, if necessary, upgrade, replace
and improve the Facilities from time to time as new technology develops, in order to
make the On-Line Lottery System more cost-effective and/or competitive, and as

may be required by PCSO shall not impose such requirements unreasonably nor
arbitrarily.
6.6
Provide PCSO with management terminals which will allow real-time
monitoring of the On-Line Lottery System.
6.7
Upon effectivity of this Contract, commence the training of PCSO and other
local personnel and the transfer of technology and expertise, such that at the end of
the term of this Contract, PCSO will be able to effectively take-over the Facilities and
efficiently operate the On-Line Lottery System.
6.8
Undertake a positive advertising and promotions campaign for both
institutional and product lines without engaging in negative advertising against
other lessors.
6.9
Bear all expenses and risks relating to the Facilities including, but not limited
to, Maintenance and Other Costs and:
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6.10 Bear all risks if the revenues from ticket sales, on an annualized basis, are
insufficient to pay the entire prize money.
6.11 Be, and is hereby, authorized to collect and retain for its own account, a
security deposit from dealers and retailers, in an amount determined with the
approval of PCSO, in respect of equipment supplied by the LESSOR. PCSO's approval
shall not be unreasonably withheld.
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6.12

Comply with procedural and coordinating rules issued by PCSO.

7.

REPRESENTATIONS AND WARRANTIES

The LESSOR represents and warrants that:

7.1
The LESSOR is corporation duly organized and existing under the laws of the
Republic of the Philippines, at least sixty percent (60%) of the outstanding capital
stock of which is owned by Filipino shareholders. The minimum required Filipino
equity participation shall not be impaired through voluntary or involuntary transfer,
disposition, or sale of shares of stock by the present stockholders.
7.2
The LESSOR and its Affiliates have the full corporate and legal power and
authority to own and operate their properties and to carry on their business in the
place where such properties are now or may be conducted. . . .
7.3
The LESSOR has or has access to all the financing and funding requirements
to promptly and effectively carry out the terms of this Contract. . . .

7.4
The LESSOR has or has access to all the managerial and technical expertise
to promptly and effectively carry out the terms of this Contract. . . .
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10.

TELECOMMUNICATIONS NETWORK

The LESSOR shall establish a telecommunications network that will connect all
municipalities and cities in the Territory in accordance with, at the LESSOR's option,
either of the LESSOR's proposals (or a combinations of both such proposals)
attached hereto as Annex "B," and under the following PCSO schedule:
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PCSO may, at its option, require the LESSOR to establish the telecommunications
network in accordance with the above Timetable in provinces where the LESSOR has
not yet installed terminals. Provided, that such provinces have existing nodes. Once
a municipality or city is serviced by land lines of a licensed public telephone
company, and such lines are connected to Metro Manila, then the obligation of the
LESSOR to connect such municipality or city through a telecommunications network
shall cease with respect to such municipality or city. The voice facility will cover the
four offices of the Office of the President, National Disaster Control Coordinating
Council, Philippine National Police and the National Bureau of Investigation, and
each city and municipality in the Territory except Metro Manila, and those cities and
municipalities which have easy telephone access from these four offices. Voice calls
from the four offices shall be transmitted via radio or VSAT to the remote
municipalities which will be connected to this voice facility through wired network or
by radio. The facility shall be designed to handle four private conversations at any
one time.
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13.

STOCK DISPERSAL PLAN

Within two (2) years from the effectivity of this Contract, the LESSOR shall cause
itself to be listed in the local stock exchange and offer at least twenty five percent
(25%) of its equity to the public.
14.

NON-COMPETITION

The LESSOR shall not, directly or indirectly, undertake any activity or business in
competition with or adverse to the On-Line Lottery System of PCSO unless it obtains
the latter's prior written consent thereto.
15.

HOLD HARMLESS CLAUSE

15.1 The LESSOR shall at all times protect and defend, at its cost and expense,
PCSO from and against any and all liabilities and claims for damages and/or suits for
or by reason of any deaths of, or any injury or injuries to any person or persons, or
damages to property of any kind whatsoever, caused by the LESSOR, its

subcontractors, its authorized agents or employees, from any cause or causes

whatsoever.
15.2 The LESSOR hereby covenants and agrees to indemnify and hold PCSO
harmless from all liabilities, charges, expenses (including reasonable counsel fees)
and costs on account of or by reason of any such death or deaths, injury or injuries,
liabilities, claims, suits or losses caused by the LESSOR's fault or negligence.
15.3 The LESSOR shall at all times protect and defend, at its own cost and
expense, its title to the facilities and PCSO's interest therein from and against any
and all claims for the duration of the Contract until transfer to PCSO of ownership of
the serviceable Facilities.
16.

SECURITY

16.1 To ensure faithful compliance by the LESSOR with the terms of the Contract,
the LESSOR shall secure a Performance Bond from a reputable insurance company
or companies acceptable to PCSO.
16.2 The Performance Bond shall be in the initial amount of Three Hundred Million
Pesos (P300,000,000.00), to its U.S. dollar equivalent, and shall be renewed to cover
the duration of the Contract. However, the Performance Bond shall be reduced
proportionately to the percentage of unencumbered terminals installed; Provided,
that the Performance Bond shall in no case be less than One Hundred Fifty Million
Pesos (P150,000,000.00).
16.3 The LESSOR may at its option maintain its Escrow Deposit as the Performance
Bond. . . .
17.

PENALTIES

17.1 Except as may be provided in Section 17.2, should the LESSOR fail to take
remedial measures within seven (7) days, and rectify the breach within thirty (30)
days, from written notice by PCSO of any wilfull or grossly negligent violation of the
material terms and conditions of this Contract, all unencumbered Facilities shall
automatically become the property of PCSO without consideration and without need
for further notice or demand by PCSO. The Performance Bond shall likewise be
forfeited in favor of PCSO.
17.2 Should the LESSOR fail to comply with the terms of the Timetables provided
in Section 9 and 10, it shall be subject to an initial Penalty of Twenty Thousand
Pesos (P20,000.00), per city or municipality per every month of delay; Provided, that
the Penalty shall increase, every ninety (90) days, by the amount of Twenty
Thousand Pesos (P20,000.00) per city or municipality per month, whilst shall failure
to comply persists. The penalty shall be deducted by PCSO from the rental fee.
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20.

OWNERSHIP OF THE FACILITIES

After expiration of the term of the lease as provided in Section 4, the Facilities
directly required for the On-Line Lottery System mentioned in Section 1.3 shall
automatically belong in full ownership to PCSO without any further consideration
other than the Rental Fees already paid during the effectivity of the lease.
21.

TERMINATION OF THE LEASE

PCSO may terminate this Contract for any breach of the material provisions of this
Contract, including the following:
21.1 The LESSOR is insolvent or bankrupt or unable to pay its debts, stops or
suspends or threatens to stop or suspend payment of all or a material part of its
debts, or proposes or makes a general assignment or an arrangement or
compositions with or for the benefit of its creditors; or
21.2 An order is made or an effective resolution passed for the winding up or
dissolution of the LESSOR or when it ceases or threatens to cease to carry on all or
a material part of its operations or business; or
21.3 Any material statement, representation or warranty made or furnished by the
LESSOR proved to be materially false or misleading;
said termination to take effect upon receipt of written notice of termination by the
LESSOR and failure to take remedial action within seven (7) days and cure or
remedy the same within thirty (30) days from notice.
Any suspension, cancellation or termination of this Contract shall not relieve the
LESSOR of any liability that may have already accrued hereunder.
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Considering the denial by the Office of the President of its protest and the
statement of Assistant Executive Secretary Renato Corona that "only a court
injunction can stop Malacaang," and the imminent implementation of the Contract
of Lease in February 1994, KILOSBAYAN, with its co-petitioners, filed on 28 January
1994 this petition.
In support of the petition, the petitioners claim that:
. . . X X THE OFFICE OF THE PRESIDENT, ACTING THROUGH RESPONDENTS
EXECUTIVE SECRETARY AND/OR ASSISTANT EXECUTIVE SECRETARY FOR LEGAL
AFFAIRS, AND THE PCSO GRAVELY ABUSE[D] THEIR DISCRETION AND/OR FUNCTIONS
TANTAMOUNT TO LACK OF JURISDICTION AND/OR AUTHORITY IN RESPECTIVELY: (A)
APPROVING THE AWARD OF THE CONTRACT TO, AND (B) ENTERING INTO THE SOCALLED "CONTRACT OF LEASE" WITH, RESPONDENT PGMC FOR THE INSTALLATION,
ESTABLISHMENT AND OPERATION OF THE ON-LINE LOTTERY AND
TELECOMMUNICATION SYSTEMS REQUIRED AND/OR AUTHORIZED UNDER THE SAID
CONTRACT, CONSIDERING THAT:

a)
Under Section 1 of the Charter of the PCSO, the PCSO is prohibited from
holding and conducting lotteries "in collaboration, association or joint venture with
any person, association, company or entity";
b)
Under Act No. 3846 and established jurisprudence, a Congressional franchise
is required before any person may be allowed to establish and operate said
telecommunications system;
c)
Under Section 11, Article XII of the Constitution, a less than 60% Filipinoowned and/or controlled corporation, like the PGMC, is disqualified from operating a
public service, like the said telecommunications system; and
d)
Respondent PGMC is not authorized by its charter and under the Foreign
Investment Act (R.A. No. 7042) to install, establish and operate the on-line lotto and
telecommunications systems. 18
Petitioners submit that the PCSO cannot validly enter into the assailed Contract of
Lease with the PGMC because it is an arrangement wherein the PCSO would hold
and conduct the on-line lottery system in "collaboration" or "association" with the
PGMC, in violation of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42,
which prohibits the PCSO from holding and conducting charity sweepstakes races,
lotteries, and other similar activities "in collaboration, association or joint venture
with any person, association, company or entity, foreign or domestic." Even
granting arguendo that a lease of facilities is not within the contemplation of
"collaboration" or "association," an analysis, however, of the Contract of Lease
clearly shows that there is a "collaboration, association, or joint venture between
respondents PCSO and PGMC in the holding of the On-Line Lottery System," and
that there are terms and conditions of the Contract "showing that respondent PGMC
is the actual lotto operator and not respondent PCSO." 19
The petitioners also point out that paragraph 10 of the Contract of Lease requires or
authorizes PGMC to establish a telecommunications network that will connect all the
municipalities and cities in the territory. However, PGMC cannot do that because it
has no franchise from Congress to construct, install, establish, or operate the
network pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a
75% foreign-owned or controlled corporation and cannot, therefore, be granted a
franchise for that purpose because of Section 11, Article XII of the 1987
Constitution. Furthermore, since "the subscribed foreign capital" of the PGMC
"comes to about 75%, as shown by paragraph EIGHT of its Articles of Incorporation,"
it cannot lawfully enter into the contract in question because all forms of gambling
and lottery is one of them are included in the so-called foreign investments
negative list under the Foreign Investments Act (R.A. No. 7042) where only up to
40% foreign capital is allowed. 20
Finally, the petitioners insist that the Articles of Incorporation of PGMC do not
authorize it to establish and operate an on-line lottery and telecommunications
systems. 21
Accordingly, the petitioners pray that we issue a temporary restraining order and a
writ of preliminary injunction commanding the respondents or any person acting in

their places or upon their instructions to cease and desist from implementing the
challenged Contract of Lease and, after hearing the merits of the petition, that we
render judgment declaring the Contract of Lease void and without effect and
making the injunction permanent. 22
We required the respondents to comment on the petition.
In its Comment filed on 1 March 1994, private respondent PGMC asserts that "(1) [it]
is merely an independent contractor for a piece of work, (i.e., the building and
maintenance of a lottery system to be used by PCSO in the operation of its lottery
franchise); and (2) as such independent contractor, PGMC is not a co-operator of the
lottery franchise with PCSO, nor is PCSO sharing its franchise, 'in collaboration,
association or joint venture' with PGMC as such statutory limitation is viewed
from the context, intent, and spirit of Republic Act 1169, as amended by Batas
Pambansa 42." It further claims that as an independent contractor for a piece of
work, it is neither engaged in "gambling" nor in "public service" relative to the
telecommunications network, which the petitioners even consider as an
"indispensable requirement" of an on-line lottery system. Finally, it states that the
execution and implementation of the contract does not violate the Constitution and
the laws; that the issue on the "morality" of the lottery franchise granted to the
PCSO is political and not judicial or legal, which should be ventilated in another
forum; and that the "petitioners do not appear to have the legal standing or real
interest in the subject contract and in obtaining the reliefs sought." 23
In their Comment filed by the Office of the Solicitor General, public respondents
Executive Secretary Teofisto Guingona, Jr., Assistant Executive Secretary Renato
Corona, and the PCSO maintain that the contract of lease in question does not
violate Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and that the
petitioner's interpretation of the phrase "in collaboration, association or joint
venture" in Section 1 is "much too narrow, strained and utterly devoid of logic" for it
"ignores the reality that PCSO, as a corporate entity, is vested with the basic and
essential prerogative to enter into all kinds of transactions or contracts as may be
necessary for the attainment of its purposes and objectives." What the PCSO
charter "seeks to prohibit is that arrangement akin to a "joint venture" or
partnership where there is "community of interest in the business, sharing of profits
and losses, and a mutual right of control," a characteristic which does not obtain in
a contract of lease." With respect to the challenged Contract of Lease, the "role of
PGMC is limited to that of a lessor of the facilities" for the on-line lottery system; in
"strict technical and legal sense," said contract "can be categorized as a contract for
a piece of work as defined in Articles 1467, 1713 and 1644 of the Civil Code."
They further claim that the establishment of the telecommunications system
stipulated in the Contract of Lease does not require a congressional franchise
because PGMC will not operate a public utility; moreover, PGMC's "establishment of
a telecommunications system is not intended to establish a telecommunications
business," and it has been held that where the facilities are operated "not for
business purposes but for its own use," a legislative franchise is not required before
a certificate of public convenience can be granted. 24 Even granting arguendo that
PGMC is a public utility, pursuant to Albano S.

Reyes, 25 "it can establish a telecommunications system even without a legislative

franchise because not every public utility is required to secure a legislative
franchise before it could establish, maintain, and operate the service"; and, in any
case, "PGMC's establishment of the telecommunications system stipulated in its
contract of lease with PCSO falls within the exceptions under Section 1 of Act No.
3846 where a legislative franchise is not necessary for the establishment of radio
stations."
They also argue that the contract does not violate the Foreign Investment Act of
1991; that the Articles of Incorporation of PGMC authorize it to enter into the
Contract of Lease; and that the issues of "wisdom, morality and propriety of acts of
the executive department are beyond the ambit of judicial review."
Finally, the public respondents allege that the petitioners have no standing to
maintain the instant suit, citing our resolution in Valmonte vs. Philippine Charity
Sweepstakes Office. 26
Several parties filed motions to intervene as petitioners in this case, 27 but only the
motion of Senators Alberto Romulo, Arturo Tolentino, Francisco Tatad, Gloria
Macapagal-Arroyo, Vicente Sotto III, John Osmea, Ramon Revilla, and Jose Lina 28
was granted, and the respondents were required to comment on their petition in
intervention, which the public respondents and PGMC did.
In the meantime, the petitioners filed with the Securities and Exchange Commission
on 29 March 1994 a petition against PGMC for the nullification of the latter's General
Information Sheets. That case, however, has no bearing in this petition.
On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to
consider the matter submitted for resolution and pending resolution of the major
issues in this case, to issue a temporary restraining order commanding the
respondents or any person acting in their place or upon their instructions to cease
and desist from implementing the challenged Contract of Lease.
In the deliberation on this case on 26 April 1994, we resolved to consider only these
issues: (a) the locus standi of the petitioners, and (b) the legality and validity of the
Contract of Lease in the light of Section 1 of R.A. No. 1169, as amended by B.P. Blg.
42, which prohibits the PCSO from holding and conducting lotteries "in collaboration,
association or joint venture with any person, association, company or entity,
whether domestic or foreign." On the first issue, seven Justices voted to sustain the
locus standi of the petitioners, while six voted not to. On the second issue, the
seven Justices were of the opinion that the Contract of Lease violates the exception
to Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore,
invalid and contrary to law. The six Justices stated that they wished to express no
opinion thereon in view of their stand on the first issue. The Chief Justice took no
part because one of the Directors of the PCSO is his brother-in-law.
This case was then assigned to this ponente for the writing of the opinion of the
Court.

The preliminary issue on the locus standi of the petitioners should, indeed, be
resolved in their favor. A party's standing before this Court is a procedural
technicality which it may, in the exercise of its discretion, set aside in view of the
importance of the issues raised. In the landmark Emergency Powers Cases, 29 this
Court brushed aside this technicality because "the transcendental importance to the
public of these cases demands that they be settled promptly and definitely,
brushing aside, if we must, technicalities of procedure. (Avelino vs. Cuenco, G.R. No.
L-2821)." Insofar as taxpayers' suits are concerned, this Court had declared that it
"is not devoid of discretion as to whether or not it should be entertained," 30 or that
it "enjoys an open discretion to entertain the same or not." 31 In De La Llana vs.
Alba, 32 this Court declared:
1.
The argument as to the lack of standing of petitioners is easily resolved. As
far as Judge de la Llana is concerned, he certainly falls within the principle set forth
in Justice Laurel's opinion in People vs. Vera [65 Phil. 56 (1937)]. Thus: "The
unchallenged rule is that the person who impugns the validity of a statute must
have a personal and substantial interest in the case such that he has sustained, or
will sustain, direct injury as a result of its enforcement [Ibid, 89]. The other
petitioners as members of the bar and officers of the court cannot be considered as
devoid of "any personal and substantial interest" on the matter. There is relevance
to this excerpt from a separate opinion in Aquino, Jr. v. Commission on Elections [L40004, January 31, 1975, 62 SCRA 275]: "Then there is the attack on the standing of
petitioners, as vindicating at most what they consider a public right and not
protecting their rights as individuals. This is to conjure the specter of the public right
dogma as an inhibition to parties intent on keeping public officials staying on the
path of constitutionalism. As was so well put by Jaffe; "The protection of private
rights is an essential constituent of public interest and, conversely, without a wellordered state there could be no enforcement of private rights. Private and public
interests are, both in a substantive and procedural sense, aspects of the totality of
the legal order." Moreover, petitioners have convincingly shown that in their
capacity as taxpayers, their standing to sue has been amply demonstrated. There
would be a retreat from the liberal approach followed in Pascual v. Secretary of
Public Works, foreshadowed by the very decision of People v. Vera where the
doctrine was first fully discussed, if we act differently now. I do not think we are
prepared to take that step. Respondents, however, would hard back to the American
Supreme Court doctrine in Mellon v. Frothingham, with their claim that what
petitioners possess "is an interest which is shared in common by other people and is
comparatively so minute and indeterminate as to afford any basis and assurance
that the judicial process can act on it." That is to speak in the language of a bygone
era, even in the United States. For as Chief Justice Warren clearly pointed out in the
later case of Flast v. Cohen, the barrier thus set up if not breached has definitely
been lowered.
In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 33
reiterated in Basco vs. Philippine Amusements and Gaming Corporation, 34 this
Court stated:
Objections to taxpayers' suits for lack of sufficient personality standing or interest
are, however, in the main procedural matters. Considering the importance to the
public of the cases at bar, and in keeping with the Court's duty, under the 1987

Constitution, to determine whether or not the other branches of government have

kept themselves within the limits of the Constitution and the laws and that they
have not abused the discretion given to them, this Court has brushed aside
technicalities of procedure and has taken cognizance of these petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary of
Agrarian Reform, 35 it declared:
With particular regard to the requirement of proper party as applied in the cases
before us, we hold that the same is satisfied by the petitioners and intervenors
because each of them has sustained or is in danger of sustaining an immediate
injury as a result of the acts or measures complained of. [Ex Parte Levitt, 303 US
633]. And even if, strictly speaking, they are not covered by the definition, it is still
within the wide discretion of the Court to waive the requirement and so remove the
impediment to its addressing and resolving the serious constitutional questions
raised.
In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed
to question the constitutionality of several executive orders issued by President
Quirino although they were invoking only an indirect and general interest shared in
common with the public. The Court dismissed the objective that they were not
proper parties and ruled that the transcendental importance to the public of these
cases demands that they be settled promptly and definitely, brushing aside, if we
must, technicalities of procedure. We have since then applied this exception in
many other cases. (Emphasis supplied)
In Daza vs. Singson, 36 this Court once more said:
. . . For another, we have early as in the Emergency Powers Cases that where
serious constitutional questions are involved, "the transcendental importance to the
public of these cases demands that they be settled promptly and definitely,
brushing aside, if we must, technicalities of procedure." The same policy has since
then been consistently followed by the Court, as in Gonzales vs. Commission on
Elections [21 SCRA 774] . . .
The Federal Supreme Court of the United States of America has also expressed its
discretionary power to liberalize the rule on locus standi. In United States vs.
Federal Power Commission and Virginia Rea Association vs. Federal Power
Commission, 37 it held:
We hold that petitioners have standing. Differences of view, however, preclude a
single opinion of the Court as to both petitioners. It would not further clarification of
this complicated specialty of federal jurisdiction, the solution of whose problems is
in any event more or less determined by the specific circumstances of individual
situations, to set out the divergent grounds in support of standing in these cases.
In line with the liberal policy of this Court on locus standi, ordinary taxpayers,
members of Congress, and even association of planters, and non-profit civic
organizations were allowed to initiate and prosecute actions before this Court to
question the constitutionality or validity of laws, acts, decisions, rulings, or orders of

various government agencies or instrumentalities. Among such cases were those

assailing the constitutionality of (a) R.A. No. 3836 insofar as it allows retirement
gratuity and commutation of vacation and sick leave to Senators and
Representatives and to elective officials of both Houses of Congress; 38 (b)
Executive Order No. 284, issued by President Corazon C. Aquino on 25 July 1987,
which allowed members of the cabinet, their undersecretaries, and assistant
secretaries to hold other government offices or positions; 39 (c) the automatic
appropriation for debt service in the General Appropriations Act; 40 (d) R.A. No.
7056 on the holding of desynchronized elections; 41 (d) R.A. No. 1869 (the charter
of the Philippine Amusement and Gaming Corporation) on the ground that it is
contrary to morals, public policy, and order; 42 and (f) R.A. No. 6975, establishing
the Philippine National
Police. 43
Other cases where we have followed a liberal policy regarding locus standi include
those attacking the validity or legality of (a) an order allowing the importation of
rice in the light of the prohibition imposed by R.A. No. 3452; 44 (b) P.D. Nos. 991
and 1033 insofar as they proposed amendments to the Constitution and P.D. No.
1031 insofar as it directed the COMELEC to supervise, control, hold, and conduct the
referendum-plebiscite on 16 October 1976; 45 (c) the bidding for the sale of the
3,179 square meters of land at Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the
approval without hearing by the Board of Investments of the amended application of
the Bataan Petrochemical Corporation to transfer the site of its plant from Bataan to
Batangas and the validity of such transfer and the shift of feedstock from naphtha
only to naphtha and/or liquefied petroleum gas; 47 (e) the decisions, orders, rulings,
and resolutions of the Executive Secretary, Secretary of Finance, Commissioner of
Internal Revenue, Commissioner of Customs, and the Fiscal Incentives Review Board
exempting the National Power Corporation from indirect tax and duties; 48 (f) the
orders of the Energy Regulatory Board of 5 and 6 December 1990 on the ground
that the hearings conducted on the second provisional increase in oil prices did not
allow the petitioner substantial cross-examination; 49 (g) Executive Order No. 478
which levied a special duty of P0.95 per liter or P151.05 per barrel of imported
crude oil and P1.00 per liter of imported oil products; 50 (h) resolutions of the
Commission on Elections concerning the apportionment, by district, of the number
of elective members of Sanggunians; 51 and (i) memorandum orders issued by a
Mayor affecting the Chief of Police of Pasay City. 52
In the 1975 case of Aquino vs. Commission on Elections, 53 this Court, despite its
unequivocal ruling that the petitioners therein had no personality to file the petition,
resolved nevertheless to pass upon the issues raised because of the far-reaching
implications of the petition. We did no less in De Guia vs. COMELEC 54 where,
although we declared that De Guia "does not appear to have locus standi, a
standing in law, a personal or substantial interest," we brushed aside the procedural
infirmity "considering the importance of the issue involved, concerning as it does
the political exercise of qualified voters affected by the apportionment, and
petitioner alleging abuse of discretion and violation of the Constitution by
respondent."
We find the instant petition to be of transcendental importance to the public. The
issues it raised are of paramount public interest and of a category even higher than

those involved in many of the aforecited cases. The ramifications of such issues
immeasurably affect the social, economic, and moral well-being of the people even
in the remotest barangays of the country and the counter-productive and
retrogressive effects of the envisioned on-line lottery system are as staggering as
the billions in pesos it is expected to raise. The legal standing then of the petitioners
deserves recognition and, in the exercise of its sound discretion, this Court hereby
brushes aside the procedural barrier which the respondents tried to take advantage
of.
And now on the substantive issue.
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from
holding and conducting lotteries "in collaboration, association or joint venture with
any person, association, company or entity, whether domestic or foreign." Section 1
provides:
Sec. 1. The Philippine Charity Sweepstakes Office. The Philippine Charity
Sweepstakes Office, hereinafter designated the Office, shall be the principal
government agency for raising and providing for funds for health programs, medical
assistance and services and charities of national character, and as such shall have
the general powers conferred in section thirteen of Act Numbered One thousand
four hundred fifty-nine, as amended, and shall have the authority:
A.
To hold and conduct charity sweepstakes races, lotteries and other similar
activities, in such frequency and manner, as shall be determined, and subject to
such rules and regulations as shall be promulgated by the Board of Directors.
B.
Subject to the approval of the Minister of Human Settlements, to engage in
health and welfare-related investments, programs, projects and activities which
may be profit-oriented, by itself or in collaboration, association or joint venture with
any person, association, company or entity, whether domestic or foreign, except for
the activities mentioned in the preceding paragraph (A), for the purpose of
providing for permanent and continuing sources of funds for health programs,
including the expansion of existing ones, medical assistance and services, and/or
charitable grants: Provided, That such investment will not compete with the private
sector in areas where investments are adequate as may be determined by the
National Economic and Development Authority. (emphasis supplied)
The language of the section is indisputably clear that with respect to its franchise or
privilege "to hold and conduct charity sweepstakes races, lotteries and other similar
activities," the PCSO cannot exercise it "in collaboration, association or joint
venture" with any other party. This is the unequivocal meaning and import of the
phrase "except for the activities mentioned in the preceding paragraph (A),"
namely, "charity sweepstakes races, lotteries and other similar activities."
B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered by
Committee Report No. 103 as reported out by the Committee on Socio-Economic
Planning and Development of the Interim Batasang Pambansa. The original text of
paragraph B, Section 1 of Parliamentary Bill No. 622 reads as follows:

To engage in any and all investments and related profit-oriented projects or

programs and activities by itself or in collaboration, association or joint venture with
any person, association, company or entity, whether domestic or foreign, for the
main purpose of raising funds for health and medical assistance and services and
charitable grants. 55
During the period of committee amendments, the Committee on Socio-Economic
Planning and Development, through Assemblyman Ronaldo B. Zamora, introduced
an amendment by substitution to the said paragraph B such that, as amended, it
should read as follows:
Subject to the approval of the Minister of Human Settlements, to engage in healthoriented investments, programs, projects and activities which may be profitoriented, by itself or in collaboration, association, or joint venture with any person,
association, company or entity, whether domestic or foreign, for the purpose of
providing for permanent and continuing sources of funds for health programs,
including the expansion of existing ones, medical assistance and services and/or
charitable grants. 56
Before the motion of Assemblyman Zamora for the approval of the amendment
could be acted upon, Assemblyman Davide introduced an amendment to the
amendment:
MR. DAVIDE.
Mr. Speaker.
THE SPEAKER.
The gentleman from Cebu is recognized.
MR. DAVIDE.
May I introduce an amendment to the committee amendment? The amendment
would be to insert after "foreign" in the amendment just read the following: EXCEPT
FOR THE ACTIVITY IN LETTER (A) ABOVE.
When it is joint venture or in collaboration with any entity such collaboration or joint
venture must not include activity activity letter (a) which is the holding and
conducting of sweepstakes races, lotteries and other similar acts.
MR. ZAMORA.
We accept the amendment, Mr. Speaker.
MR. DAVIDE.
Thank you, Mr. Speaker.
THE SPEAKER.

Is there any objection to the amendment? (Silence) The amendment, as amended,

is approved. 57
Further amendments to paragraph B were introduced and approved. When
Assemblyman Zamora read the final text of paragraph B as further amended, the
earlier approved amendment of Assemblyman Davide became "EXCEPT FOR THE
ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by virtue of the amendment
introduced by Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted
before PARAGRAPH. Assemblyman Pelaez introduced other amendments. Thereafter,
the new paragraph B was approved. 58
This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42.
No interpretation of the said provision to relax or circumvent the prohibition can be
allowed since the privilege to hold or conduct charity sweepstakes races, lotteries,
or other similar activities is a franchise granted by the legislature to the PCSO. It is a
settled rule that "in all grants by the government to individuals or corporations of
rights, privileges and franchises, the words are to be taken most strongly against
the grantee .... [o]ne who claims a franchise or privilege in derogation of the
common rights of the public must prove his title thereto by a grant which is clearly
and definitely expressed, and he cannot enlarge it by equivocal or doubtful
provisions or by probable inferences. Whatever is not unequivocally granted is
withheld. Nothing passes by mere implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of its
charter, the PCSO cannot share its franchise with another by way of collaboration,
association or joint venture. Neither can it assign, transfer, or lease such franchise.
It has been said that "the rights and privileges conferred under a franchise may,
without doubt, be assigned or transferred when the grant is to the grantee and
assigns, or is authorized by statute. On the other hand, the right of transfer or
assignment may be restricted by statute or the constitution, or be made subject to
the approval of the grantor or a governmental agency, such as a public utilities
commission, exception that an existing right of assignment cannot be impaired by
subsequent legislation." 60
It may also be pointed out that the franchise granted to the PCSO to hold and
conduct lotteries allows it to hold and conduct a species of gambling. It is settled
that "a statute which authorizes the carrying on of a gambling activity or business
should be strictly construed and every reasonable doubt so resolved as to limit the
powers and rights claimed under its authority." 61
Does the challenged Contract of Lease violate or contravene the exception in
Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO
from holding and conducting lotteries "in collaboration, association or joint venture
with" another?
We agree with the petitioners that it does, notwithstanding its denomination or
designation as a (Contract of Lease). We are neither convinced nor moved or fazed
by the insistence and forceful arguments of the PGMC that it does not because in

reality it is only an independent contractor for a piece of work, i.e., the building and
maintenance of a lottery system to be used by the PCSO in the operation of its
lottery franchise. Whether the contract in question is one of lease or whether the
PGMC is merely an independent contractor should not be decided on the basis of
the title or designation of the contract but by the intent of the parties, which may be
gathered from the provisions of the contract itself. Animus hominis est anima scripti.
The intention of the party is the soul of the instrument. In order to give life or effect
to an instrument, it is essential to look to the intention of the individual who
executed it. 62 And, pursuant to Article 1371 of the Civil Code, "to determine the
intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered." To put it more bluntly, no one should be deceived
by the title or designation of a contract.
A careful analysis and evaluation of the provisions of the contract and a
consideration of the contemporaneous acts of the PCSO and PGMC indubitably
disclose that the contract is not in reality a contract of lease under which the PGMC
is merely an independent contractor for a piece of work, but one where the
statutorily proscribed collaboration or association, in the least, or joint venture, at
the most, exists between the contracting parties. Collaboration is defined as the
acts of working together in a joint project. 63 Association means the act of a
number of persons in uniting together for some special purpose or business. 64 Joint
venture is defined as an association of persons or companies jointly undertaking
some commercial enterprise; generally all contribute assets and share risks. It
requires a community of interest in the performance of the subject matter, a right to
direct and govern the policy in connection therewith, and duty, which may be
altered by agreement to share both in profit and
losses. 65
The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had
neither funds of its own nor the expertise to operate and manage an on-line lottery
system, and that although it wished to have the system, it would have it "at no
expense or risks to the government." Because of these serious constraints and
unwillingness to bear expenses and assume risks, the PCSO was candid enough to
state in its RFP that it is seeking for "a suitable contractor which shall build, at its
own expense, all the facilities needed to operate and maintain" the system;
exclusively bear "all capital, operating expenses and expansion expenses and risks";
and submit "a comprehensive nationwide lottery development plan . . . which will
include the game, the marketing of the games, and the logistics to introduce the
game to all the cities and municipalities of the country within five (5) years"; and
that the operation of the on-line lottery system should be "at no expense or risk to
the government" meaning itself, since it is a government-owned and controlled
agency. The facilities referred to means "all capital equipment, computers,
terminals, software, nationwide telecommunications network, ticket sales offices,
furnishings and fixtures, printing costs, costs of salaries and wages, advertising and
promotions expenses, maintenance costs, expansion and replacement costs,
security and insurance, and all other related expenses needed to operate a
nationwide on-line lottery system."
In short, the only contribution the PCSO would have is its franchise or authority to
operate the on-line lottery system; with the rest, including the risks of the business,

being borne by the proponent or bidder. It could be for this reason that it warned
that "the proponent must be able to stand to the acid test of proving that it is an
entity able to take on the role of responsible maintainer of the on-line lottery
system." The PCSO, however, makes it clear in its RFP that the proponent can
propose a period of the contract which shall not exceed fifteen years, during which
time it is assured of a "rental" which shall not exceed 12% of gross receipts. As
admitted by the PGMC, upon learning of the PCSO's decision, the Berjaya Group
Berhad, with its affiliates, wanted to offer its services and resources to the PCSO.
Forthwith, it organized the PGMC as "a medium through which the technical and
management services required for the project would be offered and delivered to
PCSO." 66
Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with
an on-line lottery system, the PCSO had nothing but its franchise, which it solemnly
guaranteed it had in the General Information of the RFP. 67 Howsoever viewed then,
from the very inception, the PCSO and the PGMC mutually understood that any
arrangement between them would necessarily leave to the PGMC the technical,
operations, and management aspects of the on-line lottery system while the PCSO
would, primarily, provide the franchise. The words Gaming and Management in the
corporate name of respondent Philippine Gaming Management Corporation could
not have been conceived just for euphemistic purposes. Of course, the RFP cannot
substitute for the Contract of Lease which was subsequently executed by the PCSO
and the PGMC. Nevertheless, the Contract of Lease incorporates their intention and
understanding.
The so-called Contract of Lease is not, therefore, what it purports to be. Its
denomination as such is a crafty device, carefully conceived, to provide a built-in
defense in the event that the agreement is questioned as violative of the exception
in Section 1 (B) of the PCSO's charter. The acuity or skill of its draftsmen to
accomplish that purpose easily manifests itself in the Contract of Lease. It is
outstanding for its careful and meticulous drafting designed to give an immediate
impression that it is a contract of lease. Yet, woven therein are provisions which
negate its title and betray the true intention of the parties to be in or to have a joint
venture for a period of eight years in the operation and maintenance of the on-line
lottery system.
Consistent with the above observations on the RFP, the PCSO has only its franchise
to offer, while the PGMC represents and warrants that it has access to all
managerial and technical expertise to promptly and effectively carry out the terms
of the contract. And, for a period of eight years, the PGMC is under obligation to
keep all the Facilities in safe condition and if necessary, upgrade, replace, and
improve them from time to time as new technology develops to make the on-line
lottery system more cost-effective and competitive; exclusively bear all costs and
expenses relating to the printing, manpower, salaries and wages, advertising and
promotion, maintenance, expansion and replacement, security and insurance, and
all other related expenses needed to operate the on-line lottery system; undertake
a positive advertising and promotions campaign for both institutional and product
lines without engaging in negative advertising against other lessors; bear the
salaries and related costs of skilled and qualified personnel for administrative and
technical operations; comply with procedural and coordinating rules issued by the

PCSO; and to train PCSO and other local personnel and to effect the transfer of
technology and other expertise, such that at the end of the term of the contract, the
PCSO will be able to effectively take over the Facilities and efficiently operate the
on-line lottery system. The latter simply means that, indeed, the managers,
technicians or employees who shall operate the on-line lottery system are not
managers, technicians or employees of the PCSO, but of the PGMC and that it is
only after the expiration of the contract that the PCSO will operate the system. After
eight years, the PCSO would automatically become the owner of the Facilities
without any other further consideration.
For these reasons, too, the PGMC has the initial prerogative to prepare the detailed
plan of all games and the marketing thereof, and determine the number of players,
value of winnings, and the logistics required to introduce the games, including the
Master Games Plan. Of course, the PCSO has the reserved authority to disapprove
them. 68 And, while the PCSO has the sole responsibility over the appointment of
dealers and retailers throughout the country, the PGMC may, nevertheless,
recommend for appointment dealers and retailers which shall be acted upon by the
PCSO within forty-eight hours and collect and retain, for its own account, a security
deposit from dealers and retailers in respect of equipment supplied by it.
This joint venture is further established by the following:
(a)
Rent is defined in the lease contract as the amount to be paid to the PGMC as
compensation for the fulfillment of its obligations under the contract, including, but
not limited to the lease of the Facilities. However, this rent is not actually a fixed
amount. Although it is stated to be 4.9% of gross receipts from ticket sales, payable
net of taxes required by law to be withheld, it may be drastically reduced or, in
extreme cases, nothing may be due or demandable at all because the PGMC binds
itself to "bear all risks if the revenue from the ticket sales, on an annualized basis,
are insufficient to pay the entire prize money." This risk-bearing provision is unusual
in a lessor-lessee relationship, but inherent in a joint venture.
(b)
In the event of pre-termination of the contract by the PCSO, or its suspension
of operation of the on-line lottery system in breach of the contract and through no
fault of the PGMC, the PCSO binds itself "to promptly, and in any event not later
than sixty (60) days, reimburse the Lessor the amount of its total investment cost
associated with the On-Line Lottery System, including but not limited to the cost of
the Facilities, and further compensate the LESSOR for loss of expected net profit
after tax, computed over the unexpired term of the lease." If the contract were
indeed one of lease, the payment of the expected profits or rentals for the
unexpired portion of the term of the contract would be enough.
(c)
The PGMC cannot "directly or indirectly undertake any activity or business in
competition with or adverse to the On-Line Lottery System of PCSO unless it obtains
the latter's prior written consent." If the PGMC is engaged in the business of leasing
equipment and technology for an on-line lottery system, we fail to see any
acceptable reason why it should allow a restriction on the pursuit of such business.
(d)
The PGMC shall provide the PCSO the audited Annual Report sent to its
stockholders, and within two years from the effectivity of the contract, cause itself

to be listed in the local stock exchange and offer at least 25% of its equity to the
public. If the PGMC is merely a lessor, this imposition is unreasonable and
whimsical, and could only be tied up to the fact that the PGMC will actually operate
and manage the system; hence, increasing public participation in the corporation
would enhance public interest.
(e)
The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the
requirements of the RFP, which it may, at its option, maintain as its initial
performance bond required to ensure its faithful compliance with the terms of the
contract.
(f)
The PCSO shall designate the necessary personnel to monitor and audit the
daily performance of the on-line lottery system; and promulgate procedural and
coordinating rules governing all activities relating to the on-line lottery system. The
first further confirms that it is the PGMC which will operate the system and the PCSO
may, for the protection of its interest, monitor and audit the daily performance of
the system. The second admits the coordinating and cooperative powers and
functions of the parties.
(g)
The PCSO may validly terminate the contract if the PGMC becomes insolvent
or bankrupt or is unable to pay its debts, or if it stops or suspends or threatens to
stop or suspend payment of all or a material part of its debts.
All of the foregoing unmistakably confirm the indispensable role of the PGMC in the
pursuit, operation, conduct, and management of the On-Line Lottery System. They
exhibit and demonstrate the parties' indivisible community of interest in the
conception, birth and growth of the on-line lottery, and, above all, in its profits, with
each having a right in the formulation and implementation of policies related to the
business and sharing, as well, in the losses with the PGMC bearing the greatest
burden because of its assumption of expenses and risks, and the PCSO the least,
because of its confessed unwillingness to bear expenses and risks. In a manner of
speaking, each is wed to the other for better or for worse. In the final analysis,
however, in the light of the PCSO's RFP and the above highlighted provisions, as
well as the "Hold Harmless Clause" of the Contract of Lease, it is even safe to
conclude that the actual lessor in this case is the PCSO and the subject matter
thereof is its franchise to hold and conduct lotteries since it is, in reality, the PGMC
which operates and manages the on-line lottery system for a period of eight years.
We thus declare that the challenged Contract of Lease violates the exception
provided for in paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42,
and is, therefore, invalid for being contrary to law. This conclusion renders
unnecessary further discussion on the other issues raised by the petitioners.
WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract
of Lease executed on 17 December 1993 by respondent Philippine Charity
Sweepstakes Office (PCSO) and respondent Philippine Gaming Management
Corporation (PGMC) is hereby DECLARED contrary to law and invalid.
The Temporary Restraining Order issued on 11 April 1994 is hereby MADE
PERMANENT.

No pronouncement as to costs.
SO ORDERED.
Regalado, Romero and Bellosillo, JJ., concur.
Narvasa, C.J., took no part.

ITF VS. COMELEC G.R. No. 159139. January 13, 2004.

7/8/2010 0 Comments
Facts: On June 7, 1995, Congress passed Republic Act 8046, which authorized
Comelec to conduct a nationwide demonstration of a computerized election system
and allowed the poll body to pilot-test the system in the March 1996 elections in the
Autonomous Region in Muslim Mindanao (ARMM).
On October 29, 2002, Comelec adopted in its Resolution 02-0170 a
modernization program for the 2004 elections. It resolved to conduct biddings for
the three (3) phases of its Automated Election System; namely, Phase I Voter
Registration and Validation System; Phase II Automated Counting and Canvassing
System; and Phase III Electronic Transmission.
On January 24, 2003, President Gloria Macapagal-Arroyo issued Executive Order
No. 172, which allocated the sum of P2.5 billion to fund the AES for the May 10,
2004 elections. Upon the request of Comelec, she authorized the release of an
additional P500 million.
On January 28, 2003, the Commission issued an "Invitation to Apply for Eligibility
and to Bid".
On May 29, 2003, five individuals and entities (including the herein Petitioners
Information Technology Foundation of the Philippines, represented by its president,
Alfredo M. Torres; and Ma. Corazon Akol) wrote a letter to Comelec Chairman
Benjamin Abalos Sr. They protested the award of the Contract to Respondent MPC
"due to glaring irregularities in the manner in which the bidding process had been
conducted." Citing therein the noncompliance with eligibility as well as technical
and procedural requirements (many of which have been discussed at length in the
Petition), they sought a re-bidding.
Issue: Whether the bidding process was unconstitutional;
Whether the awarding of the contract was unconstitutional;
Whether the petitioner has standing; and
Whether the petition is premature.
Held: WHEREFORE, the Petition is GRANTED. The Court hereby declares NULL and
VOID Comelec Resolution No. 6074 awarding the contract for Phase II of the CAES to
Mega Pacific Consortium (MPC). Also declared null and void is the subject Contract
executed between Comelec and Mega Pacific eSolutions (MPEI). 55 Comelec is
further ORDERED to refrain from implementing any other contract or agreement
entered into with regard to this project.
Ratio: Comelec awarded this billion-peso undertaking with inexplicable haste,
without adequately checking and observing mandatory financial, technical and legal
requirements. It also accepted the proferred computer hardware and software even

if, at the time of the award, they had undeniably failed to pass eight critical
requirements designed to safeguard the integrity of elections:
1. Awarded the Contract to MPC though it did not even participate in the
bidding
2. Allowed MPEI to participate in the bidding despite its failure to meet the
mandatory eligibility requirements
3. Issued its Resolution of April 15, 2003 awarding the Contract to MPC despite
the issuance by the BAC of its Report, which formed the basis of the assailed
Resolution, only on April 21, 2003 31
4. Awarded the Contract, notwithstanding the fact that during the bidding
process, there were violations of the mandatory requirements of RA 8436 as well as
those set forth in Comelec's own Request for Proposal on the automated election
system IHaECA
5. Refused to declare a failed bidding and to conduct a re-bidding despite the
failure of the bidders to pass the technical tests conducted by the Department of
Science and Technology
6. Failed to follow strictly the provisions of RA 8436 in the conduct of the
bidding for the automated counting machines
After reviewing the slew of pleadings as well as the matters raised during the Oral
Argument, the Court deems it sufficient to focus discussion on the following major
areas of concern that impinge on the issue of grave abuse of discretion:
A. Matters pertaining to the identity, existence and eligibility of MPC as a bidder
B. Failure of the automated counting machines (ACMs) to pass the DOST technical
tests
C. Remedial measures and re-testings undertaken by Comelec and DOST after the
award, and their effect on the present controversy
In view of the bidding process
Unfortunately, the Certifications from DOST fail to divulge in what manner and
by what standards or criteria the condition, performance and/or readiness of the
machines were re-evaluated and re-appraised and thereafter given the passing
mark.
The Automated Counting and Canvassing Project involves not only the
manufacturing of the ACM hardware but also the development of three (3) types of
software, which are intended for use in the following:
1. Evaluation of Technical Bids
2. Testing and Acceptance Procedures
3. Election Day Use."
In short, Comelec claims that it evaluated the bids and made the decision to
award the Contract to the "winning" bidder partly on the basis of the operation of
the ACMs running a "base" software. That software was therefore nothing but a
sample or "demo" software, which would not be the actual one that would be used
on election day.
What then was the point of conducting the bidding, when the software that was
the subject of the Contract was still to be created and could conceivably undergo
innumerable changes before being considered as being in final form?

In view of awarding of contract

The public bidding system designed by Comelec under its RFP (Request for
Proposal for the Automation of the 2004 Election) mandated the use of a twoenvelope, two-stage system. A bidder's first envelope (Eligibility Envelope) was
meant to establish its eligibility to bid and its qualifications and capacity to perform
the contract if its bid was accepted, while the second envelope would be the Bid
Envelope itself.
The Eligibility Envelope was to contain legal documents such as articles of
incorporation, business registrations, licenses and permits, mayor's permit, VAT
certification, and so forth; technical documents containing documentary evidence to
establish the track record of the bidder and its technical and production capabilities
to perform the contract; and financial documents, including audited financial
statements for the last three years, to establish the bidder's financial capacity.
However, there is no sign whatsoever of any joint venture agreement,
consortium agreement, memorandum of agreement, or business plan executed
among the members of the purported consortium.So, it necessarily follows that,
during the bidding process, Comelec had no basis at all for determining that the
alleged consortium really existed and was eligible and qualified; and that the
arrangements among the members were satisfactory and sufficient to ensure
delivery on the Contract and to protect the government's interest.
In view of standing
On the other hand, petitioners suing in their capacities as taxpayers,
registered voters and concerned citizens respond that the issues central to this
case are "of transcendental importance and of national interest." Allegedly,
Comelec's flawed bidding and questionable award of the Contract to an unqualified
entity would impact directly on the success or the failure of the electoral process.
Thus, any taint on the sanctity of the ballot as the expression of the will of the
people would inevitably affect their faith in the democratic system of government.
Petitioners further argue that the award of any contract for automation involves
disbursement of public funds in gargantuan amounts; therefore, public interest
requires that the laws governing the transaction must be followed strictly.
Moreover, this Court has held that taxpayers are allowed to sue when there is a
claim of "illegal disbursement of public funds," 22 or if public money is being
"deflected to any improper purpose"; 23 or when petitioners seek to restrain
respondent from "wasting public funds through the enforcement of an invalid or
unconstitutional law."
In view of prematurity
The letter addressed to Chairman Benjamin Abalos Sr. dated May 29, 2003 28
serves to eliminate the prematurity issue as it was an actual written protest against
the decision of the poll body to award the Contract. The letter was signed by/for,
inter alia, two of herein petitioners: the Information Technology Foundation of the
Philippines, represented by its president, Alfredo M. Torres; and Ma. Corazon Akol.
Such letter-protest is sufficient compliance with the requirement to exhaust
administrative remedies particularly because it hews closely to the procedure
outlined in Section 55 of RA 9184.

Paat v. Court of Appeals enumerates the instances when the rule on exhaustion
of administrative remedies may be disregarded, as follows:
"(1) when there is a violation of due process,
(2) when the issue involved is purely a legal question,
(3) when the administrative action is patently illegal amounting to lack or
excess of jurisdiction,
(4) when there is estoppel on the part of the administrative agency concerned,
(5) when there is irreparable injury,
(6) when the respondent is a department secretary whose acts as an alter ego
of the President bears the implied and assumed approval of the latter,
(7) when to require exhaustion of administrative remedies would be
unreasonable,
(8) when it would amount to a nullification of a claim,
(9) when the subject matter is a private land in land case proceedings,
(10) when the rule does not provide a plain, speedy and adequate remedy, and
(11) when there are circumstances indicating the urgency of judicial
intervention."

ZENAIDA G. MENDOZA, G.R. No. 175885

Petitioner,
Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Chico-Nazario,
Nachura, and
Peralta, JJ.
ENGR. EDUARDO PAULE,
ENGR. ALEXANDER COLOMA
and NATIONAL IRRIGATION
ADMINISTRATION (NIA
MUOZ, NUEVA ECIJA),
Respondents.
x ------------------------------------------------------ x
MANUEL DELA CRUZ, G.R. No. 176271
Petitioner,
- versus ENGR. EDUARDO M. PAULE,
ENGR. ALEXANDER COLOMA
and NATIONAL IRRIGATION Promulgated:
ADMINISTRATION (NIA
MUOZ, NUEVA ECIJA),
Respondents. February 13, 2009
x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:
These consolidated petitions assail the August 28, 2006 Decision[1] of the Court of
Appeals in CA-G.R. CV No. 80819 dismissing the complaint in Civil Case No. 18-SD
(2000),[2] and its December 11, 2006 Resolution[3] denying the herein petitioners
motion for reconsideration.
Engineer Eduardo M. Paule (PAULE) is the proprietor of E.M. Paule Construction and
Trading (EMPCT). On May 24, 1999, PAULE executed a special power of attorney
(SPA) authorizing Zenaida G. Mendoza (MENDOZA) to participate in the prequalification and bidding of a National Irrigation Administration (NIA) project and to
represent him in all transactions related thereto, to wit:

1. To represent E.M. PAULE CONSTRUCTION & TRADING of which I (PAULE) am the

General Manager in all my business transactions with National Irrigation Authority,
Muoz, Nueva Ecija.
2. To participate in the bidding, to secure bid bonds and other documents prerequisite in the bidding of Casicnan Multi-Purpose Irrigation and Power Plant (CMIPPL
04-99), National Irrigation Authority, Muoz, Nueva Ecija.
3. To receive and collect payment in check in behalf of E.M. PAULE CONSTRUCTION
& TRADING.
4. To do and perform such acts and things that may be necessary and/or required to
make the herein authority effective.[4]
On September 29, 1999, EMPCT, through MENDOZA, participated in the bidding of
the NIA-Casecnan Multi-Purpose Irrigation and Power Project (NIA-CMIPP) and was
awarded Packages A-10 and B-11 of the NIA-CMIPP Schedule A. On November 16,
1999, MENDOZA received the Notice of Award which was signed by Engineer
Alexander M. Coloma (COLOMA), then Acting Project Manager for the NIA-CMIPP.
Packages A-10 and B-11 involved the construction of a road system, canal
structures and drainage box culverts with a project cost of P5,613,591.69.
When Manuel de la Cruz (CRUZ) learned that MENDOZA is in need of heavy
equipment for use in the NIA project, he met up with MENDOZA in Bayuga, Muoz,
Nueva Ecija, in an apartment where the latter was holding office under an EMPCT
signboard. A series of meetings followed in said EMPCT office among CRUZ,
MENDOZA and PAULE.
On December 2 and 20, 1999, MENDOZA and CRUZ signed two Job
Orders/Agreements[5] for the lease of the latters heavy equipment (dump trucks for
hauling purposes) to EMPCT.
On April 27, 2000, PAULE revoked[6] the SPA he previously issued in favor of
MENDOZA; consequently, NIA refused to make payment to MENDOZA on her
billings. CRUZ, therefore, could not be paid for the rent of the equipment. Upon
advice of MENDOZA, CRUZ addressed his demands for payment of lease rentals
directly to NIA but the latter refused to acknowledge the same and informed CRUZ
that it would be remitting payment only to EMPCT as the winning contractor for the
project.
In a letter dated April 5, 2000, CRUZ demanded from MENDOZA and/or EMPCT
payment of the outstanding rentals which amounted to P726,000.00 as of March 31,
2000.
On June 30, 2000, CRUZ filed Civil Case No. 18-SD (2000) with Branch 37 of the
Regional Trial Court of Nueva Ecija, for collection of sum of money with damages
and a prayer for the issuance of a writ of preliminary injunction against PAULE,
COLOMA and the NIA. PAULE in turn filed a third-party complaint against MENDOZA,
who filed her answer thereto, with a cross-claim against PAULE.

MENDOZA alleged in her cross-claim that because of PAULEs whimsical revocation

of the SPA, she was barred from collecting payments from NIA, thus resulting in her
inability to fund her checks which she had issued to suppliers of materials,
equipment and labor for the project. She claimed that estafa and B.P. Blg. 22 cases
were filed against her; that she could no longer finance her childrens education;
that she was evicted from her home; that her vehicle was foreclosed upon; and that
her reputation was destroyed, thus entitling her to actual and moral damages in the
respective amounts of P3 million and P1 million.
Meanwhile, on August 23, 2000, PAULE again constituted MENDOZA as his attorneyin-fact
1. To represent me (PAULE), in my capacity as General Manager of the E.M. PAULE
CONSTRUCTION AND TRADING, in all meetings, conferences and transactions
exclusively for the construction of the projects known as Package A-10 of Schedule
A and Package No. B-11 Schedule B, which are 38.61% and 63.18% finished as of
June 21, 2000, per attached Accomplishment Reports x x x;
2. To implement, execute, administer and supervise the said projects in whatever
stage they are in as of to date, to collect checks and other payments due on said
projects and act as the Project Manager for E.M. PAULE CONSTRUCTION AND
TRADING;
3. To do and perform such acts and things that may be necessary and required to
make the herein power and authority effective.[7]
At the pre-trial conference, the other parties were declared as in default and CRUZ
was allowed to present his evidence ex parte. Among the witnesses he presented
was MENDOZA, who was impleaded as defendant in PAULEs third-party complaint.
On March 6, 2003, MENDOZA filed a motion to declare third-party plaintiff PAULE
non-suited with prayer that she be allowed to present her evidence ex parte.
However, without resolving MENDOZAs motion to declare PAULE non-suited, and
without granting her the opportunity to present her evidence ex parte, the trial
court rendered its decision dated August 7, 2003, the dispositive portion of which
states, as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff as follows:
1. Ordering defendant Paule to pay the plaintiff the sum of P726,000.00 by way of
actual damages or compensation for the services rendered by him;
2. Ordering defendant Paule to pay plaintiff the sum of P500,000.00 by way of moral
damages;
3. Ordering defendant Paule to pay plaintiff the sum of P50,000.00 by way of
reasonable attorneys fees;
4. Ordering defendant Paule to pay the costs of suit; and

5. Ordering defendant National Irrigation Administration (NIA) to withhold the

balance still due from it to defendant Paule/E.M. Paule Construction and Trading
under NIA-CMIPP Contract Package A-10 and to pay plaintiff therefrom to the extent
of defendant Paules liability herein adjudged.
SO ORDERED.[8]
In holding PAULE liable, the trial court found that MENDOZA was duly constituted as
EMPCTs agent for purposes of the NIA project and that MENDOZA validly contracted
with CRUZ for the rental of heavy equipment that was to be used therefor. It found
unavailing PAULEs assertion that MENDOZA merely borrowed and used his
contractors license in exchange for a consideration of 3% of the aggregate amount
of the project. The trial court held that through the SPAs he executed, PAULE clothed
MENDOZA with apparent authority and held her out to the public as his agent; as
principal, PAULE must comply with the obligations which MENDOZA contracted
within the scope of her authority and for his benefit. Furthermore, PAULE knew of
the transactions which MENDOZA entered into since at various times when she and
CRUZ met at the EMPCT office, PAULE was present and offered no objections. The
trial court declared that it would be unfair to allow PAULE to enrich himself and
disown his acts at the expense of CRUZ.
PAULE and MENDOZA both appealed the trial courts decision to the Court of
Appeals.
PAULE claimed that he did not receive a copy of the order of default; that it was
improper for MENDOZA, as third-party defendant, to have taken the stand as
plaintiff CRUZs witness; and that the trial court erred in finding that an agency was
created between him and MENDOZA, and that he was liable as principal thereunder.
On the other hand, MENDOZA argued that the trial court erred in deciding the case
without affording her the opportunity to present evidence on her cross-claim against
PAULE; that, as a result, her cross-claim against PAULE was not resolved, leaving her
unable to collect the amounts of P3,018,864.04, P500,000.00, and P839,450.88
which allegedly represent the unpaid costs of the project and the amount PAULE
received in excess of payments made by NIA.
On August 28, 2006, the Court of Appeals rendered the assailed Decision which
dismissed CRUZs complaint, as well as MENDOZAs appeal. The appellate court held
that the SPAs issued in MENDOZAs favor did not grant the latter the authority to
enter into contract with CRUZ for hauling services; the SPAs limit MENDOZAs
authority to only represent EMPCT in its business transactions with NIA, to
participate in the bidding of the project, to receive and collect payment in behalf of
EMPCT, and to perform such acts as may be necessary and/or required to make the
said authority effective. Thus, the engagement of CRUZs hauling services was done
beyond the scope of MENDOZAs authority.
As for CRUZ, the Court of Appeals held that he knew the limits of MENDOZAs
authority under the SPAs yet he still transacted with her. Citing Manila Memorial
Park Cemetery, Inc. v. Linsangan,[9] the appellate court declared that the principal

(PAULE) may not be bound by the acts of the agent (MENDOZA) where the third
person (CRUZ) transacting with the agent knew that the latter was acting beyond
the scope of her power or authority under the agency.
With respect to MENDOZAs appeal, the Court of Appeals held that when the trial
court rendered judgment, not only did it rule on the plaintiffs complaint; in effect, it
resolved the third-party complaint as well;[10] that the trial court correctly
dismissed the cross-claim and did not unduly ignore or disregard it; that MENDOZA
may not claim, on appeal, the amounts of P3,018,864.04, P500,000.00, and
P839,450.88 which allegedly represent the unpaid costs of the project and the
amount PAULE received in excess of payments made by NIA, as these are not
covered by her cross-claim in the court a quo, which seeks reimbursement only of
the amounts of P3 million and P1 million, respectively, for actual damages (debts to
suppliers, laborers, lessors of heavy equipment, lost personal property) and moral
damages she claims she suffered as a result of PAULEs revocation of the SPAs; and
that the revocation of the SPAs is a prerogative that is allowed to PAULE under
Article 1920[11] of the Civil Code.
CRUZ and MENDOZAs motions for reconsideration were denied; hence, these
consolidated petitions:
G.R. No. 175885 (MENDOZA PETITION)
a) The Court of Appeals erred in sustaining the trial courts failure to resolve her
motion praying that PAULE be declared non-suited on his third-party complaint, as
well as her motion seeking that she be allowed to present evidence ex parte on her
cross-claim;
b) The Court of Appeals erred when it sanctioned the trial courts failure to resolve
her cross-claim against PAULE; and,
c) The Court of Appeals erred in its application of Article 1920 of the Civil Code, and
in adjudging that MENDOZA had no right to claim actual damages from PAULE for
debts incurred on account of the SPAs issued to her.
G.R. No. 176271 (CRUZ PETITION)
CRUZ argues that the decision of the Court of Appeals is contrary to the provisions
of law on agency, and conflicts with the Resolution of the Court in G.R. No. 173275,
which affirmed the Court of Appeals decision in CA-G.R. CV No. 81175, finding the
existence of an agency relation and where PAULE was declared as MENDOZAs
principal under the subject SPAs and, thus, liable for obligations (unpaid
construction materials, fuel and heavy equipment rentals) incurred by the latter for
the purpose of implementing and carrying out the NIA project awarded to EMPCT.
CRUZ argues that MENDOZA was acting within the scope of her authority when she
hired his services as hauler of debris because the NIA project (both Packages A-10
and B-11 of the NIA-CMIPP) consisted of construction of canal structures, which

involved the clearing and disposal of waste, acts that are necessary and incidental
to PAULEs obligation under the NIA project; and that the decision in a civil case
involving the same SPAs, where PAULE was found liable as MENDOZAs principal
already became final and executory; that in Civil Case No. 90-SD filed by MENDOZA
against PAULE,[12] the latter was adjudged liable to the former for unpaid rentals of
heavy equipment and for construction materials which MENDOZA obtained for use
in the subject NIA project. On September 15, 2003, judgment was rendered in said
civil case against PAULE, to wit:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (MENDOZA) and
against the defendant (PAULE) as follows:
1. Ordering defendant Paule to pay plaintiff the sum of P138,304.00 representing
the obligation incurred by the plaintiff with LGH Construction;
2. Ordering defendant Paule to pay plaintiff the sum of P200,000.00 representing
the balance of the obligation incurred by the plaintiff with Artemio Alejandrino;
3. Ordering defendant Paule to pay plaintiff the sum of P520,000.00 by way of moral
damages, and further sum of P100,000.00 by way of exemplary damages;
4. Ordering defendant Paule to pay plaintiff the sum of P25,000.00 as for attorneys
fees; and
5. To pay the cost of suit.[13]
PAULE appealed[14] the above decision, but it was dismissed by the Court of
Appeals in a Decision[15] which reads, in part:
As to the finding of the trial court that the principle of agency is applicable in this
case, this Court agrees therewith. It must be emphasized that appellant (PAULE)
authorized appellee (MENDOZA) to perform any and all acts necessary to make the
business transaction of EMPCT with NIA effective. Needless to state, said business
transaction pertained to the construction of canal structures which necessitated the
utilization of construction materials and equipments. Having given said authority,
appellant cannot be allowed to turn its back on the transactions entered into by
appellee in behalf of EMPCT.
The amount of moral damages and attorneys fees awarded by the trial court being
justifiable and commensurate to the damage suffered by appellee, this Court shall
not disturb the same. It is well-settled that the award of damages as well as
attorneys fees lies upon the discretion of the court in the context of the facts and
circumstances of each case.
WHEREFORE, the appeal is DISMISSED and the appealed Decision is AFFIRMED.
SO ORDERED.[16]
PAULE filed a petition to this Court docketed as G.R. No. 173275 but it was denied
with finality on September 13, 2006.

MENDOZA, for her part, claims that she has a right to be heard on her cause of
action as stated in her cross-claim against PAULE; that the trial courts failure to
resolve the cross-claim was a violation of her constitutional right to be apprised of
the facts or the law on which the trial courts decision is based; that PAULE may not
revoke her appointment as attorney-in-fact for and in behalf of EMPCT because, as
manager of their partnership in the NIA project, she was obligated to collect from
NIA the funds to be used for the payment of suppliers and contractors with whom
she had earlier contracted for labor, materials and equipment.
PAULE, on the other hand, argues in his Comment that MENDOZAs authority under
the SPAs was for the limited purpose of securing the NIA project; that MENDOZA was
not authorized to contract with other parties with regard to the works and services
required for the project, such as CRUZs hauling services; that MENDOZA acted
beyond her authority in contracting with CRUZ, and PAULE, as principal, should not
be made civilly liable to CRUZ under the SPAs; and that MENDOZA has no cause of
action against him for actual and moral damages since the latter exceeded her
authority under the agency.
We grant the consolidated petitions.
Records show that PAULE (or, more appropriately, EMPCT) and MENDOZA had
entered into a partnership in regard to the NIA project. PAULEs contribution thereto
is his contractors license and expertise, while MENDOZA would provide and secure
the needed funds for labor, materials and services; deal with the suppliers and subcontractors; and in general and together with PAULE, oversee the effective
implementation of the project. For this, PAULE would receive as his share three per
cent (3%) of the project cost while the rest of the profits shall go to MENDOZA.
PAULE admits to this arrangement in all his pleadings.[17]
Although the SPAs limit MENDOZAs authority to such acts as representing EMPCT in
its business transactions with NIA, participating in the bidding of the project,
receiving and collecting payment in behalf of EMPCT, and performing other acts in
furtherance thereof, the evidence shows that when MENDOZA and CRUZ met and
discussed (at the EMPCT office in Bayuga, Muoz, Nueva Ecija) the lease of the
latters heavy equipment for use in the project, PAULE was present and interposed
no objection to MENDOZAs actuations. In his pleadings, PAULE does not even deny
this. Quite the contrary, MENDOZAs actions were in accord with what she and PAULE
originally agreed upon, as to division of labor and delineation of functions within
their partnership. Under the Civil Code, every partner is an agent of the partnership
for the purpose of its business;[18] each one may separately execute all acts of
administration, unless a specification of their respective duties has been agreed
upon, or else it is stipulated that any one of them shall not act without the consent
of all the others.[19] At any rate, PAULE does not have any valid cause for
opposition because his only role in the partnership is to provide his contractors
license and expertise, while the sourcing of funds, materials, labor and equipment
has been relegated to MENDOZA.
Moreover, it does not speak well for PAULE that he reinstated MENDOZA as his
attorney-in-fact, this time with broader powers to implement, execute, administer

and supervise the NIA project, to collect checks and other payments due on said
project, and act as the Project Manager for EMPCT, even after CRUZ has already
filed his complaint. Despite knowledge that he was already being sued on the SPAs,
he proceeded to execute another in MENDOZAs favor, and even granted her
broader powers of administration than in those being sued upon. If he truly believed
that MENDOZA exceeded her authority with respect to the initial SPA, then he would
not have issued another SPA. If he thought that his trust had been violated, then he
should not have executed another SPA in favor of MENDOZA, much less grant her
broader authority.
Given the present factual milieu, CRUZ has a cause of action against PAULE and
MENDOZA. Thus, the Court of Appeals erred in dismissing CRUZs complaint on a
finding of exceeded agency. Besides, that PAULE could be held liable under the SPAs
for transactions entered into by MENDOZA with laborers, suppliers of materials and
services for use in the NIA project, has been settled with finality in G.R. No. 173275.
What has been adjudged in said case as regards the SPAs should be made to apply
to the instant case. Although the said case involves different parties and
transactions, it finally disposed of the matter regarding the SPAs specifically their
effect as among PAULE, MENDOZA and third parties with whom MENDOZA had
contracted with by virtue of the SPAs a disposition that should apply to CRUZ as
well. If a particular point or question is in issue in the second action, and the
judgment will depend on the determination of that particular point or question, a
former judgment between the same parties or their privies will be final and
conclusive in the second if that same point or question was in issue and adjudicated
in the first suit. Identity of cause of action is not required but merely identity of
issues.[20]
There was no valid reason for PAULE to revoke MENDOZAs SPAs. Since MENDOZA
took care of the funding and sourcing of labor, materials and equipment for the
project, it is only logical that she controls the finances, which means that the SPAs
issued to her were necessary for the proper performance of her role in the
partnership, and to discharge the obligations she had already contracted prior to
revocation. Without the SPAs, she could not collect from NIA, because as far as it is
concerned, EMPCT and not the PAULE-MENDOZA partnership is the entity it had
contracted with. Without these payments from NIA, there would be no source of
funds to complete the project and to pay off obligations incurred. As MENDOZA
correctly argues, an agency cannot be revoked if a bilateral contract depends upon
it, or if it is the means of fulfilling an obligation already contracted, or if a partner is
appointed manager of a partnership in the contract of partnership and his removal
from the management is unjustifiable.[21]
PAULEs revocation of the SPAs was done in evident bad faith. Admitting all
throughout that his only entitlement in the partnership with MENDOZA is his 3%
royalty for the use of his contractors license, he knew that the rest of the amounts
collected from NIA was owing to MENDOZA and suppliers of materials and services,
as well as the laborers. Yet, he deliberately revoked MENDOZAs authority such that
the latter could no longer collect from NIA the amounts necessary to proceed with
the project and settle outstanding obligations.

From the way he conducted himself, PAULE committed a willful and deliberate
breach of his contractual duty to his partner and those with whom the partnership
had contracted. Thus, PAULE should be made liable for moral damages.
Bad faith does not simply connote bad judgment or negligence; it imputes a
dishonest purpose or some moral obliquity and conscious doing of a wrong; a
breach of a sworn duty through some motive or intent or ill-will; it partakes of the
nature of fraud (Spiegel v. Beacon Participation, 8 NE 2nd Series, 895, 1007). It
contemplates a state of mind affirmatively operating with furtive design or some
motive of self-interest or ill will for ulterior purposes (Air France v. Carrascoso, 18
SCRA 155, 166-167). Evident bad faith connotes a manifest deliberate intent on the
part of the accused to do wrong or cause damage.[22]
Moreover, PAULE should be made civilly liable for abandoning the partnership,
leaving MENDOZA to fend for her own, and for unduly revoking her authority to
collect payments from NIA, payments which were necessary for the settlement of
obligations contracted for and already owing to laborers and suppliers of materials
and equipment like CRUZ, not to mention the agreed profits to be derived from the
venture that are owing to MENDOZA by reason of their partnership agreement.
Thus, the trial court erred in disregarding and dismissing MENDOZAs cross-claim
which is properly a counterclaim, since it is a claim made by her as defendant in a
third-party complaint against PAULE, just as the appellate court erred in sustaining it
on the justification that PAULEs revocation of the SPAs was within the bounds of his
discretion under Article 1920 of the Civil Code.
Where the defendant has interposed a counterclaim (whether compulsory or
permissive) or is seeking affirmative relief by a cross-complaint, the plaintiff cannot
dismiss the action so as to affect the right of the defendant in his counterclaim or
prayer for affirmative relief. The reason for that exception is clear. When the answer
sets up an independent action against the plaintiff, it then becomes an action by the
defendant against the plaintiff, and, of course, the plaintiff has no right to ask for a
dismissal of the defendants action. The present rule embodied in Sections 2 and 3
of Rule 17 of the 1997 Rules of Civil Procedure ordains a more equitable disposition
of the counterclaims by ensuring that any judgment thereon is based on the merit
of the counterclaim itself and not on the survival of the main complaint. Certainly, if
the counterclaim is palpably without merit or suffers jurisdictional flaws which stand
independent of the complaint, the trial court is not precluded from dismissing it
under the amended rules, provided that the judgment or order dismissing the
counterclaim is premised on those defects. At the same time, if the counterclaim is
justified, the amended rules now unequivocally protect such counterclaim from
peremptory dismissal by reason of the dismissal of the complaint.[23]
Notwithstanding the immutable character of PAULEs liability to MENDOZA, however,
the exact amount thereof is yet to be determined by the trial court, after receiving
evidence for and in behalf of MENDOZA on her counterclaim, which must be
considered pending and unresolved.
WHEREFORE, the petitions are GRANTED. The August 28, 2006 Decision of the Court
of Appeals in CA-G.R. CV No. 80819 dismissing the complaint in Civil Case No. 18-SD

(2000) and its December 11, 2006 Resolution denying the motion for
reconsideration are REVERSED and SET ASIDE. The August 7, 2003 Decision of the
Regional Trial Court of Nueva Ecija, Branch 37 in Civil Case No. 18-SD (2000) finding
PAULE liable is REINSTATED, with the MODIFICATION that the trial court is ORDERED
to receive evidence on the counterclaim of petitioner Zenaida G. Mendoza.

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court
of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax
Appeals in C.T.A. Case No. 5200. Also assailed is the April 3, 2001 Resolution3
denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into
an agreement4 with Baguio Gold Mining Company ("Baguio Gold") for the former to
manage and operate the latters mining claim, known as the Sto. Nino mine, located
in Atok and Tublay, Benguet Province. The parties agreement was denominated as
"Power of Attorney" and provided for the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO.
NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for
internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any part
of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto.
Nino PROJECT, shall be added to such owners account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or
property to the Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried
by the Sto. Nino PROJECT as a special fund to be known as the MANAGERS account.
(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be added to the MANAGERS account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the
MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the

claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will
be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the other
hand, require at their option that property originally transferred by them to the Sto.
Nino PROJECT be re-transferred to them. Until such assets are transferred to the
MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit
of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS
shall pay income tax on their compensation, while the PRINCIPAL shall pay income
tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and,
in the future, may incur other obligations in favor of the MANAGERS. This Power of
Attorney has been executed as security for the payment and satisfaction of all such
obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the
same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS
account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been
paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and
the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be
held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d)
hereof shall be operative in case of the MANAGERS withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining made advances
of cash and property in accordance with paragraph 5 of the agreement. However,
the mine suffered continuing losses over the years which resulted to petitioners
withdrawal as manager of the mine on January 28, 1982 and in the eventual
cessation of mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with
Dation in Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in
the amount of P179,394,000.00 and agreed to pay the same in three segments by
first assigning Baguio Golds tangible assets to petitioner, transferring to the latter
Baguio Golds equitable title in its Philodrill assets and finally settling the remaining
liability through properties that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with
Dation in Payment"8 where the parties determined that Baguio Golds indebtedness

to petitioner actually amounted to P259,137,245.00, which sum included liabilities

of Baguio Gold to other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted
by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time,
Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the amount of
P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining
outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to
allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982
operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the
amount of P112,136,000.00 as "loss on settlement of receivables from Baguio Gold
against reserves and allowances."9 However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed petitioner a
deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed
since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a
valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was
charged off within the taxable year when it was determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it
entered into with Baguio Gold. The bad debt deduction represented advances made
by petitioner which, pursuant to the management contract, formed part of Baguio
Golds "pecuniary obligations" to petitioner. It also included payments made by
petitioner as guarantor of Baguio Golds long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Golds irreversible losses, it became
evident that it would not be able to recover the advances and payments it had
made in behalf of Baguio Gold. For a debt to be considered worthless, petitioner
claimed that it was neither required to institute a judicial action for collection
against the debtor nor to sell or dispose of collateral assets in satisfaction of the
debt. It is enough that a taxpayer exerted diligent efforts to enforce collection and
exhausted all reasonable means to collect.
On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual
basis. It held that the alleged debt was not ascertained to be worthless since Baguio
Gold remained existing and had not filed a petition for bankruptcy; and that the
deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects
net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment,
as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus,
20% delinquency interest due computed from February 10, 1995, which is the date
after the 20-day grace period given by the respondent within which petitioner has to
pay the deficiency amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioners assertion that the advances it made for the Sto. Nino
mine were in the nature of a loan. It instead characterized the advances as
petitioners investment in a partnership with Baguio Gold for the development and
exploitation of the Sto. Nino mine. The CTA held that the "Power of Attorney"
executed by petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could not be
deducted as a bad debt from petitioners gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan
obligations of Baguio Gold could not be allowed as a bad debt deduction. At the
time the payments were made, Baguio Gold was not in default since its loans were
not yet due and demandable. What petitioner did was to pre-pay the loans as
evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank
imposed and collected a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its
motion for reconsideration,13 petitioner took this recourse under Rule 45 of the
Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of
the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the
development of the Sto. Nino Mine notwithstanding the clear absence of any intent
on the part of Philex and Baguio Gold to form a partnership.
III.

The Court of Appeals erred in relying only on the Power of Attorney and in
completely disregarding the Compromise Agreement and the Amended Compromise
Agreement when it construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the
bad debts write-off.14
Petitioner insists that in determining the nature of its business relationship with
Baguio Gold, we should not only rely on the "Power of Attorney", but also on the
subsequent "Compromise with Dation in Payment" and "Amended Compromise with
Dation in Payment" that the parties executed in 1982. These documents, allegedly
evinced the parties intent to treat the advances and payments as a loan and
establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument that is
material in determining the true nature of the business relationship between
petitioner and Baguio Gold. Before resort may be had to the two compromise
agreements, the parties contractual intent must first be discovered from the
expressed language of the primary contract under which the parties business
relations were founded. It should be noted that the compromise agreements were
mere collateral documents executed by the parties pursuant to the termination of
their business relationship created under the "Power of Attorney". On the other
hand, it is the latter which established the juridical relation of the parties and
defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered as a
subsequent or contemporaneous act that is reflective of the parties true intent. The
compromise agreements were executed eleven years after the "Power of Attorney"
and merely laid out a plan or procedure by which petitioner could recover the
advances and payments it made under the "Power of Attorney". The parties entered
into the compromise agreements as a consequence of the dissolution of their
business relationship. It did not define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint
venture was indeed intended by the parties. Under a contract of partnership, two or
more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.15 While
a corporation, like petitioner, cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been held that it may enter into a joint
venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for
some temporary purpose. x x x It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the
business, sharing of profits and losses, and a mutual right of control. x x x The main

distinction cited by most opinions in common law jurisdictions is that the

partnership contemplates a general business with some degree of continuity, while
the joint venture is formed for the execution of a single transaction, and is thus of a
temporary nature. x x x This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. x x x It would
seem therefore that under Philippine law, a joint venture is a form of partnership
and should be governed by the law of partnerships. The Supreme Court has
however recognized a distinction between these two business forms, and has held
that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates that the
parties had intended to create a partnership and establish a common fund for the
purpose. They also had a joint interest in the profits of the business as shown by a
50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute
money, property and industry to the common fund known as the Sto. Nio mine.17
In this regard, we note that there is a substantive equivalence in the respective
contributions of the parties to the development and operation of the mine. Pursuant
to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to
contribute equally to the joint venture assets under their respective accounts.
Baguio Gold would contribute P11M under its owners account plus any of its income
that is left in the project, in addition to its actual mining claim. Meanwhile,
petitioners contribution would consist of its expertise in the management and
operation of mines, as well as the managers account which is comprised of P11M in
funds and property and petitioners "compensation" as manager that cannot be paid
in cash.
However, petitioner asserts that it could not have entered into a partnership
agreement with Baguio Gold because it did not "bind" itself to contribute money or
property to the project; that under paragraph 5 of the agreement, it was only
optional for petitioner to transfer funds or property to the Sto. Nio project
"(w)henever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIO MINE."18
The wording of the parties agreement as to petitioners contribution to the common
fund does not detract from the fact that petitioner transferred its funds and property
to the project as specified in paragraph 5, thus rendering effective the other
stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner
from withdrawing the advances until termination of the parties business relations.
As can be seen, petitioner became bound by its contributions once the transfers
were made. The contributions acquired an obligatory nature as soon as petitioner
had chosen to exercise its option under paragraph 5.
There is no merit to petitioners claim that the prohibition in paragraph 5(c) against
withdrawal of advances should not be taken as an indication that it had entered into
a partnership with Baguio Gold; that the stipulation only showed that what the

parties entered into was actually a contract of agency coupled with an interest
which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or
withdrawn by the principal due to an interest of a third party that depends upon it,
or the mutual interest of both principal and agent.19 In this case, the nonrevocation or non-withdrawal under paragraph 5(c) applies to the advances made
by petitioner who is supposedly the agent and not the principal under the contract.
Thus, it cannot be inferred from the stipulation that the parties relation under the
agreement is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the
relationship of the parties was one of agency and not a partnership. Although the
said provision states that "this Agency shall be irrevocable while any obligation of
the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS
account," it does not necessarily follow that the parties entered into an agency
contract coupled with an interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not to
confer a power in favor of petitioner to contract with third persons on behalf of
Baguio Gold but to create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latters mine through the
parties mutual contribution of material resources and industry. The essence of an
agency, even one that is coupled with interest, is the agents ability to represent his
principal and bring about business relations between the latter and third persons.20
Where representation for and in behalf of the principal is merely incidental or
necessary for the proper discharge of ones paramount undertaking under a
contract, the latter may not necessarily be a contract of agency, but some other
agreement depending on the ultimate undertaking of the parties.21
In this case, the totality of the circumstances and the stipulations in the parties
agreement indubitably lead to the conclusion that a partnership was formed
between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return
the advances made by petitioner under the agreement. Paragraph 5 (d) thereof
provides that upon termination of the parties business relations, "the ratio which
the MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims" shall be transferred to petitioner.22 As pointed out by the Court of Tax
Appeals, petitioner was merely entitled to a proportionate return of the mines
assets upon dissolution of the parties business relations. There was nothing in the
agreement that would require Baguio Gold to make payments of the advances to
petitioner as would be recognized as an item of obligation or "accounts payable" for
Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Nio mine upon termination, a provision that is
more consistent with a partnership than a creditor-debtor relationship. It should be
pointed out that in a contract of loan, a person who receives a loan or money or any

fungible thing acquires ownership thereof and is bound to pay the creditor an equal
amount of the same kind and quality.23 In this case, however, there was no
stipulation for Baguio Gold to actually repay petitioner the cash and property that it
had advanced, but only the return of an amount pegged at a ratio which the
managers account had to the owners account.
In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business relations
over the Sto. Nino mine. The "Power of Attorney" clearly provides that petitioner
would only be entitled to the return of a proportionate share of the mine assets to
be computed at a ratio that the managers account had to the owners account.
Except to provide a basis for claiming the advances as a bad debt deduction, there
is no reason for Baguio Gold to hold itself liable to petitioner under the compromise
agreements, for any amount over and above the proportion agreed upon in the
"Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business corporation
to lend hundreds of millions of pesos to another corporation with neither security, or
collateral, nor a specific deed evidencing the terms and conditions of such loans.
The parties also did not provide a specific maturity date for the advances to become
due and demandable, and the manner of payment was unclear. All these point to
the inevitable conclusion that the advances were not loans but capital contributions
to a partnership.
The strongest indication that petitioner was a partner in the Sto Nio mine is the
fact that it would receive 50% of the net profits as "compensation" under paragraph
12 of the agreement. The entirety of the parties contractual stipulations simply
leads to no other conclusion than that petitioners "compensation" is actually its
share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of
a share in the profits of a business is prima facie evidence that he is a partner in the
business." Petitioner asserts, however, that no such inference can be drawn against
it since its share in the profits of the Sto Nio project was in the nature of
compensation or "wages of an employee", under the exception provided in Article
1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of
Baguio Gold who will be paid "wages" pursuant to an employer-employee
relationship. To begin with, petitioner was the manager of the project and had put
substantial sums into the venture in order to ensure its viability and profitability. By
pegging its compensation to profits, petitioner also stood not to be remunerated in
case the mine had no income. It is hard to believe that petitioner would take the risk
of not being paid at all for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioners "compensation" under paragraph 12 of the
agreement actually constitutes its share in the net profits of the partnership.
Indeed, petitioner would not be entitled to an equal share in the income of the mine
if it were just an employee of Baguio Gold.25 It is not surprising that petitioner was

to receive a 50% share in the net profits, considering that the "Power of Attorney"
also provided for an almost equal contribution of the parties to the St. Nino mine.
The "compensation" agreed upon only serves to reinforce the notion that the
parties relations were indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioners advances as investments
in a partnership known as the Sto. Nino mine. The advances were not "debts" of
Baguio Gold to petitioner inasmuch as the latter was under no unconditional
obligation to return the same to the former under the "Power of Attorney". As for the
amounts that petitioner paid as guarantor to Baguio Golds creditors, we find no
reason to depart from the tax courts factual finding that Baguio Golds debts were
not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed.27 In this case,
petitioner failed to substantiate its assertion that the advances were subsisting
debts of Baguio Gold that could be deducted from its gross income. Consequently, it
could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R.
SP No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax
Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is
ORDERED to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from February 10, 1995,
which is the due date given for the payment of the deficiency income tax, up to the
actual date of payment.
SO ORDERED.

OLDARICO S. TRAVEO, ROVEL A. GENELSA, RUEL U. VILLARMENTE, ALFREDO A.

PANILAGAO, CARMEN P. DANILA, ELIZABETH B. MACALINO, RAMIL P. ALBITO,
REYNALDO A. LADRILLO, LUCAS G. TAMAYO, DIOSDADO A. AMORIN, RODINO C.
VASQUEZ, GLORIA A. FELICANO, NOLE E. FERMILAN, JOSELITO B. RENDON, CRISTETA
D. CAA, EVELYN D. ARCENAL and JEORGE M. NONO,
Petitioners,
- versus BOBONGON BANANA GROWERS MULTI-PURPOSE COOPERATIVE, TIMOG
AGRICULTURAL CORPORATION, DIAMOND FARMS, INC., and DOLE ASIA PHILIPPINES,
Respondents.
G.R. No. 164205
Present:
QUISUMBING, J., Chairperson,
CORONA,*
CARPIO MORALES,
DEL CASTILLO, and
ABAD, JJ.

Promulgated:
September 3, 2009
x-------------------------------------------x

DECISION
CARPIO MORALES, J.:
By the account of petitioner Oldarico Traveo and his 16 co-petitioners, in 1992,
respondent Timog Agricultural Corporation (TACOR) and respondent Diamond
Farms, Inc. (DFI) hired them to work at a banana plantation at Bobongon, Santo
Tomas, Davao Del Norte which covered lands previously planted with rice and corn
but whose owners had agreed to convert into a banana plantation upon being
convinced that TACOR and DFI could provide the needed capital, expertise, and
equipment. Petitioners helped prepare the lands for the planting of banana suckers
and eventually carried out the planting as well.[1]
Petitioners asseverated that while they worked under the direct control of
supervisors assigned by TACOR and DFI, these companies used different schemes to
make it appear that petitioners were hired through independent contractors,
including individuals, unregistered associations, and cooperatives; that the

successive changes in the names of their employers notwithstanding, they

continued to perform the same work under the direct control of TACOR and DFI
supervisors; and that under the last scheme adopted by these companies, the
nominal individual contractors were required to, as they did, join a cooperative and
thus became members of respondent Bobongon Banana Growers Multi-purpose
Cooperative (the Cooperative).[2]
Continued petitioners: Sometime in 2000, above-named respondents began utilizing
harassment tactics to ease them out of their jobs. Without first seeking the approval
of the Department of Labor and Employment (DOLE), they changed their
compensation package from being based on a daily rate to a pakyawan rate that
depended on the combined productivity of the gangs they had been grouped into.
Soon thereafter, they stopped paying their salaries, prompting them to stop
working.[3]
One after another, three separate complaints for illegal dismissal were filed by
petitioners, individually and collectively, with the National Labor Relations
Commission (NLRC) against said respondents including respondent Dole Asia
Philippines as it then supposedly owned TACOR,[4] for unpaid salaries, overtime
pay, 13th month pay, service incentive leave pay, damages, and attorneys fees.[5]
DFI answered for itself and TACOR, which it claimed had been merged with it and
ceased to exist as a corporation. Denying that it had engaged the services of
petitioners,[6] DFI alleged that during the corporate lifetime of TACOR, it had an
arrangement with several landowners in Santo Tomas, Davao Del Norte whereby
TACOR was to extend financial and technical assistance to them for the
development of their lands into a banana plantation on the condition that the
bananas produced therein would be sold exclusively to TACOR; that the landowners
worked on their own farms and hired laborers to assist them; that the landowners
themselves decided to form a cooperative in order to better attain their business
objectives; and that it was not in a position to state whether petitioners were
working on the banana plantation of the landowners who had contracted with
TACOR.[7]
The Cooperative failed to file a position paper despite due notice, prompting the
Labor Arbiter to consider it to have waived its right to adduce evidence in its
defense.
Nothing was heard from respondent Dole Asia Philippines.
By consolidated Decision dated October 30, 2002,[8] the Labor Arbiter, found
respondent Cooperative guilty of illegal dismissal. It dropped the complaints against
DFI, TACOR and Dole Asia Philippines. Thus it disposed:
WHEREFORE, judgment is hereby rendered:
1.
Declaring respondent Bobongon Banana Growers Multi-purpose Cooperative
guilty of illegal dismissal;

2.
Ordering respondent Bobongon Banana Growers Multi-purpose Cooperative to
pay complainants full backwages from the time of their illegal dismissal up to this
promulgation, to be determined during the execution stage;
3.
Ordering respondent Bobongon Banana Growers Multi-purpose Cooperative to
reinstate complainants to their former positions without loss of seniority rights and
if not possible, to pay them separation pay equivalent to 1/2 month pay for every
year of service;
4.
Ordering respondent Bobongon Banana Grower Cooperative [sic] to pay 10%
of the total award as Attorneys fees;
5.
All other respondents are hereby dropped as party-respondents for lack of
merit. (Underscoring supplied)
In finding for petitioners, the Labor Arbiter relied heavily on the following Orders
submitted by DFI which were issued in an earlier case filed with the DOLE, viz: (1)
Order dated July 11, 1995 of the Director of DOLE Regional Office No. XI declaring
the Cooperative as the employer of the 341 workers in the farms of its several
members; (2) Order dated December 17, 1997 of the DOLE Secretary affirming the
Order dated July 11, 1995 of the Director of DOLE Regional Office No. XI; and (3)
Order dated June 23, 1998 of the DOLE Secretary denying the Cooperatives Motion
for Reconsideration.
On partial appeal to the NLRC, petitioners questioned the Labor Arbiters denial of
their money claims and the dropping of their complaints against TACOR, DFI, and
Dole Asia Philippines.
By Resolution dated July 30, 2003,[9] the NLRC sustained the Labor Arbiters ruling
that the employer of petitioners is the Cooperative, there being no showing that the
earlier mentioned Orders of the DOLE Secretary had been set aside by a court of
competent jurisdiction. It partially granted petitioners appeal, however, by ordering
the Cooperative to pay them their unpaid wages, wage differentials, service
incentive leave pay, and 13th month pay. It thus remanded the case to the Labor
Arbiter for computation of those awards.
Their Motion for Reconsideration having been denied by Resolution of September
30, 2003,[10] petitioners appealed to the Court of Appeals via certiorari.[11]
By Resolution dated February 20, 2004,[12] the appellate court dismissed
petitioners petition for certiorari on the ground that the accompanying verification
and certification against forum shopping was defective, it having been signed by
only 19 of the 22 therein named petitioners. Their Motion for Reconsideration
having been denied by Resolution of May 13, 2004,[13] petitioners lodged the
present Petition for Review on Certiorari.

Petitioners posit that the appellate court erred in dismissing their petition on a mere
technicality as it should have, at most, dismissed the petition only with respect to
the non-signing petitioners.
Dwelling on the merits of the case, petitioners posit that the Labor Arbiter and the
NLRC disregarded evidence on record showing that while the Cooperative was their
employer on paper, the other respondents exercised control and supervision over
them; that the Cooperative was a labor-only contractor; and that the Orders of the
DOLE Secretary relied upon by the Labor Arbiter and the NLRC are not applicable to
them as the same pertained to a certification election case involving different
parties and issues.[14]
DFI, commenting for itself and TACOR, maintains that, among other things, it was
not the employer of petitioners; and that it cannot comment on their money claims
because no evidence was submitted in support thereof.[15]
It appears that respondent Cooperative had been dissolved.[16]
As respondent Dole Asia Philippines failed to file a comment, the Court, by
Resolution of November 29, 2006,[17] required it to (1) show cause why it should
not be held in contempt for its failure to heed the Courts directive, and (2) file the
required comment, within 10 days from notice.
Dole Philippines, Inc. (DPI) promptly filed an Urgent Manifestation[18] stating that,
among other things, while its division located in Davao City received the Courts
Resolution directing Dole Asia Philippines to file a comment on the present petition,
DPI did not file a comment as the directive was addressed to Dole Asia Philippines,
an entity which is not registered at the Securities and Exchange Commission.
Commenting on DPIs Urgent Manifestation, petitioners contend that DPI cannot be
allowed to take advantage of their lack of knowledge as to its exact corporate
name, DPI having raised the matter for the first time before this Court
notwithstanding its receipt of all pleadings and court processes from the inception
of this case.[19]
Upon review of the records, the Court finds that DPI never ever participated in the
proceedings despite due notice. Its posturing, therefore, that the court processes it
received were addressed to Dole Asia Philippines, a non-existent entity, does not lie.
That DPI is the intended respondent, there is no doubt.
Respecting the appellate courts dismissal of petitioners appeal due to the failure of
some of them to sign the therein accompanying verification and certification against
forum-shopping, the Courts guidelines for the bench and bar in Altres v. Empleo,[20]
which were culled from jurisprudential pronouncements, are instructive:
For the guidance of the bench and bar, the Court restates in capsule form the
jurisprudential pronouncements already reflected above respecting non-compliance
with the requirements on, or submission of defective, verification and certification
against forum shopping:

1) A distinction must be made between non-compliance with the requirement on or

submission of defective verification, and non-compliance with the requirement on or
submission of defective certification against forum shopping.
2) As to verification, non-compliance therewith or a defect therein does not
necessarily render the pleading fatally defective. The court may order its
submission or correction or act on the pleading if the attending circumstances are
such that strict compliance with the Rule may be dispensed with in order that the
ends of justice may be served thereby.
3) Verification is deemed substantially complied with when one who has ample
knowledge to swear to the truth of the allegations in the complaint or petition signs
the verification, and when matters alleged in the petition have been made in good
faith or are true and correct.
4) As to certification against forum shopping, non-compliance therewith or a defect
therein, unlike in verification, is generally not curable by its subsequent submission
or correction thereof, unless there is a need to relax the Rule on the ground of
substantial compliance or presence of special circumstances or compelling reasons.
5) The certification against forum shopping must be signed by all the plaintiffs or
petitioners in a case; otherwise, those who did not sign will be dropped as parties to
the case. Under reasonable or justifiable circumstances, however, as when all the
plaintiffs or petitioners share a common interest and invoke a common cause of
action or defense, the signature of only one of them in the certification against
forum shopping substantially complies with the Rule.
6) Finally, the certification against forum shopping must be executed by the partypleader, not by his counsel. If, however, for reasonable or justifiable reasons, the
party-pleader is unable to sign, he must execute a Special Power of Attorney
designating his counsel of record to sign on his behalf. (Emphasis and underscoring
supplied)
The foregoing restated pronouncements were lost in the challenged Resolutions of
the appellate court. Petitioners contention that the appellate court should have
dismissed the petition only as to the non-signing petitioners or merely dropped
them as parties to the case is thus in order.
Instead of remanding the case to the appellate court, however, the Court deems it
more practical to decide the substantive issue raised in this petition so as not to
further delay the disposition of this case.[21] And it thus resolves to deviate as well
from the general rule that factual questions are not entertained in petitions for
review on certiorari of the appellate courts decisions in order to write finis to this
protracted litigation.
The sole issue is whether DFI (with which TACOR had been merged) and DPI should
be held solidarily liable with the Cooperative for petitioners illegal dismissal and
money claims.
The Labor Code and its Implementing Rules empower the Labor Arbiter to be the
trier of facts in labor cases.[22] Much reliance is thus placed on the Arbiters findings

of fact, having had the opportunity to discuss with the parties and their witnesses
the factual matters of the case during the conciliation phase.[23] Just the same, a
review of the records of the present case does not warrant a conclusion different
from the Arbiters, as affirmed by the NLRC, that the Cooperative is the employer of
petitioners.
To be sure, the matter of whether the Cooperative is an independent contractor or a
labor-only contractor may not be used to predicate a ruling in this case. Job
contracting or subcontracting refers to an arrangement whereby a principal agrees
to farm out with a contractor or subcontractor the performance of a specific job,
work or service within a definite or predetermined period, regardless of whether
such job, work or service is to be performed or completed within or outside the
premises of the principal.[24] The present case does not involve such an
arrangement.
DFI did not farm out to the Cooperative the performance of a specific job, work, or
service. Instead, it entered into a Banana Production and Purchase Agreement[25]
(Contract) with the Cooperative, under which the Cooperative would handle and
fund the production of bananas and operation of the plantation covering lands
owned by its members in consideration of DFIs commitment to provide financial and
technical assistance as needed, including the supply of information and equipment
in growing, packing, and shipping bananas. The Cooperative would hire its own
workers and pay their wages and benefits, and sell exclusively to DFI all export
quality bananas produced that meet the specifications agreed upon.
To the Court, the Contract between the Cooperative and DFI, far from being a job
contracting arrangement, is in essence a business partnership that partakes of the
nature of a joint venture.[26] The rules on job contracting are, therefore, inapposite.
The Court may not alter the intention of the contracting parties as gleaned from
their stipulations without violating the autonomy of contracts principle under Article
1306 of the Civil Code which gives the contracting parties the utmost liberality and
freedom to establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good custom,
public order or public policy.
Petitioners claim of employment relationship with the Cooperatives herein corespondents must be assessed on the basis of four standards, viz: (a) the manner of
their selection and engagement; (b) the mode of payment of their wages; (c) the
presence or absence of the power of dismissal; and (d) the presence or absence of
control over their conduct. Most determinative among these factors is the so-called
control test.[27]
There is nothing in the records which indicates the presence of any of the foregoing
elements of an employer-employee relationship.
The absence of the first requisite, which refers to selection and engagement, is
shown by DFIs total lack of knowledge on who actually were engaged by the
Cooperative to work in the banana plantation. This is borne out by the Contract
between the Cooperative and DFI, under which the Cooperative was to hire its own
workers. As TACOR had been merged with DFI, and DPI is merely alleged to have

previously owned TACOR, this applies to them as well. Petitioners failed to prove the
contrary. No employment contract whatsoever was submitted to substantiate how
petitioners were hired and by whom.
On the second requisite, which refers to the payment of wages, it was likewise the
Cooperative that paid the same. As reflected earlier, under the Contract, the
Cooperative was to handle and fund the production of bananas and operation of the
plantation.[28] The Cooperative was also to be responsible for the proper conduct,
safety, benefits, and general welfare of its members and workers in the plantation.
[29]
As to the third requisite, which refers to the power of dismissal, and the fourth
requisite, which refers to the power of control, both were retained by the
Cooperative. Again, the Contract stipulated that the Cooperative was to be
responsible for the proper conduct and general welfare of its members and workers
in the plantation.
The crucial element of control refers to the authority of the employer to control the
employee not only with regard to the result of the work to be done, but also to the
means and methods by which the work is to be accomplished.[30] While it suffices
that the power of control exists, albeit not actually exercised, there must be some
evidence of such power. In the present case, petitioners did not present any.
There being no employer-employee relationship between petitioners and the
Cooperatives co-respondents, the latter are not solidarily liable with the Cooperative
for petitioners illegal dismissal and money claims.
While the Court commiserates with petitioners on their loss of employment,
especially now that the Cooperative is no longer a going concern, it cannot simply,
by default, hold the Cooperatives co-respondents liable for their claims without any
factual and legal justification therefor. The social justice policy of labor laws and the
Constitution is not meant to be oppressive of capital.
En passant, petitioners are not precluded from pursuing any available remedies
against the former members of the defunct Cooperative as their individual
circumstances may warrant.
MARSMAN DRYSDALE LAND, INC.,
Petitioner,
- versus PHILIPPINE GEOANALYTICS, INC. AND GOTESCO PROPERTIES, INC.,
Respondents.
x--------------------------------------------x
GOTESCO PROPERTIES, INC.,
Petitioner,
- versus -

MARSMAN DRYSDALE LAND, INC. AND PHILIPPINE GEOANALYTICS, INC.,

Respondents.
G.R. No. 183374
Present:
CARPIO,*
CARPIO MORALES, Chairperson,
BRION,
ABAD,** and
VILLARAMA, JR., JJ.

G.R. No. 183376

Promulgated:
June 29, 2010
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO MORALES, J.:
On February 12, 1997, Marsman Drysdale Land, Inc. (Marsman Drysdale) and
Gotesco Properties, Inc. (Gotesco) entered into a Joint Venture Agreement (JVA) for
the construction and development of an office building on a land owned by
Marsman Drysdale in Makati City.[1]
The JVA contained the following pertinent provisions:
SECTION 4. CAPITAL OF THE JV
It is the desire of the Parties herein to implement this Agreement by investing in the
PROJECT on a FIFTY (50%) PERCENT- FIFTY (50%) PERCENT basis.
4.1. Contribution of [Marsman Drysdale]-[Marsman Drysdale] shall contribute the
Property.
The total appraised value of the Property is PESOS: FOUR HUNDRED TWENTY
MILLION (P420,000,000.00).

For this purpose, [Marsman Drysdale] shall deliver the Property in a buildable
condition within ninety (90) days from signing of this Agreement barring any
unforeseen circumstances over which [Marsman Drysdale] has no control. Buildable
condition shall mean that the old building/structure which stands on the Property is
demolished and taken to ground level.
4.2.
Contribution of [Gotesco]- [Gotesco] shall contribute the amount of PESOS:
FOUR HUNDRED TWENTY MILLION (P420,000,000.00) in cash which shall be payable
as follows:
4.2.1.
The amount of PESOS: FIFTY MILLION (P50,000,000.00) upon signing of
this Agreement.
4.2.2.
The balance of PESOS: THREE HUNDRED SEVENTY MILLION
(P370,000,000.00) shall be paid based on progress billings, relative to the
development and construction of the Building, but shall in no case exceed ten (10)
months from delivery of the Property in a Buildable condition as defined in section
4.1.
A joint account shall be opened and maintained by both Parties for handling of said
balance, among other Project concerns.
4.3. Funding and Financing
4.3.1
Construction funding for the Project shall be obtained from the cash
contribution of [Gotesco].
4.3.2
Subsequent funding shall be obtained from the pre-selling of units in the
Building or, when necessary, from loans from various banks or financial institutions.
[Gotesco] shall arrange the required funding from such banks or financial
institutions, under such terms and conditions which will provide financing rates
favorable to the Parties.
4.3.3
[Marsman Drysdale] shall not be obligated to fund the Project as its
contribution is limited to the Property.
4.3.4
If the cost of the Project exceeds the cash contribution of [Gotesco], the
proceeds obtained from the pre-selling of units and proceeds from loans, the Parties
shall agree on other sources and terms of funding such excess as soon as
practicable.
4.3.5

x x x x.

4.3.6

x x x x.

4.3.7

x x x x.

4.3.8
All funds advanced by a Party (or by third parties in substitution for
advances from a Party) shall be repaid by the JV.

4.3.9
If any Party agrees to make an advance to the Project but fails to do so (in
whole or in part) the other party may advance the shortfall and the Party in default
shall indemnify the Party making the substitute advance on demand for all of its
losses, costs and expenses incurred in so doing. (emphasis supplied; underscoring
in the original)
Via Technical Services Contract (TSC) dated July 14, 1997,[2] the joint venture
engaged the services of Philippine Geoanalytics, Inc. (PGI) to provide subsurface soil
exploration, laboratory testing, seismic study and geotechnical engineering for the
project. PGI, was, however, able to drill only four of five boreholes needed to
conduct its subsurface soil exploration and laboratory testing, justifying its failure to
drill the remaining borehole to the failure on the part of the joint venture partners to
clear the area where the drilling was to be made.[3] PGI was able to complete its
seismic study though.
PGI then billed the joint venture on November 24, 1997 for P284,553.50
representing the cost of partial subsurface soil exploration; and on January 15, 1998
for P250,800 representing the cost of the completed seismic study.[4]
Despite repeated demands from PGI,[5] the joint venture failed to pay its
obligations.
Meanwhile, due to unfavorable economic conditions at the time, the joint venture
was cut short and the planned building project was eventually shelved.[6]
PGI subsequently filed on November 11, 1999 a complaint for collection of sum of
money and damages at the Regional Trial Court (RTC) of Quezon City against
Marsman Drysdale and Gotesco.
In its Answer with Counterclaim and Cross-claim, Marsman Drysdale passed the
responsibility of paying PGI to Gotesco which, under the JVA, was solely liable for the
monetary expenses of the project.[7]
Gotesco, on the other hand, countered that PGI has no cause of action against it as
PGI had yet to complete the services enumerated in the contract; and that Marsman
Drysdale failed to clear the property of debris which prevented PGI from completing
its work.[8]
By Decision of June 2, 2004,[9] Branch 226 of the Quezon City RTC rendered
judgment in favor of PGI, disposing as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of
plaintiff [PGI].
The defendants [Gotesco] and [Marsman Drysdale] are ordered to pay plaintiff,
jointly:
(1)
the sum of P535,353.50 with legal interest from the date of this
decision until fully paid;

(2)

the sum of P200,000.00 as exemplary damages;

(3)

the sum of P200,000.00 as and for attorneys fees; and

(4)

costs of suit.

The cross-claim of defendant [Marsman Drysdale] against defendant [Gotesco] is

hereby GRANTED as follows:
a)
Defendant [Gotesco] is ordered to reimburse co-defendant [Marsman
Drysdale] in the amount of P535,353.[50] in accordance with the [JVA].
b)
Defendant [Gotesco] is further ordered to pay co-defendant [Marsman
Drysdale] the sum of P100,000.00 as and for attorneys fees.
SO ORDERED. (underscoring in the original; emphasis supplied)
Marsman Drysdale moved for partial reconsideration, contending that it should not
have been held jointly liable with Gotesco on PGIs claim as well as on the awards of
exemplary damages and attorneys fees. The motion was, by Resolution of October
28, 2005, denied.
Both Marsman Drysdale and Gotesco appealed to the Court of Appeals which, by
Decision of January 28, 2008,[10] affirmed with modification the decision of the trial
court. Thus the appellate court disposed:
WHEREFORE, premises considered, the instant appeal is PARTLY GRANTED. The
assailed Decision dated June 2, 2004 and the Resolution dated October 28, 2005 of
the RTC of Quezon City, Branch 226, in Civil Case No. Q99-39248 are hereby
AFFIRMED with MODIFICATION deleting the award of exemplary damages in favor of
[PGI] and the P100,000.00 attorneys fees in favor of [Marsman Drysdale] and
ordering defendant-appellant [Gotesco] to REIMBURSE [Marsman Drysdale] 50% of
the aggregate sum due [PGI], instead of the lump sum P535,353.00 awarded by the
RTC. The rest of the Decision stands.
SO ORDERED. (capitalization and emphasis in the original; underscoring supplied)
In partly affirming the trial courts decision, the appellate court ratiocinated that
notwithstanding the terms of the JVA, the joint venture cannot avoid payment of
PGIs claim since [the JVA] could not affect third persons like [PGI] because of the
basic civil law principle of relativity of contracts which provides that contracts can
only bind the parties who entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof.
[11]
Their motions for partial reconsideration having been denied,[12] Marsman
Drysdale and Gotesco filed separate petitions for review with the Court which were
docketed as G.R. Nos. 183374 and 183376, respectively. By Resolution of
September 8, 2008, the Court consolidated the petitions.

In G.R. No. 183374, Marsman Drysdale imputes error on the appellate court in
A. ADJUDGING [MARSMAN DRYSDALE] WITH JOINT LIABILITY AFTER CONCEDING
THAT [GOTESCO] SHOULD ULTIMATELY BE SOLELY LIABLE TO [PGI].
B. AWARDING ATTORNEYS FEES IN FAVOR OF [PGI]
C. IGNORING THE FACT THAT [PGI] DID NOT COMPLY WITH THE REQUIREMENT OF
SATISFACTORY PERFORMANCE OF ITS PRESTATION WHICH, PURSUANT TO THE
TECHNICAL SERVICES CONTRACT, IS THE CONDITION SINE QUA NON TO
COMPENSATION.
D. DISREGARDING CLEAR EVIDENCE SHOWING [MARSMAN DRYSDALES]
ENTITLEMENT TO AN AWARD OF ATTORNEYS FEES.[13]
On the other hand, in G.R. No. 183376, Gotesco peddles that the appellate court
committed error when it
ORDERED [GOTESCO] TO PAY P535,353.50 AS COST OF THE WORK PERFORMED BY
[PGI] AND P100,000.00 [AS] ATTORNEYS FEES [AND] TO REIMBURSE [MARSMAN
DRYSDALE] 50% OF P535,353.50 AND PAY [MARSMAN DRYSDALE] P100,000.00 AS
ATTORNEYS FEES. [14]
On the issue of whether PGI was indeed entitled to the payment of services it
rendered, the Court sees no imperative to re-examine the congruent findings of the
trial and appellate courts thereon. Undoubtedly, the exercise involves an
examination of facts which is normally beyond the ambit of the Courts functions
under a petition for review, for it is well-settled that this Court is not a trier of facts.
While this judicial tenet admits of exceptions, such as when the findings of facts of
the appellate court are contrary to those of the trial courts, or when the judgment is
based on a misapprehension of facts, or when the findings of facts are contradicted
by the evidence on record,[15] these extenuating grounds find no application in the
present petitions.
AT ALL EVENTS, the Court is convinced that PGI had more than sufficiently
established its claims against the joint venture. In fact, Marsman Drysdale had long
recognized PGIs contractual claims when it (PGI) received a Certificate of
Payment[16] from the joint ventures project manager[17] which was endorsed to
Gotesco for processing and payment.[18]
The core issue to be resolved then is which between joint venturers Marsman
Drysdale and Gotesco bears the liability to pay PGI its unpaid claims.
To Marsman Drysdale, it is Gotesco since, under the JVA, construction funding for
the project was to be obtained from Gotescos cash contribution, as its (Marsman
Drysdales) participation in the venture was limited to the land.
Gotesco maintains, however, that it has no liability to pay PGI since it was due to
the fault of Marsman Drysdale that PGI was unable to complete its undertaking.

The Court finds Marsman Drysdale and Gotesco jointly liable to PGI.
PGI executed a technical service contract with the joint venture and was never a
party to the JVA. While the JVA clearly spelled out, inter alia, the capital
contributions of Marsman Drysdale (land) and Gotesco (cash) as well as the funding
and financing mechanism for the project, the same cannot be used to defeat the
lawful claim of PGI against the two joint venturers-partners.
The TSC clearly listed the joint venturers Marsman Drysdale and Gotesco as the
beneficial owner of the project,[19] and all billing invoices indicated the consortium
therein as the client.
As the appellate court held, Articles 1207 and 1208 of the Civil Code, which
respectively read:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire compliance with
the prestations. There is a solidary liability only when the obligation expressly so
states, or when the law or nature of the obligation requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the obligations to which
the preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors,
the credits or debts being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of suits. (emphasis and underscoring supplied),
presume that the obligation owing to PGI is joint between Marsman Drysdale and
Gotesco.
The only time that the JVA may be made to apply in the present petitions is when
the liability of the joint venturers to each other would set in.
A joint venture being a form of partnership, it is to be governed by the laws on
partnership.[20] Article 1797 of the Civil Code provides:
Art. 1797. The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed upon,
the share of each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each 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. (emphasis and underscoring supplied)
In the JVA, Marsman Drysdale and Gotesco agreed on a 50-50 ratio on the proceeds
of the project.[21] They did not provide for the splitting of losses, however. Applying

the above-quoted provision of Article 1797 then, the same ratio applies in splitting
the P535,353.50 obligation-loss of the joint venture.
The appellate courts decision must be modified, however. Marsman Drysdale and
Gotesco being jointly liable, there is no need for Gotesco to reimburse Marsman
Drysdale for 50% of the aggregate sum due to PGI.
Allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not
only be contrary to the law on partnership on division of losses but would partake of
a clear case of unjust enrichment at Gotescos expense. The grant by the lower
courts of Marsman Drysdale cross-claim against Gotesco was thus erroneous.
Marsman Drysdales supplication for the award of attorneys fees in its favor must be
denied. It cannot claim that it was compelled to litigate or that the civil action or
proceeding against it was clearly unfounded, for the JVA provided that, in the event
a party advances funds for the project, the joint venture shall repay the advancing
party. [22]
Marsman Drysdale was thus not precluded from advancing funds to pay for PGIs
contracted services to abate any legal action against the joint venture itself. It was
in fact hardline insistence on Gotesco having sole responsibility to pay for the
obligation, despite the fact that PGIs services redounded to the benefit of the joint
venture, that spawned the legal action against it and Gotesco.
Finally, an interest of 12% per annum on the outstanding obligation must be
imposed from the time of demand[23] as the delay in payment makes the obligation
one of forbearance of money, conformably with this Courts ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals.[24] Marsman Drysdale and Gotesco should
bear legal interest on their respective obligations.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are
AFFIRMED with MODIFICATION in that the order for Gotesco to reimburse Marsman
Drysdale is DELETED, and interest of 12% per annum on the respective obligations
of Marsman Drysdale and Gotesco is imposed, computed from the last demand or
on January 5, 1999 up to the finality of the Decision.
If the adjudged amount and the interest remain unpaid thereafter, the interest rate
shall be 12% per annum computed from the time the judgment becomes final and
executory until it is fully satisfied. The appealed decision is, in all other respects,
affirmed.
Costs against petitioners Marsman Drysdale and Gotesco.
SO ORDERED.

J. TIOSEJO INVESTMENT CORP.,

Petitioner,
G.R. No. 174149

- versus -

SPOUSES BENJAMIN AND ELEANOR ANG,

Respondents.
Present:
CORONA, C.J.,
Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
PEREZ, and
MENDOZA,* JJ.
Promulgated:
September 8, 2010
x--------------------------------------------------x
DECISION
PEREZ, J.:
Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review
at bench seeks the reversal of the Resolutions dated 23 May 2006 and 9 August
2006 issued by the Third Division of the Court of Appeals (CA) in CA-G.R. SP No.
93841 which, respectively, dismissed the petition for review of petitioner J. Tiosejo
Investment Corp. (JTIC) for having been filed out of time[1] and denied the motion
for reconsideration of said dismissal.[2]

The Facts

On 28 December 1995 petitioner entered into a Joint Venture Agreement (JVA) with
Primetown Property Group, Inc. (PPGI) for the development of a residential
condominium project to be known as The Meditel on the formers 9,502 square
meter property along Samat St., Highway Hills, Mandaluyong City.[3] With petitioner
contributing the same property to the joint venture and PPGI undertaking to develop
the condominium, the JVA provided, among other terms and conditions, that the
developed units shall be shared by the former and the latter at a ratio of 17%-83%,
respectively.[4] While both parties were allowed, at their own individual
responsibility, to pre-sell the units pertaining to them,[5] PPGI further undertook to
use all proceeds from the pre-selling of its saleable units for the completion of the
Condominium Project. [6]

On 17 June 1996, the Housing and Land Use Regulatory Board (HLURB) issued
License to Sell No. 96-06-2854 in favor of petitioner and PPGI as project owners.[7]
By virtue of said license, PPGI executed Contract to Sell No. 0212 with Spouses
Benjamin and Eleanor Ang on 5 February 1997, over the 35.45-square meter
condominium unit denominated as Unit A-1006, for the agreed contract price of
P52,597.88 per square meter or a total P2,077,334.25.[8] On the same date PPGI
and respondents also executed Contract to Sell No. 0214 over the 12.50 square
meter parking space identified as Parking Slot No. 0405, for the stipulated
consideration of P26,400.00 square meters or a total of P313,500.00.[9]

On 21 July 1999, respondents filed against petitioner and PPGI the complaint for the
rescission of the aforesaid Contracts to Sell docketed before the HLURB as HLURB
Case No. REM 072199-10567. Contending that they were assured by petitioner and
PPGI that the subject condominium unit and parking space would be available for
turn-over and occupancy in December 1998, respondents averred, among other
matters, that in view of the non-completion of the project according to said
representation, respondents instructed petitioner and PPGI to stop depositing the
post-dated checks they issued and to cancel said Contracts to Sell; and, that despite
several demands, petitioner and PPGI have failed and refused to refund the
P611,519.52 they already paid under the circumstances. Together with the refund of
said amount and interests thereon at the rate of 12% per annum, respondents
prayed for the grant of their claims for moral and exemplary damages as well as
attorneys fees and the costs.[10]

Specifically denying the material allegations of the foregoing complaint, PPGI filed
its 7 September 1999 answer alleging that the delay in the completion of the
project was attributable to the economic crisis which affected the country at the
time; that the unexpected and unforeseen inflation as well as increase in interest
rates and cost of building materials constitute force majeure and were beyond its
control; that aware of its responsibilities, it offered several alternatives to its buyers
like respondents for a transfer of their investment to its other feasible projects and
for the amounts they already paid to be considered as partial payment for the

replacement unit/s; and, that the complaint was prematurely filed in view of the ongoing negotiations it is undertaking with its buyers and prospective joint venture
partners. Aside from the dismissal of the complaint, PPGI sought the readjustment
of the contract price and the grant of its counterclaims for attorneys fees and
litigation expenses.[11]

Petitioner also specifically denied the material allegations of the complaint in

separate answer dated 5 February 2002[12] which it amended on 20 May 2002.
Calling attention to the fact that its prestation under the JVA consisted in
contributing the property on which The Meditel was to be constructed, petitioner
asseverated that, by the terms of the JVA, each party was individually responsible
for the marketing and sale of the units pertaining to its share; that not being privy
to the Contracts to Sell executed by PPGI and respondents, it did not receive any
portion of the payments made by the latter; and, that without any contributory fault
and negligence on its part, PPGI breached its undertakings under the JVA by failing
to complete the condominium project. In addition to the dismissal of the complaint
and the grant of its counterclaims for exemplary damages, attorneys fees, litigation
expenses and the costs, petitioner interposed a cross-claim against PPGI for full
reimbursement of any sum it may be adjudged liable to pay respondents.[13]

Acting on the position papers and draft decisions subsequently submitted by the
parties,[14] Housing and Land Use (HLU) Arbiter Dunstan T. San Vicente went on to
render the 30 July 2003 decision declaring the subject Contracts to Sell cancelled
and rescinded on account of the non-completion of the condominium project. On the
ground that the JVA created a partnership liability on their part, petitioner and PPGI,
as co-owners of the condominium project, were ordered to pay: (a) respondents
claim for refund of the P611,519.52 they paid, with interest at the rate of 12% per
annum from 5 February 1997; (b) damages in the sum of P75,000.00; (c) attorneys
fees in the sum of P30,000.00; (d) the costs; and, (e) an administrative fine in the
sum of P10,000.00 for violation of Sec. 20 in relation to Sec. 38 of Presidential
Decree No. 957. [15] Elevated to the HLURB Board of Commissioners via the petition
for review filed by petitioner,[16] the foregoing decision was modified to grant the
latters cross-claim in the 14 September 2004 decision rendered by said
administrative bodys Second Division in HLURB Case No. REM-A-031007-0240,[17]
to wit:

Wherefore, the petition for review of the respondent Corporation is dismissed.

However, the decision of the Office below dated July 30, 2003 is modified, hence, its
dispositive portion shall read:
1. Declaring the contracts to sell, both dated February 5, 1997, as cancelled and
rescinded, and ordering the respondents to immediately pay the complainants the
following:

a.
The amount of P611,519.52, with interest at the legal rate reckoned from
February 5, 1997 until fully paid;
b.
Damages of P75,000.00;
c.
Attorneys fees equivalent to P30,000.00; and
d.
The Cost of suit;
2. Ordering respondents to pay this Office administrative fine of P10,000.00 for
violation of Section 20 in relation to Section 38 of P.D. 957; and
3. Ordering respondent Primetown to reimburse the entire amount which the
respondent Corporation will be constrained to pay the complainants.
So ordered.[18]
With the denial of its motion for reconsideration of the foregoing decision,[19]
petitioner filed a Notice of Appeal dated 28 February 2005 which was docketed
before the Office of the President (OP) as O.P. Case No. 05-B-072.[20] On 3 March
2005, the OP issued an order directing petitioner to submit its appeal memorandum
within 15 days from receipt thereof.[21] Acting on the motion therefor filed, the OP
also issued another order on the same date, granting petitioner a period of 15 days
from 28 February 2005 or until 15 March 2005 within which to file its appeal
memorandum.[22] In view of petitioners filing of a second motion for extension
dated 15 March 2005,[23] the OP issued the 18 March 2005 order granting the
former an additional 10 days from 15 March 2005 or until 25 March 2005 within
which to file its appeal memorandum, provided no further extension shall be
allowed.[24] Claiming to have received the aforesaid 3 March 2005 order only on 16
March 2005, however, petitioner filed its 31 March 2005 motion seeking yet another
extension of 10 days or until 10 April 2005 within which to file its appeal
memorandum.[25]

On 7 April 2005, respondents filed their opposition to the 31 March 2005 motion for
extension of petitioner[26] which eventually filed its appeal memorandum by
registered mail on 11 April 2005 in view of the fact that 10 April 2005 fell on a
Sunday.[27] On 25 October 2005, the OP rendered a decision dismissing petitioners
appeal on the ground that the latters appeal memorandum was filed out of time and
that the HLURB Board committed no grave abuse of discretion in rendering the
appealed decision.[28] Aggrieved by the denial of its motion for reconsideration of
the foregoing decision in the 3 March 2006 order issued by the OP,[29] petitioner
filed before the CA its 29 March 2006 motion for an extension of 15 days from 31
March 2006 or until 15 April 2006 within which to file its petition for review.[30]
Accordingly, a non-extendible period of 15 days to file its petition for review was
granted petitioner in the 31 March 2006 resolution issued by the CA Third Division in
CA-G.R, SP No. 93841.[31]

Maintaining that 15 April 2006 fell on a Saturday and that pressures of work
prevented its counsel from finalizing its petition for review, petitioner filed a motion

on 17 April 2006, seeking for an additional time of 10 days or until 27 April 2006
within which to file said pleading.[32] Although petitioner filed by registered mail a
motion to admit its attached petition for review on 19 April 2006,[33] the CA issued
the herein assailed 23 May 2006 resolution,[34] disposing of the formers pending
motion for extension as well as the petition itself in the following wise:
We resolve to DENY the second extension motion and rule to DISMISS the petition
for being filed late.
Settled is that heavy workload is by no means excusable (Land Bank of the
Philippines vs. Natividad, 458 SCRA 441 [2005]). If the failure of the petitioners
counsel to cope up with heavy workload should be considered a valid justification to
sidestep the reglementary period, there would be no end to litigations so long as
counsel had not been sufficiently diligent or experienced (LTS Philippine Corporation
vs. Maliwat, 448 SCRA 254, 259-260 [2005], citing Sublay vs. National Labor
Relations Commission, 324 SCRA 188 [2000]).
Moreover, lawyers should not assume that their motion for extension or
postponement will be granted the length of time they pray for (Ramos vs. Dajoyag,
378 SCRA 229 [2002]).
SO ORDERED.[35]
Petitioners motion for reconsideration of the foregoing resolution[36] was denied for
lack of merit in the CAs second assailed 9 August 2006 resolution,[37] hence, this
petition.
The Issues

Petitioner seeks the reversal of the assailed resolutions on the following grounds, to
wit:
I. THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION ON MERE
TECHNICALITY;
II. THE COURT OF APPEALS ERRED IN REFUSING TO RESOLVE THE PETITION ON THE
MERITS THEREBY AFFIRMING THE OFFICE OF THE PRESIDENTS DECISION (A)
DISMISSING JTICS APPEAL ON A MERE TECHNICALITY; (B) AFFIRMING THE HLURB
BOARDS DECISION INSOFAR AS IT FOUND JTIC SOLIDARILY LIABLE WITH PRIMETOWN
TO PAY SPOUSES ANG DAMAGES, ATTORNEYS FEES AND THE COST OF THE SUIT;
AND (C) AFFIRMING THE HLURB BOARDS DECISION INSOFAR AS IT FAILED TO AWARD
JITC ITS COUNTERCLAIMS AGAINST SPOUSES ANG.[38]
The Courts Ruling

We find the petition bereft of merit.

While the dismissal of an appeal on purely technical grounds is concededly frowned
upon,[39] it bears emphasizing that the procedural requirements of the rules on
appeal are not harmless and trivial technicalities that litigants can just discard and
disregard at will.[40] Neither being a natural right nor a part of due process, the rule
is settled that the right to appeal is merely a statutory privilege which may be
exercised only in the manner and in accordance with the provisions of the law.[41]
The perfection of an appeal in the manner and within the period prescribed by law
is, in fact, not only mandatory but jurisdictional.[42] Considering that they are
requirements which cannot be trifled with as mere technicality to suit the interest of
a party,[43] failure to perfect an appeal in the prescribed manner has the effect of
rendering the judgment final and executory.[44]

Fealty to the foregoing principles impels us to discount the error petitioner imputes
against the CA for denying its second motion for extension of time for lack of merit
and dismissing its petition for review for having been filed out of time. Acting on the
29 March 2006 motion filed for the purpose, after all, the CA had already granted
petitioner an inextendible period of 15 days from 31 March 2006 or until 15 April
2006 within which to file its petition for review. Sec. 4, Rule 43 of the 1997 Rules of
Civil Procedure provides as follows:
Sec. 4. Period of appeal. The appeal shall be taken within fifteen (15) days from
notice of the award, judgment, final order or resolution, or from the date of its last
publication, if publication is required by law for its effectivity, or of the denial of
petitioners motion for new trial or reconsideration duly filed in accordance with the
governing law of the court or agency a quo. Only one (1) motion for reconsideration
shall be allowed. Upon proper motion and payment of the full amount of the docket
fee before the expiration of the reglementary period, the Court of Appeals may
grant an additional period of fifteen (15) days only within which to file the petition
for review. No further extension shall be granted except for the most compelling
reason and in no case to exceed fifteen (15) days. (Underscoring supplied)
The record shows that, having been granted the 15-day extension sought in its first
motion, petitioner filed a second motion for extension praying for an additional 10
days from 17 April 2006 within which to file its petition for review, on the ground
that pressures of work and the demands posed by equally important cases
prevented its counsel from finalizing the same. As correctly ruled by the CA,
however, heavy workload cannot be considered as a valid justification to sidestep
the reglementary period[45] since to do so would only serve to encourage needless
delays and interminable litigations. Indeed, rules prescribing the time for doing
specific acts or for taking certain proceedings are considered absolutely
indispensable to prevent needless delays and to orderly and promptly discharge
judicial business.[46] Corollary to the principle that the allowance or denial of a

motion for extension of time is addressed to the sound discretion of the court,[47]
moreover, lawyers cannot expect that their motions for extension or postponement
will be granted[48] as a matter of course.

Although technical rules of procedure are not ends in themselves, they are
necessary for an effective and expeditious administration of justice and cannot, for
said reason, be discarded with the mere expediency of claiming substantial merit.
[49] This holds particularly true in the case at bench where, prior to the filing of its
petition for review before the CA, petitioners appeal before the OP was likewise
dismissed in view of its failure to file its appeal memorandum within the extensions
of time it had been granted by said office. After being granted an initial extension of
15 days to do the same, the records disclose that petitioner was granted by the OP
a second extension of 10 days from 15 March 2005 or until 25 March 2005 within
which to file its appeal memorandum, on the condition that no further extensions
shall be allowed. Aside from not heeding said proviso, petitioner had, consequently,
no more time to extend when it filed its 31 March 2005 motion seeking yet another
extension of 10 days or until 10 April 2005 within which to file its appeal
memorandum.

With the foregoing procedural antecedents, the initial 15-day extension granted by
the CA and the injunction under Sec. 4, Rule 43 of the 1997 Rules of Civil Procedure
against further extensions except for the most compelling reason, it was clearly
inexcusable for petitioner to expediently plead its counsels heavy workload as
ground for seeking an additional extension of 10 days within which to file its petition
for review. To our mind, petitioner would do well to remember that, rather than the
low gate to which parties are unreasonably required to stoop, procedural rules are
designed for the orderly conduct of proceedings and expeditious settlement of
cases in the courts of law. Like all rules, they are required to be followed[50] and
utter disregard of the same cannot be expediently rationalized by harping on the
policy of liberal construction[51] which was never intended as an unfettered license
to disregard the letter of the law or, for that matter, a convenient excuse to
substitute substantial compliance for regular adherence thereto. When it comes to
compliance with time rules, the Court cannot afford inexcusable delay.[52]

Even prescinding from the foregoing procedural considerations, we also find that the
HLURB Arbiter and Board correctly held petitioner liable alongside PPGI for
respondents claims and the P10,000.00 administrative fine imposed pursuant to
Section 20 in relation to Section 38 of P.D. 957. By the express terms of the JVA, it
appears that petitioner not only retained ownership of the property pending
completion of the condominium project[53] but had also bound itself to answer
liabilities proceeding from contracts entered into by PPGI with third parties. Article
VIII, Section 1 of the JVA distinctly provides as follows:

Sec. 1. Rescission and damages. Non-performance by either party of its obligations

under this Agreement shall be excused when the same is due to Force Majeure. In
such cases, the defaulting party must exercise due diligence to minimize the breach
and to remedy the same at the soonest possible time. In the event that either party
defaults or breaches any of the provisions of this Agreement other than by reason of
Force Majeure, the other party shall have the right to terminate this Agreement by
giving notice to the defaulting party, without prejudice to the filing of a civil case for
damages arising from the breach of the defaulting party.
In the event that the Developer shall be rendered unable to complete the
Condominium Project, and such failure is directly and solely attributable to the
Developer, the Owner shall send written notice to the Developer to cause the
completion of the Condominium Project. If the developer fails to comply within One
Hundred Eighty (180) days from such notice or, within such time, indicates its
incapacity to complete the Project, the Owner shall have the right to take over the
construction and cause the completion thereof. If the Owner exercises its right to
complete the Condominium Project under these circumstances, this Agreement shall
be automatically rescinded upon written notice to the Developer and the latter shall
hold the former free and harmless from any and all liabilities to third persons arising
from such rescission. In any case, the Owner shall respect and strictly comply with
any covenant entered into by the Developer and third parties with respect to any of
its units in the Condominium Project. To enable the owner to comply with this
contingent liability, the Developer shall furnish the Owner with a copy of its
contracts with the said buyers on a month-to-month basis. Finally, in case the
Owner would be constrained to assume the obligations of the Developer to its own
buyers, the Developer shall lose its right to ask for indemnity for whatever it may
have spent in the Development of the Project.
Nevertheless, with respect to the buyers of the Developer for the First Phase, the
area intended for the Second Phase shall not be bound and/or subjected to the said
covenants and/or any other liability incurred by the Developer in connection with
the development of the first phase. (Underscoring supplied)
Viewed in the light of the foregoing provision of the JVA, petitioner cannot avoid
liability by claiming that it was not in any way privy to the Contracts to Sell
executed by PPGI and respondents. As correctly argued by the latter, moreover, a
joint venture is considered in this jurisdiction as a form of partnership and is,
accordingly, governed by the law of partnerships.[54] Under Article 1824 of the Civil
Code of the Philippines, all partners are solidarily liable with the partnership for
everything chargeable to the partnership, including loss or injury caused to a third
person or penalties incurred due to any wrongful act or omission of any partner
acting in the ordinary course of the business of the partnership or with the authority
of his co-partners.[55] Whether innocent or guilty, all the partners are solidarily
liable with the partnership itself.[56]
WHEREFORE, premises considered, the petition for review is DENIED for lack of
merit.

SO ORDERED.

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President
TAN ENG LAY, respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the
Decision1 dated March 13, 1996 of the former Fifth Division2 of the Court of Appeals
in CA-G.R. CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the
complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the
common-law spouse of the decedent, joined by their children Teresita, Nena, Clarita,
Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF TAN
ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19,
1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court
of Baguio City was for accounting, liquidation and winding up of the alleged
partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On
March 18, 1991, the petitioners filed an amended complaint4 impleading private
respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The
amended complaint was admitted by the trial court in its Order dated May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan
Eng Kee and Tan Eng Lay, pooling their resources and industry together, entered
into a partnership engaged in the business of selling lumber and hardware and
construction supplies. They named their enterprise "Benguet Lumber" which they
jointly managed until Tan Eng Kee's death. Petitioners herein averred that the
business prospered due to the hard work and thrift of the alleged partners.
However, they claimed that in 1981, Tan Eng Lay and his children caused the
conversion of the partnership "Benguet Lumber" into a corporation called "Benguet
Lumber Company." The incorporation was purportedly a ruse to deprive Tan Eng Kee
and his heirs of their rightful participation in the profits of the business. Petitioners
prayed for accounting of the partnership assets, and the dissolution, winding up and
liquidation thereof, and the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April
12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular
partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers
and/or partners in a business venture and/or particular partnership called Benguet

Lumber and as such should share in the profits and/or losses of the business
venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to
Benguet Lumber Co. Inc. and as such the heirs or legal representatives of the
deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer
and/or as partner in a particular partnership have descended to the plaintiffs who
are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager
of Benguet Lumber Company Inc. to render an accounting of all the assets of
Benguet Lumber Company, Inc. so the plaintiffs know their proper share in the
business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets
of Benguet Lumber Company, Inc. until such time that said corporation is finally
liquidated are directed to submit the name of any person they want to be appointed
as receiver failing in which this Court will appoint the Branch Clerk of Court or
another one who is qualified to act as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the
expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13,
1996, rendered the assailed decision reversing the judgment of the trial court.
Petitioners' motion for reconsideration7 was denied by the Court of Appeals in a
Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against
Tan Eng Lay and Wilborn Tan for the use of allegedly falsified documents in a judicial
proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by the
defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee
was a mere employee of Benguet Lumber, were fake, based on the discrepancy in
the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870
against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan,
for alleged falsification of commercial documents by a private individual. On March
20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges
were filed, rendered judgment9 dismissing the cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
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 SELFSERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A
SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING
FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH 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 coventures 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.26 Tan Eng Lay, however, denied knowledge of this meeting or of the
conversation between Peralta and his brother.27 Tan Eng Lay consistently testified
that he had his business and his brother had his, that it was only later on that his
said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or
co-possession (specifically here, of the G.I. sheets) is not an indicium of the
existence of a partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the
partnership was allegedly in existence, Tan Eng Kee never asked for an accounting.
The essence of a partnership is that the partners share in the profits and losses.29
Each has the right to demand an accounting as long as the partnership exists.30 We
have allowed a scenario wherein "[i]f excellent relations exist among the partners at
the start of the business and all the partners are more interested in seeing the firm

grow rather than get immediate returns, a deferment of sharing in the profits is
perfectly plausible."31 But in the situation in the case at bar, the deferment, if any,
had gone on too long to be plausible. A person is presumed to take ordinary care of
his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the
second place, she did not furnish any help or intervention in the management of the
theatre. In the third place, it does not appear that she has even demanded from
defendant any accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how the business
was progressing, whether the expenses were legitimate, whether the earnings were
correct, etc. She was absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of P3,000.00 a month,
which cannot be interpreted in any manner than a payment for the use of the
premises which she had leased from the owners. Clearly, plaintiff had always acted
in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which
shows that both parties considered this offer as the real contract between them.33
[emphasis supplied]
A demand for periodic accounting is evidence of a partnership.34 During his
lifetime, Tan Eng Kee appeared never to have made any such demand for
accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents,
consisting of payrolls purporting to show that Tan Eng Kee was an ordinary
employee of Benguet Lumber, as it was then called. The authenticity of these
documents was questioned by petitioners, to the extent that they filed criminal
charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal
cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact
shows that Tan Eng Kee received sums as wages of an employee. In connection
therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each
other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by
the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is a prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was
only an employee, not a partner. Even if the payrolls as evidence were discarded,
petitioners would still be back to square one, so to speak, since they did not present
and offer evidence that would show that Tan Eng Kee received amounts of money
allegedly representing his share in the profits of the enterprise. Petitioners failed to
show how much their father, Tan Eng Kee, received, if any, as his share in the profits
of Benguet Lumber Company for any particular period. Hence, they failed to prove
that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the business
between themselves, which is one of the essential features of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence
of a partnership from this set of circumstances: that Tan Eng Lay and Tan Eng Kee
were commanding the employees; that both were supervising the employees; that
both were the ones who determined the price at which the stocks were to be sold;
and that both placed orders to the suppliers of the Benguet Lumber Company. They
also point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at
the Benguet Lumber Company compound, a privilege not extended to its ordinary
employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated
powers and privileges granted in favor of Tan Eng Kee, were indicative of his being a
partner in Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and
directions to 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 hereby AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing and Buena, JJ ., concur.

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

5.

Management

xxx

(a)
The management of the Corporation shall be vested in a Board of Directors,
which shall consist of nine individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation, three of the nine directors
shall be designated by American-Standard, and the other six shall be designated by
the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as
a minority group, including the grant of veto powers over a number of corporate
acts and the right to designate certain officers, such as a member of the Executive
Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the
condition that at least 60% of the capital stock of the corporation shall be owned by
Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American
corporation prospered. Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between the two groups.
According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it apparently
had other subsidiaries of joint joint venture groups in the countries where Philippine
exports were contemplated. On March 8, 1983, the annual stockholders' meeting
was held. The meeting was presided by Baldwin Young. The minutes were taken by
the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda,
the stockholders then proceeded to the election of the members of the board of
directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John

Griffin and David P. Whittingham. The Philippine investors nominated six, namely;
Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in
turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last
two nominations out of order on the basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors,
and the legal advice of Saniwares' legal counsel. The following events then,
transpired:
... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the
3 nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that
all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, ACG.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 7597576)
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 know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx

xxx

xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9

votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power. Furthermore,
the grant to ASI of the right to designate certain officers of the corporation; the
super-majority voting requirements for amendments of the articles and by-laws; and
most significantly to the issues of tms case, the provision that ASI shall designate 3
out of the 9 directors and the other stockholders shall designate the other 6, clearly
indicate that there are two distinct groups in Saniwares, namely ASI, which owns
40% of the capital stock and the Philippine National stockholders who own the
balance of 60%, and that 2) ASI is given certain protections as the minority
stockholder.

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or
"elected" in the selection of the nine directors on a six to three ratio. Each group is
assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture.
Baldwin Young also testified that Section 16(c) of the Agreement that "Nothing
herein contained shall be construed to constitute any of the parties hereto partners
or joint venturers in respect of any transaction hereunder" was merely to obviate
the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the technology and
marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later. As the
Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is
not consistent with fair dealing to say the least. To the extent that such subversive
actions can be lawfully prevented, the courts should extend protection especially in
industries where constitutional and legal requirements reserve controlling
ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.xxx

xxx

xxx

2.
An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares held
by them shall be voted as therein provided, or as they may agree, or as determined
in accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time
of the disputed stockholders meeting, these 95 stockholders are not separate from

each other but are divisible into groups representing a single Identifiable interest.
For example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered
as one (which, it is respectfully submitted, they should be for purposes of
determining how closely held Saniwares is there were as of 8 March 1983,
practically only 17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to
6 of appellees' Rejoinder Memorandum dated 11 December 1984 and Annex "A"
thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is a closeheld 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 9man 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.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

J.G. SUMMIT HOLDINGS, INC., petitioner,

vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members;
ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit
Holdings, Inc. for reconsideration of our Resolution dated September 24, 2003 and
to elevate this case to the Court En Banc. The petitioner questions the Resolution
which reversed our Decision of November 20, 2000, which in turn reversed and set
aside a Decision of the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24,
2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC),
a government corporation, entered into a Joint Venture Agreement (JVA) with
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction,
operation and management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering Corporation
(PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million for
the capitalization of PHILSECO in the proportion of 60%-40% respectively. One of its
salient features is the grant to the parties of the right of first refusal should either of
them decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS
[PHILSECO] to any third party without giving the other under the same terms the
right of first refusal. This provision shall not apply if the transferee is a corporation
owned or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO
to the Philippine National Bank (PNB). Such interests were subsequently transferred
to the National Government pursuant to Administrative Order No. 14. On December
8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the
Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title
to, and possession of, conserve, manage and dispose of non-performing assets of
the National Government. Thereafter, on February 27, 1987, a trust agreement was
entered into between the National Government and the APT wherein the latter was
named the trustee of the National Government's share in PHILSECO. In 1989, as a
result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB,
the National Government's shareholdings in PHILSECO increased to 97.41% thereby
reducing KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the APT
deemed it best to sell the National Government's share in PHILSECO to private

entities. After a series of negotiations between the APT and KAWASAKI, they agreed
that the latter's right of first refusal under the JVA be "exchanged" for the right to
top by five percent (5%) the highest bid for the said shares. They further agreed
that KAWASAKI would be entitled to name a company in which it was a stockholder,
which could exercise the right to top. On September 7, 1990, KAWASAKI informed
APT that Philyards Holdings, Inc. (PHI)1 would exercise its right to top.
At the pre-bidding conference held on September 18, 1993, interested bidders were
given copies of the JVA between NIDC and KAWASAKI, and of the Asset Specific
Bidding Rules (ASBR) drafted for the National Government's 87.6% equity share in
PHILSECO. The provisions of the ASBR were explained to the interested bidders who
were notified that the bidding would be held on December 2, 1993. A portion of the
ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is
the National Government's equity in PHILSECO consisting of 896,869,942 shares of
stock (representing 87.67% of PHILSECO's outstanding capital stock), which will be
sold as a whole block in accordance with the rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final approval of
both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative
price set for the National Government's 87.67% equity in PHILSECO is PESOS: ONE
BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its
regular meeting following the bidding, for the purpose of determining whether or
not it should be endorsed by the APT Board of Trustees to the COP, and the latter
approves the same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or its
nominee, [PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings,
Inc. shall then have a period of thirty (30) calendar days from the date of receipt of
such advice from APT within which to exercise their "Option to Top the Highest Bid"
by offering a bid equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.
exercise their "Option to Top the Highest Bid," they shall so notify the APT about
such exercise of their option and deposit with APT the amount equivalent to ten
percent (10%) of the highest bid plus five percent (5%) thereof within the thirty
(30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon
Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. declaring them as
the preferred bidder and they shall have a period of ninety (90) days from the
receipt of the APT's notice within which to pay the balance of their bid price.

6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to
exercise their "Option to Top the Highest Bid" within the thirty (30)-day period, APT
will declare the highest bidder as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with appropriate care
these rules, the official bid forms, including any addenda or amendments thereto
issued during the bidding period. The bidder shall likewise be responsible for
informing itself with respect to any and all conditions concerning the PHILSECO
Shares which may, in any manner, affect the bidder's proposal. Failure on the part of
the bidder to so examine and inform itself shall be its sole risk and no relief for error
or omission will be given by APT or COP. . . .
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.2
submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an
acknowledgment of KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty (30)
days to act on APT's recommendation based on the result of this bidding. Should the
COP approve the highest bid, APT shall advise Kawasaki Heavy Industries, Inc.
and/or its nominee, [PHILYARDS] Holdings, Inc. that the highest bid is acceptable to
the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of
receipt of such advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
As petitioner was declared the highest bidder, the COP approved the sale on
December 3, 1993 "subject to the right of Kawasaki Heavy Industries, Inc./
[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as specified in the bidding
rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of
PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed
of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated
the ASBR because the last four (4) companies were the losing bidders thereby
circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI
could exercise the right to top; (c) giving the same option to top to PHI constituted
unwarranted benefit to a third party; (d) no right of first refusal can be exercised in
a public bidding or auction sale; and (e) the JG Summit consortium was not
estopped from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of
the purchase price of the subject bidding. On February 7, 1994, the APT notified
petitioner that PHI had exercised its option to top the highest bid and that the COP
had approved the same on January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court
a Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was

referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the
same for lack of merit. It ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right of first refusal and
the right to top that was exercised by KAWASAKI/PHI, and that the matter must be
brought "by the proper party in the proper forum at the proper time and threshed
out in a full blown trial." The Court of Appeals further ruled that the right of first
refusal and the right to top are prima facie legal and that the petitioner, "by
participating in the public bidding, with full knowledge of the right to top granted to
KAWASAKI/[PHILYARDS] isestopped from questioning the validity of the award
given to [PHILYARDS] after the latter exercised the right to top and had paid in full
the purchase price of the subject shares, pursuant to the ASBR." Petitioner filed a
Motion for Reconsideration of said Decision which was denied on March 15, 1996.
Petitioner thus filed a Petition for Certiorari with this Court alleging grave abuse of
discretion on the part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling among others
that the Court of Appeals erred when it dismissed the petition on the sole ground of
the impropriety of the special civil action of mandamus because the petition was
also one of certiorari. It further ruled that a shipyard like PHILSECO is a public utility
whose capitalization must be sixty percent (60%) Filipino-owned. Consequently, the
right to top granted to KAWASAKI under the Asset Specific Bidding Rules (ASBR)
drafted for the sale of the 87.67% equity of the National Government in PHILSECO is
illegal not only because it violates the rules on competitive bidding but more
so, because it allows foreign corporations to own more than 40% equity in the
shipyard. It also held that "although the petitioner had the opportunity to examine
the ASBR before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions thereof." Thus,
this Court voided the transfer of the national government's 87.67% share in
PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the
highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed
Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE.
Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million Pesos
(P2,030,000,000.00), less its bid deposit plus interests upon the finality of this
Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from
petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing
87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred ThirtyOne Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.

SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues
for x x x resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the
1977 JVA, KAWASAKI can exercise its right of first refusal only up to 40% of the total
capitalization of PHILSECO; and (3) Whether the right to top granted to KAWASAKI
violates the principles of competitive bidding.3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the
respondents. On the first issue, we held that Philippine Shipyard and Engineering
Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a
public utility4 and that no law declares a shipyard to be a public utility.5 On the
second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which
prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring
more than 40% of PHILSECOs total capitalization.6 On the final issue, we held that
the right to top granted to KAWASAKI in exchange for its right of first refusal did not
violate the principles of competitive bidding.7
On October 20, 2003, the petitioner filed a Motion for Reconsideration8 and a
Motion to Elevate This Case to the Court En Banc.9 Public respondents Committee
on Privatization (COP) and Asset Privatization Trust (APT), and private respondent
Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit Holdings,
Inc.s (JG Summits) Motion for Reconsideration and Motion to Elevate This Case to
the Court En Banc on January 29, 2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the
following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en
banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason
to warrant a reconsideration of this Courts Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the
following grounds:
1. The main issue of the propriety of the bidding process involved in the present
case has been confused with the policy issue of the supposed fate of the shipping
industry which has never been an issue that is determinative of this case.10
2. The present case may be considered under the Supreme Court Resolution dated
February 23, 1984 which included among en banc cases those involving a novel

question of law and those where a doctrine or principle laid down by the Court en
banc or in division may be modified or reversed.11
3. There was clear executive interference in the judicial functions of the Court when
the Honorable Jose Isidro Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching a copy of the Foreign
Chambers Report dated October 17, 2001, which matter was placed in the agenda
of the Court and noted by it in a formal resolution dated November 28, 2001.12
Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out
the petitioners inconsistency in previously opposing PHILYARDS Motion to Refer the
Case to the Court En Banc. PHILYARDS contends that J.G. Summit should now be
estopped from asking that the case be referred to the Court en banc. PHILYARDS
further contends that the Supreme Court en banc is not an appellate court to which
decisions or resolutions of its divisions may be appealed citing Supreme Court
Circular No. 2-89 dated February 7, 1989.13 PHILYARDS also alleges that there is no
novel question of law involved in the present case as the assailed Resolution was
based on well-settled jurisprudence. Likewise, PHILYARDS stresses that the
Resolution was merely an outcome of the motions for reconsideration filed by it and
the COP and APT and is "consistent with the inherent power of courts to amend and
control its process and orders so as to make them conformable to law and justice.
(Rule 135, sec. 5)"14 Private respondent belittles the petitioners allegations
regarding the change in ponente and the alleged executive interference as shown
by former Secretary of Finance Jose Isidro Camachos memorandum dated
November 5, 2001 arguing that these do not justify a referral of the present case to
the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En Banc should be
granted, J.G. Summit further argued that: its Opposition to the Office of the Solicitor
Generals Motion to Refer is different from its own Motion to Elevate; different
grounds are invoked by the two motions; there was unwarranted "executive
interference"; and the change in ponente is merely noted in asserting that this case
should be decided by the Court en banc.15
We find no merit in petitioners contention that the propriety of the bidding process
involved in the present case has been confused with the policy issue of the fate of
the shipping industry which, petitioner maintains, has never been an issue that is
determinative of this case. The Courts Resolution of September 24, 2003 reveals a
clear and definitive ruling on the propriety of the bidding process. In discussing
whether the right to top granted to KAWASAKI in exchange for its right of first
refusal violates the principles of competitive bidding, we made an exhaustive
discourse on the rules and principles of public bidding and whether they were
complied with in the case at bar.16 This Court categorically ruled on the petitioners
argument that PHILSECO, as a shipyard, is a public utility which should maintain a
60%-40% Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we
recognized the impact of our ruling on the shipbuilding industry which was beyond
avoidance.17
We reject petitioners argument that the present case may be considered under the
Supreme Court Resolution dated February 23, 1984 which included among en banc

cases those involving a novel question of law and those where a doctrine or
principle laid down by the court en banc or in division may be modified or reversed.
The case was resolved based on basic principles of the right of first refusal in
commercial law and estoppel in civil law. Contractual obligations arising from rights
of first refusal are not new in this jurisdiction and have been recognized in
numerous cases.18 Estoppel is too known a civil law concept to require an
elongated discussion. Fundamental principles on public bidding were likewise used
to resolve the issues raised by the petitioner. To be sure, petitioner leans on the
right to top in a public bidding in arguing that the case at bar involves a novel issue.
We are not swayed. The right to top was merely a condition or a reservation made
in the bidding rules which was fully disclosed to all bidding parties. In Bureau
Veritas, represented by Theodor H. Hunermann v. Office of the President, et al., 19
we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et
al., (L-18751, 28 April 1962, 4 SCRA 1245), that in an "invitation to bid, there is a
condition imposed upon the bidders to the effect that the bidding shall be subject to
the right of the government to reject any and all bids subject to its discretion. In the
case at bar, the government has made its choice and unless an unfairness or
injustice is shown, the losing bidders have no cause to complain nor right to dispute
that choice. This is a well-settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the
authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award
(Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation, comparison,
evaluation, and deliberation. This task can best be discharged by the Government
agencies concerned, not by the Courts. The role of the Courts is to ascertain
whether a branch or instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with executive or
legislative discretion exercised within those boundaries. Otherwise, it strays into the
realm of policy decision-making.
It is only upon a clear showing of grave abuse of discretion that the Courts will set
aside the award of a contract made by a government entity. Grave abuse of
discretion implies a capricious, arbitrary and whimsical exercise of power (Filinvest
Credit Corp. v. Intermediate Appellate Court, No. 65935, 30 September 1988, 166
SCRA 155). The abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, as
to act at all in contemplation of law, where the power is exercised in an arbitrary
and despotic manner by reason of passion or hostility (Litton Mills, Inc. v. Galleon
Trader, Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of discretion on the part
of public respondents when they awarded the CISS contract to Respondent SGS. In
the "Invitation to Prequalify and Bid" (Annex "C," supra), the CISS Committee made
an express reservation of the right of the Government to "reject any or all bids or
any part thereof or waive any defects contained thereon and accept an offer most

advantageous to the Government." It is a well-settled rule that where such

reservation is made in an Invitation to Bid, the highest or lowest bidder, as the case
may be, is not entitled to an award as a matter of right (C & C Commercial Corp. v.
Menor, L-28360, 27 January 1983, 120 SCRA 112). Even the lowest Bid or any Bid
may be rejected or, in the exercise of sound discretion, the award may be made to
another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am.
Jur., 788). (emphases supplied)1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was a condition
imposed by the government in the bidding rules which was made known to all
parties. It was a condition imposed on all bidders equally, based on the APTs
exercise of its discretion in deciding on how best to privatize the governments
shares in PHILSECO. It was not a whimsical or arbitrary condition plucked from the
ether and inserted in the bidding rules but a condition which the APT approved as
the best way the government could comply with its contractual obligations to
KAWASAKI under the JVA and its mandate of getting the most advantageous deal for
the government. The right to top had its history in the mutual right of first refusal in
the JVA and was reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the
mere filing of a memorandum by Secretary of Finance Jose Isidro Camacho. The
memorandum was merely "noted" to acknowledge its filing. It had no further legal
significance. Notably too, the assailed Resolution dated September 24, 2003 was
decided unanimously by the Special First Division in favor of the respondents.
Again, we emphasize that a decision or resolution of a Division is that of the
Supreme Court20 and the Court en banc is not an appellate court to which decisions
or resolutions of a Division may be appealed.21
For all the foregoing reasons, we find no basis to elevate this case to the Court en
banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion for
Reconsideration. First, that a fair resolution of the case should be based on contract
law, not on policy considerations; the contracts do not authorize the right to top to
be derived from the right of first refusal.22 Second, that neither the right of first
refusal nor the right to top can be legally exercised by the consortium which is not
the proper party granted such right under either the JVA or the Asset Specific
Bidding Rules (ASBR).23 Third, that the maintenance of the 60%-40% relationship
between the National Investment and Development Corporation (NIDC) and
KAWASAKI arises from contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be bound by the 60%40% constitutional limitation.24
On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not
been able to show compelling reasons to warrant a reconsideration of the Decision
of the Court.25 PHILYARDS denies that the Decision is based mainly on policy
considerations and points out that it is premised on principles governing obligations

and contracts and corporate law such as the rule requiring respect for contractual
stipulations, upholding rights of first refusal, and recognizing the assignable nature
of contracts rights.26 Also, the ruling that shipyards are not public utilities relies on
established case law and fundamental rules of statutory construction. PHILYARDS
stresses that KAWASAKIs right of first refusal or even the right to top is not limited
to the 40% equity of the latter.27 On the landholding issue raised by J.G. Summit,
PHILYARDS emphasizes that this is a non-issue and even involves a question of fact.
Even assuming that this Court can take cognizance of such question of fact even
without the benefit of a trial, PHILYARDS opines that landholding by PHILSECO at the
time of the bidding is irrelevant because what is essential is that ultimately a
qualified entity would eventually hold PHILSECOs real estate properties.28 Further,
given the assignable nature of the right of first refusal, any applicable nationality
restrictions, including landholding limitations, would not affect the right of first
refusal itself, but only the manner of its exercise.29 Also, PHILYARDS argues that if
this Court takes cognizance of J.G. Summits allegations of fact regarding
PHILSECOs landholding, it must also recognize PHILYARDS assertions that
PHILSECOs landholdings were sold to another corporation.30 As regards the right of
first refusal, private respondent explains that KAWASAKIs reduced shareholdings
(from 40% to 2.59%) did not translate to a deprivation or loss of its contractually
granted right of first refusal.31 Also, the bidding was valid because PHILYARDS
exercised the right to top and it was of no moment that losing bidders later joined
PHILYARDS in raising the purchase price.32
In cadence with the private respondent PHILYARDS, public respondents COP and APT
contend:
1. The conversion of the right of first refusal into a right to top by 5% does not
violate any provision in the JVA between NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional
restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of
the public bidding as it voluntarily submitted itself to the terms of the ASBR which
included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and
the fact that PHILYARDS formed a consortium to raise the required amount to
exercise the right to top the highest bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of
lands does not apply to PHILSECO because as admitted by petitioner itself,
PHILSECO no longer owns real property.
6. Petitioners motion to elevate the case to the Court en banc is baseless and
would only delay the termination of this case.33
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the
arguments of the public and private respondents in this wise:

1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing
bidders through the exercise of a right to top, which is contrary to law and the
constitution is null and void for being violative of substantive due process and the
abuse of right provision in the Civil Code.
a. The bidders[] right to top was actually exercised by losing bidders.
b. The right to top or the right of first refusal cannot co-exist with a genuine
competitive bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but
is shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed
upon and at the time of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first
refusal to the right to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by
law or against public policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced from the right of
first refusal is not new and we have already ruled on the issue in our Resolution of
September 24, 2003. We upheld the mutual right of first refusal in the JVA.34 We
also ruled that nothing in the JVA prevents KAWASAKI from acquiring more than 40%
of PHILSECOs total capitalization.35 Likewise, nothing in the JVA or ASBR bars the
conversion of the right of first refusal to the right to top. In sum, nothing new and of
significance in the petitioners pleading warrants a reconsideration of our ruling.

Likewise, we already disposed of the argument that neither the right of first refusal
nor the right to top can legally be exercised by the consortium which is not the
proper party granted such right under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group,
Insular Life Assurance, Mitsui and ICTSI), has joined PHILYARDS in the latter's effort
to raise P2.131 billion necessary in exercising the right to top is not contrary to law,
public policy or public morals. There is nothing in the ASBR that bars the losing
bidders from joining either the winning bidder (should the right to top is not
exercised) or KAWASAKI/PHI (should it exercise its right to top as it did), to raise the
purchase price. The petitioner did not allege, nor was it shown by competent
evidence, that the participation of the losing bidders in the public bidding was done
with fraudulent intent. Absent any proof of fraud, the formation by [PHILYARDS] of a
consortium is legitimate in a free enterprise system. The appellate court is thus
correct in holding the petitioner estopped from questioning the validity of the
transfer of the National Government's shares in PHILSECO to respondent.36
Further, we see no inherent illegality on PHILYARDS act in seeking funding from
parties who were losing bidders. This is a purely commercial decision over which the
State should not interfere absent any legal infirmity. It is emphasized that the case
at bar involves the disposition of shares in a corporation which the government
sought to privatize. As such, the persons with whom PHILYARDS desired to enter into
business with in order to raise funds to purchase the shares are basically its
business. This is in contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of the buyer/bidder
or financier constitutes an important consideration. In such cases, the government
would have to take utmost precaution to protect public interest by ensuring that the
parties with which it is contracting have the ability to satisfactorily construct or
operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding
company, KAWASAKI could exercise its right of first refusal only up to 40% of the
shares of PHILSECO due to the constitutional prohibition on landholding by
corporations with more than 40% foreign-owned equity. It further argues that since
KAWASAKI already held at least 40% equity in PHILSECO, the right of first refusal
was inutile and as such, could not subsequently be converted into the right to top.
37 Petitioner also asserts that, at present, PHILSECO continues to violate the
constitutional provision on landholdings as its shares are more than 40% foreignowned.38 PHILYARDS admits that it may have previously held land but had already
divested such landholdings.39 It contends, however, that even if PHILSECO owned
land, this would not affect the right of first refusal but only the exercise thereof. If
the land is retained, the right of first refusal, being a property right, could be
assigned to a qualified party. In the alternative, the land could be divested before
the exercise of the right of first refusal. In the case at bar, respondents assert that
since the right of first refusal was validly converted into a right to top, which was
exercised not by KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e.,
60% of its shares are owned by Filipinos), then there is no violation of the
Constitution.40 At first, it would seem that questions of fact beyond cognizance by
this Court were involved in the issue. However, the records show that PHILYARDS
admits it had owned land up until the time of the bidding.41 Hence, the only issue is

whether KAWASAKI had a valid right of first refusal over PHILSECO shares under the
JVA considering that PHILSECO owned land until the time of the bidding and
KAWASAKI already held 40% of PHILSECOs equity.
We uphold the validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC. First of all, the right of first refusal is a property right of
PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right
allows them to purchase the shares of their co-shareholder before they are offered
to a third party. The agreement of co-shareholders to mutually grant this right to
each other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino corporations. As
PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can
be validly assigned to a qualified Filipino entity in order to maintain the 60%-40%
ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be made either to a
nominee or such other party which the holder of the right of first refusal feels it can
comfortably do business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its right of first refusal, can
exceed 40% of PHILSECOs equity. In fact, it can even be said that if the foreign
shareholdings of a landholding corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected but the capacity
of the corporation to own land that is, the corporation becomes disqualified to own
land. This finds support under the basic corporate law principle that the corporation
and its stockholders are separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas the capacity to own land
pertains to the corporation. Hence, the fact that PHILSECO owns land cannot
deprive stockholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the corporation from owning
land. This is the clear import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife,
flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated.
The exploration, development, and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law. In cases of
water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, beneficial use may be the measure and limit of the
grant.
xxx xxx xxx

Section 7. Save in cases of hereditary succession, no private lands shall be

transferred or conveyed except to individuals, corporations, or associations qualified
to acquire or hold lands of the public domain.42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine
Banking Corporation v. Lui She, 21 SCRA 52 [1967]). The right of first refusal
granted to KAWASAKI, a Japanese corporation, is similarly void. Hence, the right to
top, sourced from the right of first refusal, is also void."43 Contrary to the
contention of petitioner, the case of Lui She did not that say "an option to buy land
is void in itself," for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option
giving an alien the right to buy real property on condition that he is granted
Philippine citizenship. As this Court said in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for
residential purposes. Since their residence in the Philippines is temporary, they may
be granted temporary rights such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land,
by virtue of which the Filipino owner cannot sell or otherwise dispose of his
property, this to last for 50 years, then it becomes clear that the arrangement is a
virtual transfer of ownership whereby the owner divests himself in stages not only
of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus
abutendi) but also of the right to dispose of it (jus disponendi) rights the sum
total of which make up ownership. It is just as if today the possession is transferred,
tomorrow, the use, the next day, the disposition, and so on, until ultimately all the
rights of which ownership is made up are consolidated in an alien. And yet this is
just exactly what the parties in this case did within this pace of one year, with the
result that Justina Santos'[s] ownership of her property was reduced to a hollow
concept. If this can be done, then the Constitutional ban against alien landholding in
the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted to a virtual
transfer of ownership as the owner could not sell or dispose of his properties. The
contract in Lui She prohibited the owner of the land from selling, donating,
mortgaging, or encumbering the property during the 50-year period of the option to
buy. This is not so in the case at bar where the mutual right of first refusal in favor
of NIDC and KAWASAKI does not amount to a virtual transfer of land to a nonFilipino. In fact, the case at bar involves a right of first refusal over shares of stock
while the Lui She case involves an option to buy the land itself. As discussed earlier,
there is a distinction between the shareholders ownership of shares and the
corporations ownership of land arising from the separate juridical personalities of
the corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO
continues to violate the Constitution as its foreign equity is above 40% and yet

owns long-term leasehold rights which are real rights.45 It cites Article 415 of the
Civil Code which includes in the definition of immovable property, "contracts for
public works, and servitudes and other real rights over immovable property."46 Any
existing landholding, however, is denied by PHILYARDS citing its recent financial
statements.47 First, these are questions of fact, the veracity of which would require
introduction of evidence. The Court needs to validate these factual allegations
based on competent and reliable evidence. As such, the Court cannot resolve the
questions they pose. Second, J.G. Summit misreads the provisions of the
Constitution cited in its own pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private respondent is
not a 60%-40% corporation, and this violates the Constitution x x x The violation
continues to this day because under the law, it continues to own real property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the
1973 Constitution (the JVA was signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or
hold lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the
public domain are corporations at least 60% of which is owned by Filipino citizens
(Sec. 22, Commonwealth Act 141, as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in the Constitution
applies only to ownership of land.48 It does not extend to immovable or real
property as defined under Article 415 of the Civil Code. Otherwise, we would have a
strange situation where the ownership of immovable property such as trees, plants
and growing fruit attached to the land49 would be limited to Filipinos and Filipino
corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is
DENIED WITH FINALITY and the decision appealed from is AFFIRMED. The Motion to
Elevate This Case to the Court En Banc is likewise DENIED for lack of merit.
SO ORDERED.