CASE 1

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA

EVANGELISTA, petitioners, vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and
Francisca Evangelista, for review of a decision of the Court of Tax Appeals, the
dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the
income tax, real estate dealer's tax and the residence tax for the years 1945 to
1949, inclusive, in accordance with the respondent's assessment for the same in
the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with
an area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land
with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot
of 4,353 sq. m. including improvements thereon for P108,825.00. This property
has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. This property has an
assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother
Simeon Evangelista to 'manage their properties with full power to lease; to collect
and receive rents; to issue receipts therefor; in default of such payment, to bring
suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners
had the same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the
total amount collected as rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a net rental income of
P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30,
out of which amount was deducted in the sum of P16,288.27 for expenses
thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the
which amount was deducted the sum of P4,837.65 as expenses, thereby leaving
them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of
Internal Revenue demanded the payment of income tax on corporations, real
estate dealer's fixed tax and corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as follows:
XXXXXX
Said letter of demand and corresponding assessments were delivered to
petitioners on December 3, 1954, whereupon they instituted the present case in
the Court of Tax Appeals, with a prayer that "the decision of the respondent
contained in his letter of demand dated September 24, 1954" be reversed, and
that they be absolved from the payment of the taxes in question, with costs
against the respondent.
After appropriate proceedings, the Court of Tax Appeals the abovementioned decision for the respondent, and a petition for reconsideration and
new trial having been subsequently denied, the case is now before Us for review
at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations
and the real estate dealers fixed tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms "corporation" and "partnership," as
used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed,
collected, and paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or organized but not including
duly registered general co-partnerships (compaias colectivas), a tax upon such
income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations or insurance companies, but does not include duly
registered general copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to
contribute money, properly, or industry to a common fund, with the intention of
dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully

satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence.
It was not property inherited by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial portion thereof in order to
establish said common fund.
2. They invested the same, not merely not merely in one transaction, but
in a series of transactions. On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was
soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as
well as the brief interregnum between each, particularly the last three purchases,
is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of
the property acquired by the petitioners in February, 1943. In other words, one
cannot but perceive a character of habitually peculiar to business transactions
engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of
one person, namely Simeon Evangelista, with full power to lease, to collect rents,
to issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or,
to be exact, over fifteen (15) years, since the first property was acquired, and
over twelve (12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these circumstances
is such as to leave no room for doubt on the existence of said intent in petitioners
herein. Only one or two of the aforementioned circumstances were present in the
cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners,
for, in consequence of the acts performed by them, a legal entity, with a
personality independent of that of its members, did not come into existence, and
some of the characteristics of partnerships are lacking in the case at bar. This
pretense was correctly rejected by the Court of Tax Appeals.

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

which, strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to the
tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical
forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of
said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said
section 84(b), the term "corporation" includes, among other, joint accounts,
(cuentas en participation)" and "associations," none of which has a legal
personality of its own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated, "duly
registered general copartnerships" which are possessed of the aforementioned
personality have been expressly excluded by law (sections 24 and 84 [b] from
the connotation of the term "corporation" It may not be amiss to add that
petitioners' allegation to the effect that their liability in connection with the
leasing of the lots above referred to, under the management of one person
even if true, on which we express no opinion tends to increase the similarity
between the nature of their venture and that corporations, and is, therefore, an
additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed
differently from "partnerships". By specific provisions of said laws, such
"corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned
laws.
. . . in any narrow or technical sense. It includes any organization, created
for the transaction of designed affairs, or the attainment of some object, which
like a corporation, continues notwithstanding that its members or participants
change, and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative
capacity. It is immaterial whether such organization is created by an agreement, a
declaration of trust, a statute, or otherwise. It includes a voluntary association, a
joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a
'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney
in fact, a partnership association, and any other type of organization (by whatever
name known) which is not, within the meaning of the Code, a trust or an estate,
or a partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis
supplied.).
Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership

'it includes not only a partnership as known at common law but, as well, a
syndicate, group, pool, joint venture or other unincorporated organizations which
carries on any business financial operation, or venture, and which is not, within
the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of
Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal
Income Taxation, p. 562 Note 63;.) .
For purposes of the tax on corporations, our National Internal Revenue
Code, includes these partnerships with the exception only of duly registered
general copartnerships within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned and are subject to the income tax for
corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act
No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created
or organized, whether domestic or resident foreign, engaged in or doing business
in the Philippines shall pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand pesos, in accordance
with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock
company, partnership, joint account (cuentas en participacion), association or
insurance company, no matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of
section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act
No. 466), and that the latter was approved on June 15, 1939, the day immediately
after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is
apparent that the terms "corporation" and "partnership" are used in both statutes
with substantially the same meaning. Consequently, petitioners are subject, also,
to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in
leasing the properties above mentioned for a period of over twelve years, and
that the yearly gross rentals of said properties from June 1945 to 1948 ranged
from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193
(q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of
buying, selling, exchanging, leasing, or renting property or his own account as
principal and holding himself out as a full or part time dealer in real estate or as
an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . . (emphasis
supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby

affirmed with costs against the petitioners herein. It is so ordered.
CASE 2
BENJAMIN YU, petitioner, vs.
NATIONAL LABOR RELATIONS
COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY
CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HOFU, respondents.
FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager of the
marble quarrying and export business operated by a registered partnership with
the firm name of "Jade Mountain Products Company Limited" ("Jade Mountain").
The partnership was originally organized on 28 June 1984 with Lea Bendal and
Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu
Chang, all citizens of the Republic of China (Taiwan), as limited partners. The
partnership business consisted of exploiting a marble deposit found on land
owned by the Sps. Ricardo and Guillerma Cruz, situated in Bulacan Province,
under a Memorandum Agreement dated 26 June 1984 with the Cruz
spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14
March 1985, as Assistant General Manager with a monthly salary of P4,000.00.
According to petitioner Yu, however, he actually received only half of his
stipulated monthly salary, since he had accepted the promise of the partners that
the balance would be paid when the firm shall have secured additional operating
funds from abroad. Benjamin Yu actually managed the operations and finances of
the business; he had overall supervision of the workers at the marble quarry in
Bulacan and took charge of the preparation of papers relating to the exportation
of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general
partners Lea Bendal and Rhodora Bendal sold and transferred their interests in
the partnership to private respondent Willy Co and to one Emmanuel Zapanta. Mr.
Yu Chang, a limited partner, also sold and transferred his interest in the
partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership interest. The
partnership now constituted solely by Willy Co and Emmanuel Zapanta continued
to use the old firm name of Jade Mountain, though they moved the firm's main
office from Makati to Mandaluyong, Metropolitan Manila. A Supplement to the
Memorandum Agreement relating to the operation of the marble quarry was
entered into with the Cruz spouses in February of 1988. 2 The actual operations of
the business enterprise continued as before. All the employees of the partnership
continued working in the business, all, save petitioner Benjamin Yu as it turned
out.
On 16 November 1987, having learned of the transfer of the firm's main
office from Makati to Mandaluyong, petitioner Benjamin Yu reported to the
Mandaluyong office for work and there met private respondent Willy Co for the

first time. Petitioner was informed by Willy Co that the latter had bought the
business from the original partners and that it was for him to decide whether or
not he was responsible for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in
the Jade Mountain business enterprise. His unpaid salaries remained unpaid. 3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal
and recovery of unpaid salaries accruing from November 1984 to October 1988,
moral and exemplary damages and attorney's fees, against Jade Mountain, Mr.
Willy Co and the other private respondents. The partnership and Willy Co denied
petitioner's charges, contending in the main that Benjamin Yu was never hired as
an employee by the present or new partnership. 4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision
holding that petitioner had been illegally dismissed. The Labor Arbiter decreed his
reinstatement and awarded him his claim for unpaid salaries, backwages and
attorney's fees. 5
On appeal, the National Labor Relations Commission ("NLRC") reversed the
decision of the Labor Arbiter and dismissed petitioner's complaint in a Resolution
dated 29 November 1990. The NLRC held that a new partnership consisting of Mr.
Willy Co and Mr. Emmanuel Zapanta had bought the Jade Mountain business, that
the new partnership had not retained petitioner Yu in his original position as
Assistant General Manager, and that there was no law requiring the new
partnership to absorb the employees of the old partnership. Benjamin Yu,
therefore, had not been illegally dismissed by the new partnership which had
simply declined to retain him in his former managerial position or any other
position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages should
be asserted against the original members of the preceding partnership, but these
though impleaded had, apparently, not been served with summons in the
proceedings before the Labor Arbiter. 6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari,
asking us to set aside and annul the Resolution of the NLRC as a product of grave
abuse of discretion amounting to lack or excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the
principle that a partnership has a juridical personality separate and distinct from
that of each of its members. Such independent legal personality subsists,
petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the
partnership Jade Mountain could not have been affected by changes in the latter's
membership. 7
Two (2) main issues are thus posed for our consideration in the case at bar:
(1) whether the partnership which had hired petitioner Yu as Assistant General
Manager had been extinguished and replaced by a new partnerships composed of
Willy Co and Emmanuel Zapanta; and (2) if indeed a new partnership had come
into existence, whether petitioner Yu could nonetheless assert his rights under his
employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC,
that is, that the legal effect of the changes in the membership of the partnership

was the dissolution of the old partnership which had hired petitioner in 1984 and
the emergence of a new firm composed of Willy Co and Emmanuel Zapanta in
1987.
The applicable law in this connection of which the NLRC seemed quite
unaware is found in the Civil Code provisions relating to partnerships. Article
1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in good faith, when no
definite term or particular undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision of this
article, by the express will of any partner at any time;
xxx xxx xxx
In the case at bar, just about all of the partners had sold their partnership
interests (amounting to 82% of the total partnership interest) to Mr. Willy Co and
Emmanuel Zapanta. The record does not show what happened to the remaining
18% of the original partnership interest. The acquisition of 82% of the partnership
interest by new partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was enough to constitute a
new partnership.
The occurrence of events which precipitate the legal consequence of
dissolution of a partnership do not, however, automatically result in the
termination of the legal personality of the old partnership. Article 1829 of the Civil
Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding
up of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring
partnership persists for the limited purpose of winding up and closing of the
affairs of the partnership. In the case at bar, it is important to underscore the fact
that the business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures relating to
dissolution and winding up of its business affairs. In other words, the new
partnership simply took over the business enterprise owned by the preceeding
partnership, and continued using the old name of Jade Mountain Products
Company Limited, without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and then reassembling the said assets or most of them and opening a new business
enterprise. There were, no doubt, powerful tax considerations which underlay

such an informal approach to business on the part of the retiring and the
incoming partners. It is not, however, necessary to inquire into such matters.
What is important for present purposes is that, under the above described
situation, not only the retiring partners (Rhodora Bendal, et al.) but also the new
partnership itself which continued the business of the old, dissolved, one, are
liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw
Mill, et al, 8 the Court held that under facts very similar to those in the case at bar,
a withdrawing partner remains liable to a third party creditor of the old
partnership. 9 The liability of the new partnership, upon the other hand, in the set
of circumstances obtaining in the case at bar, is established in Article 1840 of the
Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved partnership
are also creditors of the person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or
when any partner retires and assigns (or the representative of the deceased
partner assigns) his rights in partnership property to two or more of the partners,
or to one or more of the partners and one or more third persons, if the business is
continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a
deceased partner assigns) their rights in partnership property to the remaining
partner, who continues the business without liquidation of partnership affairs,
either alone or with others;
(3) When any Partner retires or dies and the business of the dissolved
partnership is continued as set forth in Nos. 1 and 2 of this Article, with the
consent of the retired partners or the representative of the deceased partner, but
without any assignment of his right in partnership property;
(4) When all the partners or their representatives assign their rights in
partnership property to one or more third persons who promise to pay the debts
and who continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining
partners continue the businessunder the provisions of article 1837, second
paragraph, No. 2, either alone or with others, and without liquidation of the
partnership affairs;
(6) When a partner is expelled and the remaining partners continue the
business either alone or with others without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing
the business, under this article, to the creditors of the dissolved partnership shall
be satisfied out of the partnership property only, unless there is a stipulation to
the contrary.
When the business of a partnership after dissolution is continued under
any conditions set forth in this article the creditors of the retiring or deceased
partner or the representative of the deceased partner, have a prior right to any
claim of the retired partner or the representative of the deceased partner against
the person or partnership continuing the business on account of the retired or
deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set
assignment on the ground of fraud.
xxx xxx xxx
Under Article 1840 above, creditors of the old Jade Mountain are also
creditors of the new Jade Mountain which continued the business of the old one
without liquidation of the partnership affairs. Indeed, a creditor of the old Jade
Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid wages, is
entitled to priority vis-a-visany claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not
necessary for the Court to determine under which one or mare of the above six
(6) paragraphs, the case at bar would fall, if only because the facts on record are
not detailed with sufficient precision to permit such determination. It is, however,
clear to the Court that under Article 1840 above, Benjamin Yu is entitled to
enforce his claim for unpaid salaries, as well as other claims relating to his
employment with the previous partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership
was entitled to appoint and hire a new general or assistant general manager to
run the affairs of the business enterprise take over. An assistant general manager
belongs to the most senior ranks of management and a new partnership is
entitled to appoint a top manager of its own choice and confidence. The nonretention of Benjamin Yu as Assistant General Manager did not therefore
constitute unlawful termination, or termination without just or authorized cause.
We think that the precise authorized cause for termination in the case at bar
was redundancy. 10 The new partnership had its own new General Manager,
apparently Mr. Willy Co, the principal new owner himself, who personally ran the
business of Jade Mountain. Benjamin Yu's old position as Assistant General
Manager thus became superfluous or redundant. 11 It follows that petitioner
Benjamin Yu is entitled to separation pay at the rate of one month's pay for each
year of service that he had rendered to the old partnership, a fraction of at least
six (6) months being considered as a whole year.
While the new Jade Mountain was entitled to decline to retain petitioner Benjamin
Yu in its employ, we consider that Benjamin Yu was very shabbily treated by the
new partnership. The old partnership certainly benefitted from the services of
Benjamin Yu who, as noted, previously ran the whole marble quarrying,
processing and exporting enterprise. His work constituted value-added to the
business itself and therefore, the new partnership similarly benefitted from the
labors of Benjamin Yu. It is worthy of note that the new partnership did not try to
suggest that there was any cause consisting of some blameworthy act or
omission on the part of Mr. Yu which compelled the new partnership to terminate
his services. Nonetheless, the new Jade Mountain did not notify him of the change
in ownership of the business, the relocation of the main office of Jade Mountain
from Makati to Mandaluyong and the assumption by Mr. Willy Co of control of
operations. The treatment (including the refusal to honor his claim for unpaid
wages) accorded to Assistant General Manager Benjamin Yu was so summary and
cavalier as to amount to arbitrary, bad faith treatment, for which the new Jade
Mountain may legitimately be required to respond by paying moral damages. This

Court, exercising its discretion and in view of all the circumstances of this case,
believes that an indemnity for moral damages in the amount of P20,000.00 is
proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest
at the legal rate of six percent (6%) per annum on the amount of unpaid wages,
and of his separation pay, computed from the date of promulgation of the award
of the Labor Arbiter. Finally, because the new Jade Mountain compelled Benjamin
Yu to resort to litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total amount due from
private respondent Jade Mountain.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE
COURSE, the Comment filed by private respondents is treated as their Answer to
the Petition for Certiorari, and the Decision of the NLRC dated 29 November 1990
is hereby NULLIFIED and SET ASIDE. A new Decision is hereby ENTERED requiring
private respondent Jade Mountain Products Company Limited to pay to petitioner
Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six (36) months
(November 1984 to December 1987) in the total amount of P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay
multiplied by three (3) years of service or a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a) and
(b) above, commencing on 26 December 1989 and until fully paid; and
(e) ten percent (10%) attorney's fees on the total amount due from private
respondent Jade Mountain.
CASE 3
THE UNITED STATES, plaintiff-appellee, vs. EUSEBIO CLARIN, defendantappellant.
ARELLANO, C.J.:
Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in
company with Eusebio Clarin and Carlos de Guzman, might buy and sell mangoes,
and, believing that he could make some money in this business, the said Larin
made an agreement with the three men by which the profits were to be divided
equally between him and them.
Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in
mangoes and obtained P203 from the business, but did not comply with the terms
of the contract by delivering to Larin his half of the profits; neither did they render
him any account of the capital.
Larin charged them with the crime of estafa, but the provincial fiscal filed
an information only against Eusebio Clarin in which he accused him of
appropriating to himself not only the P172 but also the share of the profits that
belonged to Larin, amounting to P15.50.

Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and
assumed that the facts presented concerned the defendant and themselves
together.
The trial court, that of First Instance of Pampanga, sentenced the defendant,
Eusebio Clarin, to six months' arresto mayor, to suffer the accessory penalties,
and to return to Pedro Larin P172, besides P30.50 as his share of the profits, or to
subsidiary imprisonment in case of insolvency, and to pay the costs. The
defendant appealed, and in deciding his appeal we arrive at the following
conclusions:
When two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits
among themselves, a contract is formed which is called partnership. (Art. 1665,
Civil Code.)
When Larin put the P172 into the partnership which he formed with Tarug,
Clarin, and Guzman, he invested his capital in the risks or benefits of the business
of the purchase and sale of mangoes, and, even though he had reserved the
capital and conveyed only the usufruct of his money, it would not devolve upon of
his three partners to return his capital to him, but upon the partnership of which
he himself formed part, or if it were to be done by one of the three specifically, it
would be Tarug, who, according to the evidence, was the person who received the
money directly from Larin.
The P172 having been received by the partnership, the business
commenced and profits accrued, the action that lies with the partner who
furnished the capital for the recovery of his money is not a criminal action
for estafa, but a civil one arising from the partnership contract for a liquidation of
the partnership and a levy on its assets if there should be any.
No. 5 of article 535 of the Penal Code, according to which those are guilty
of estafa "who, to the prejudice of another, shall appropriate or misapply any
money, goods, or any kind of personal property which they may have received as
a deposit on commission for administration or in any other character producing
the obligation to deliver or return the same," (as, for example,
in commodatum, precarium, and other unilateral contracts which require the
return of the same thing received) does not include money received for a
partnership; otherwise the result would be that, if the partnership, instead of
obtaining profits, suffered losses, as it could not be held liable civilly for the share
of the capitalist partner who reserved the ownership of the money brought in by
him, it would have to answer to the charge of estafa, for which it would be
sufficient to argue that the partnership had received the money under obligation
to return it.
We therefore freely acquit Eusebio Clarin, with the costs de oficio. The
complaint for estafa is dismissed without prejudice to the institution of a civil
action.
Torres, Johnson, Moreland and Trent, JJ., concur.
CASE 4
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B. MAGLANA,

PARAS, J.:
This is a direct appeal to this Court from a decision ** of the then Court of
First Instance of Davao, Seventh Judicial District, Branch III, in Civil Case No. 3518,
dismissing appellant's complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership
(Exhibit "A") called Eastcoast Development Enterprises (EDE) with only the two of
them as partners. The partnership EDE with an indefinite term of existence was
duly registered on January 21, 1955 with the Securities and Exchange
Commission.
One of the purposes of the duly-registered partnership was to "apply or
secure timber and/or minor forests products licenses and concessions over public
and/or private forest lands and to operate, develop and promote such forests
rights and concessions." (Rollo, p. 114).
A duly registered Articles of Co-Partnership was filed together with an
application for a timber concession covering the area located at Cateel and
Baganga, Davao with the Bureau of Forestry which was approved and Timber
License No. 35-56 was duly issued and became the basis of subsequent renewals
made for and in behalf of the duly registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage
the business affairs of the partnership, including marketing and handling of cash
and is authorized to sign all papers and instruments relating to the partnership,
while appellant Rojas shall be the logging superintendent and shall manage the
logging operations of the partnership. It is also provided in the said articles of copartnership that all profits and losses of the partnership shall be divided share
and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no
operation of said partnership (Record on Appeal [R.A.] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to
avail of the services of Pahamotang as industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their
Articles of Co-Partnership (Exhibit "B" and Exhibit "C") under the firm name
EASTCOAST DEVELOPMENT ENTERPRISES (EDE). Aside from the slight difference
in the purpose of the second partnership which is to hold and secure renewal of
timber license instead of to secure the license as in the first partnership and the
term of the second partnership is fixed to thirty (30) years, everything else is the
same.
The partnership formed by Maglana, Pahamotang and Rojas started
operation on May 1, 1956, and was able to ship logs and realize profits. An
income was derived from the proceeds of the logs in the sum of P643,633.07
(Decision, R.A. 919).
On October 25, 1956, Pahamotang, Maglana and Rojas executed a
document entitled "CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP,
EASTCOAST DEVELOPMENT ENTERPRISE" (Exhibits "C" and "D") agreeing among
themselves that Maglana and Rojas shall purchase the interest, share and

participation in the Partnership of Pahamotang assessed in the amount of

P31,501.12. It was also agreed in the said instrument that after payment of the
sum of P31,501.12 to Pahamotang including the amount of loan secured by
Pahamotang in favor of the partnership, the two (Maglana and Rojas) shall
become the owners of all equipment contributed by Pahamotang and the
EASTCOAST DEVELOPMENT ENTERPRISES, the name also given to the second
partnership, be dissolved. Pahamotang was paid in fun on August 31, 1957. No
other rights and obligations accrued in the name of the second partnership (R.A.
921).
After the withdrawal of Pahamotang, the partnership was continued by
Maglana and Rojas without the benefit of any written agreement or reconstitution
of their written Articles of Partnership (Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract with
another logging enterprise, the CMS Estate, Inc. He left and abandoned the
partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership
for use in the newly acquired area (Decision, R.A. 948).
The equipment withdrawn were his supposed contributions to the first partnership
and was transferred to CMS Estate, Inc. by way of chattel mortgage (Decision,
R.A. p. 948).
On March 17, 1957, Maglana wrote Rojas reminding the latter of his
obligation to contribute, either in cash or in equipment, to the capital investments
of the partnership as well as his obligation to perform his duties as logging
superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will not be
able to comply with the promised contributions and he will not work as logging
superintendent. Maglana then told Rojas that the latter's share will just be 20% of
the net profits. Such was the sharing from 1957 to 1959 without complaint or
dispute (Decision, R.A. 949).: nad
Meanwhile, Rojas took funds from the partnership more than his
contribution. Thus, in a letter dated February 21, 1961 (Exhibit "10") Maglana
notified Rojas that he dissolved the partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of
Davao against Maglana for the recovery of properties, accounting, receivership
and damages, docketed as Civil Case No. 3518 (Record on Appeal, pp. 1-26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners
to examine the long and voluminous accounts of the Eastcoast Development
Enterprises (Ibid., pp. 894-895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961
(Ibid., pp. 102-114) was denied by Judge Romero for want of merit (Ibid., p. 125).
Judge Romero also required the inclusion of the entire year 1961 in the report to
be submitted by the commissioners (Ibid., pp. 138-143). Accordingly, the
commissioners started examining the records and supporting papers of the
partnership as well as the information furnished them by the parties, which were
compiled in three (3) volumes.

On May 11, 1964, Maglana filed his motion for leave of court to amend his
answer with counterclaim, attaching thereto the amended answer (Ibid., pp. 26336), which was granted on May 22, 1964 (Ibid., p. 336).
On May 27, 1964, Judge M.G. Reyes approved the submitted
Commissioners' Report (Ibid., p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order
dated May 27, 1964 approving the report of the commissioners which was
opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid.,
pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the
following issues were agreed upon to be submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after
the dissolution of the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and
share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving
the partnership (Decision, R.A. pp. 895-896).- nad
After trial, the lower court rendered its decision on March 11, 1968, the dispositive
portion of which reads as follows:
"WHEREFORE, the above facts and issues duly considered, judgment is hereby
rendered by the Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and
Rojas after Pahamotang retired from the second partnership, that is, after August
31, 1957, when Pahamotang was finally paid his share the partnership of the
defendant and the plaintiff is one of a de facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of
computation, that is the ratio and proportion of their respective contributions, or
on the basis of share and share alike this covered by actual contributions of the
plaintiff and the defendant and by their verbal agreement; that the sharing of
profits and losses is on the basis of actual contributions; that from 1957 to 1959,
the sharing is on the basis of 80% for the defendant and 20% for the plaintiff of
the profits, but from 1960 to the date of dissolution, February 23, 1961, the
plaintiff's share will be on the basis of his actual contribution and, considering his
indebtedness to the partnership, the plaintiff is not entitled to any share in the
profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and
placed in his or in his wife's name were acquired with partnership funds or with
funds of the defendant and the Court declares that there is no evidence that
these properties were acquired by the partnership funds, and therefore the same
should not belong to the partnership;
"4. As to whether damages were suffered and, if so, how much, and who
caused them and who should be liable for them the Court declares that neither
parties is entitled to damages, for as already stated above it is not a wise policy

to place a price on the right of a person to litigate and/or to come to Court for the
assertion of the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff
dated February 23, 1961; did it dissolve the partnership or not the Court
declares that the letter of the defendant to the plaintiff dated February 23, 1961,
in effect dissolved the partnership;
"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and
other merchandise to the laborers and employees of the Eastcoast Development
Enterprises, the COURT DECLARES THE SAME AS NOT BELONGING TO THE
PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by
Pablo Angeles David is VALID AND BINDING UPON THE PARTIES AND SHOULD
BE CONSIDERED AS PART OF MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over
to the partnership the amount of P69,000.00 the profits he received from the CMS
Estate, Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum
of P85,000.00 which according to him he is still entitled to receive from the CMS
Estate, Inc. is hereby denied considering that it has not yet been actually
received, and further the receipt is merely based upon an expectancy and/or still
speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of
P62,988.19 his personal account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the
amount he should have received as logging superintendent, and which was not
paid to him, and this should be considered as part of Maglana's contribution
likewise to the partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.: rd
"SO ORDERED." Decision, Record on Appeal, pp. 985-989).
Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal
relationship of the Maglana-Rojas after Pahamotang retired from the second
partnership.
T
he lower court is of the view that the second partnership superseded the
first, so that when the second partnership was dissolved there was no written
contract of co-partnership; there was no reconstitution as provided for in the
Maglana, Rojas and Pahamotang partnership contract. Hence, the partnership
which was carried on by Rojas and Maglana after the dissolution of the second
partnership was a de facto partnership and at will. It was considered as a
partnership at will because there was no term, express or implied; no period was
fixed, expressly or impliedly (Decision, R.A. pp. 962-963).
On the other hand, Rojas insists that the registered partnership under the
firm name of Eastcoast Development Enterprises (EDE) evidenced by the Articles
of Co-Partnership dated January 14, 1955 (Exhibit "A") has not been novated,
superseded and/or dissolved by the unregistered articles of co-partnership among
appellant Rojas, appellee Maglana and Agustin Pahamotang, dated March 4, 1956

(Exhibit "C") and accordingly, the terms and stipulations of said registered Articles
of Co-Partnership (Exhibit "A") should govern the relations between him and
Maglana. Upon withdrawal of Agustin Pahamotang from the unregistered
partnership (Exhibit "C"), the legally constituted partnership EDE (Exhibit "A")
continues to govern the relations between them and it was legal error to consider
a de facto partnership between said two partners or a partnership at will. Hence,
the letter of appellee Maglana dated February 23, 1961, did not legally dissolve
the registered partnership between them, being in contravention of the
partnership agreement agreed upon and stipulated in their Articles of CoPartnership (Exhibit "A"). Rather, appellant is entitled to the rights enumerated in
Article 1837 of the Civil Code and to the sharing profits between them of "share
and share alike" as stipulated in the registered Articles of Co-Partnership (Exhibit
"A").
After a careful study of the records as against the conflicting claims of
Rojas and Maglana, it appears evident that it was not the intention of the partners
to dissolve the first partnership, upon the constitution of the second one, which
they unmistakably called an "Additional Agreement" (Exhibit "9-B") (Brief for
Defendant-Appellee, pp. 24-25). Except for the fact that they took in one
industrial partner; gave him an equal share in the profits and fixed the term of the
second partnership to thirty (30) years, everything else was the same. Thus, they
adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued
the same purposes and the capital contributions of Rojas and Maglana as
stipulated in both partnerships call for the same amounts. Just as important is the
fact that all subsequent renewals of Timber License No. 35-36 were secured in
favor of the First Partnership, the original licensee. To all intents and purposes
therefore, the First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered
(Brief for Plaintiff-Appellant, p. 5). Otherwise stated, even during the existence of
the second partnership, all business transactions were carried out under the duly
registered articles. As found by the trial court, it is an admitted fact that even up
to now, there are still subsisting obligations and contracts of the latter (Decision,
R.A. pp. 950-957). No rights and obligations accrued in the name of the second
partnership except in favor of Pahamotang which was fully paid by the duly
registered partnership (Decision, R.A., pp. 919-921).
On the other hand, there is no dispute that the second partnership was
dissolved by common consent. Said dissolution did not affect the first partnership
which continued to exist. Significantly, Maglana and Rojas agreed to purchase the
interest, share and participation in the second partnership of Pahamotang and
that thereafter, the two (Maglana and Rojas) became the owners of equipment
contributed by Pahamotang. Even more convincing, is the fact that Maglana on
March 17, 1957, wrote Rojas, reminding the latter of his obligation to contribute
either in cash or in equipment, to the capital investment of the partnership as
well as his obligation to perform his duties as logging superintendent. This
reminder cannot refer to any other but to the provisions of the duly registered
Articles of Co-Partnership. As earlier stated, Rojas replied that he will not be able
to comply with the promised contributions and he will not work as logging

superintendent. By such statements, it is obvious that Roxas understood what

Maglana was referring to and left no room for doubt that both considered
themselves governed by the articles of the duly registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the
withdrawal of Pahamotang can neither be considered as a De Facto Partnership,
nor a Partnership at Will, for as stressed, there is an existing partnership, duly
registered.
As to the question of whether or not Maglana can unilaterally dissolve the
partnership in the case at bar, the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he
dissolved the partnership, it is in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified
term, one partner can cause its dissolution by expressly withdrawing even before
the expiration of the period, with or without justifiable cause. Of course, if the
cause is not justified or no cause was given, the withdrawing partner is liable for
damages but in no case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the dissolution. And in
whatever way he may view the situation, the conclusion is inevitable that Rojas
and Maglana shall be guided in the liquidation of the partnership by the provisions
of its duly registered Articles of Co-Partnership; that is, all profits and losses of the
partnership shall be divided "share and share alike" between the partners.
But an accounting must first be made and which in fact was ordered by
the trial court and accomplished by the commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution
of the partners from 1956-1961 are as follows: Eufracio Rojas who should have
contributed P158,158.00, contributed only P18,750.00 while Maglana who should
have contributed P160,984.00, contributed P267,541.44 (Decision, R.A. p. 976). It
is a settled rule that when a partner who has undertaken to contribute a sum of
money fails to do so, he becomes a debtor of the partnership for whatever he
may have promised to contribute (Article 1786, Civil Code) and for interests and
damages from the time he should have complied with his obligation (Article 1788,
Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a contract
of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to
any profits. In their voluminous reports which was approved by the trial court,
they showed that on 50-50% basis, Rojas will be liable in the amount of
P131,166.00; on 80-20%, he will be liable for P40,092.96 and finally on the basis
of actual capital contribution, he will be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners after the
withdrawal of Pahamotang which is unquestionably a continuation of the duly
registered partnership and the sharing of profits and losses which should be on
the basis of share and share alike as provided for in the duly registered Articles of
Co-Partnership, no plausible reason could be found to disturb the findings and
conclusions of the trial court.: nad

As to whether Maglana is liable for damages because of such withdrawal,

it will be recalled that after the withdrawal of Pahamotang, Rojas entered into a
management contract with another logging enterprise, the CMS Estate, Inc., a
company engaged in the same business as the partnership. He withdrew his
equipment, refused to contribute either in cash or in equipment to the capital
investment and to perform his duties as logging superintendent, as stipulated in
their partnership agreement. The records also show that Rojas not only
abandoned the partnership but also took funds in an amount more than his
contribution (Decision, R.A., p. 949).
In the given situation Maglana cannot be said to be in bad faith nor can he
be liable for damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance
of Davao, Branch III, is hereby MODIFIED in the sense that the duly registered
partnership of Eastcoast Development Enterprises continued to exist until
liquidated and that the sharing basis of the partners should be on share and share
alike as provided for in its Articles of Partnership, in accordance with the
computation of the commissioners. We also hereby AFFIRM the decision of the
trial court in all other respects.: nad
SO ORDERED.
CASE 5
INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en C., appellee,
vs. PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO., and
INTERNATIONAL BANKING CORPORATION,petitioners-appellants.
ROMUALDEZ, J.:
The record of this proceeding having been transmitted to this court by
virtue of an appeal taken herein, a motion was presented by the appellants
praying this court that this case be considered purely a moot question now, for
the reason that subsequent to the decision appealed from, the partnership
Campos Rueda & Co., voluntarily filed an application for a judicial decree
adjudging itself insolvent, which is just what the herein petitioners and appellants
tried to obtain from the lower court in this proceeding.
The motion now before us must be, and is hereby, denied even under the facts
stated by the appellants in their motion aforesaid. The question raised in this case
is not purely moot one; the fact that a man was insolvent on a certain day does
not justify an inference that he was some time prior thereto.
Proof that a man was insolvent on a certain day does not justify an
inference that he was on a day some time prior thereto. Many contingencies, such
as unwise investments, losing contracts, misfortune, or accident, might happen to
reduce a person from a state of solvency within a short space of time. (Kimball vs.
Dresser, 98 Me., 519; 57 Atl. Rep., 767.)
A decree of insolvency begins to operate on the date it is issued. It is one thing to
adjudge Campos Rueda & Co. insolvent in December, 1921, as prayed for in this
case, and another to declare it insolvent in July, 1922, as stated in the motion.

Turning to the merits of this appeal, we find that this limited partnership
was, and is, indebted to the appellants in various sums amounting to not less
than P1,000, payable in the Philippines, which were not paid more than thirty
days prior to the date of the filing by the petitioners of the application for
involuntary insolvency now before us. These facts were sufficient established by
the evidence.
The trial court denied the petition on the ground that it was not proven,
nor alleged, that the members of the aforesaid firm were insolvent at the time the
application was filed; and that was said partners are personally and solidarily
liable for the consequence of the transactions of the partnership, it cannot be
adjudged insolvent so long as the partners are not alleged and proven to be
insolvent. From this judgment the petitioners appeal to this court, on the ground
that this finding of the lower court is erroneous.
The fundamental question that presents itself for decision is whether or
not a limited partnership, such as the appellee, which has failed to pay its
obligation with three creditors for more than thirty days, may be held to have
committed an act of insolvency, and thereby be adjudged insolvent against its
will.
Unlike the common law, the Philippine statutes consider a limited
partnership as a juridical entity for all intents and purposes, which personality is
recognized in all its acts and contracts (art. 116, Code of Commerce). This being
so and the juridical personality of a limited partnership being different from that
of its members, it must, on general principle, answer for, and suffer, the
consequence of its acts as such an entity capable of being the subject of rights
and obligations. If, as in the instant case, the limited partnership of Campos
Rueda & Co. Failed to pay its obligations with three creditors for a period of more
than thirty days, which failure constitutes, under our Insolvency Law, one of the
acts of bankruptcy upon which an adjudication of involuntary insolvency can be
predicated, this partnership must suffer the consequences of such a failure, and
must be adjudged insolvent. We are not unmindful of the fact that some courts of
the United States have held that a partnership may not be adjudged insolvent in
an involuntary insolvency proceeding unless all of its members are insolvent,
while others have maintained a contrary view. But it must be borne in mind that
under the American common law, partnerships have no juridical personality
independent from that of its members; and if now they have such personality for
the purpose of the insolvency law, it is only by virtue of general law enacted by
the Congress of the United States on July 1, 1898, section 5, paragraph (h), of
which reads thus:
In the event of one or more but not all of the members of a partnership
being adjudged bankrupt, the partnership property shall not be administered in
bankruptcy, unless by consent of the partner or partners not adjudged bankrupt;
but such partner or partners not adjudged bankrupt shall settle the partnership
business as expeditiously as its nature will permit, and account for the interest of
the partner or partners adjudged bankrupt.
The general consideration that these partnership had no juridical
personality and the limitations prescribed in subsection (h) above set forth gave

rise to the conflict noted in American decisions, as stated in the case of In

reSamuels (215 Fed., 845), which mentions the two apparently conflicting
doctrines, citing one from In reBertenshaw (157 Fed., 363), and the other from
Francis vs. McNeal (186 Fed., 481).
But there being in our insolvency law no such provision as that contained in
section 5 of said Act of Congress of July 1, 1898, nor any rule similar thereto, and
the juridical personality of limited partnership being recognized by our statutes
from their formation in all their acts and contracts the decision of American courts
on this point can have no application in this jurisdiction, nor we see any reason
why these partnerships cannot be adjudged bankrupt irrespective of the solvency
or insolvency of their members, provided the partnership has, as such, committed
some of the acts of insolvency provided in our law. Under this view it is
unnecessary to discuss the other points raised by the parties, although in the
particular case under consideration it can be added that the liability of the limited
partners for the obligations and losses of the partnership is limited to the
amounts paid or promised to be paid into the common fund except when a limited
partner should have included his name or consented to its inclusion in the firm
name (arts. 147 and 148, Code of Commerce).
Therefore, it having been proven that the partnership Campos Rueda & Co.
failed for more than thirty days to pay its obligations to the petitioners the Pacific
Commercial Co. the Asiatic Petroleum Co. and the International Banking
Corporation, the case comes under paragraph 11 of section 20 of Act No. 1956,
and consequently the petitioners have the right to a judicial decree declaring the
involuntary insolvency of said partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged
that the limited partnership Campos Rueda & Co. is and was on December 28,
1921, insolvent and liable for having failed for more than thirty days to meet its
obligations with the three petitioners herein, and it is ordered that this proceeding
be remanded to the Court of First Instance of Manila with instruction to said court
to issue the proper decrees under section 24 of Act No. 1956, and proceed
therewith until its final disposition.
It is so ordered without special finding as to costs.
CASE 6
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner, vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO
SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA,
COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et
al., respondents.
NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino
on February 28, 1986 and March 12, 1986, respectively, and (2) the

sequestration, takeover, and other orders issued, and acts done, in accordance
with said executive orders by the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated
all its misery was issued on April 14, 1986 by Commissioner Mary Concepcion
Bautista. It was addressed to three of the agents of the Commission, hereafter
simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good
Government, by authority of the President of the Philippines, you are hereby
directed to sequester the following companies.
1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and
Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum disruption of these
companies' business activities.
2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President
through the Commission on Good Government should decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of
this sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the
PCGG, addressed a letter dated April 18, 1986 to the President and other officers
of petitioner firm, reiterating an earlier request for the production of certain
documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings of the Board of Directors from
1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings
from 1973 to 1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and
others from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31, 1986.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the authorized
signatories for withdrawals thereof.
10. Schedule of company investments and placements. 2
The letter closed with the warning that if the documents were not submitted
within five days, the officers would be cited for "contempt in pursuance with
Presidential Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply as
BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a
member of the task force assigned to carry out the basic sequestration order. He
sent a letter to BASECO's Vice-President for Finance, 3 terminating the contract for
security services within the Engineer Island compound between BASECO and
"Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM military
personnel having already been assigned to the area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to
"Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla National
Marine Corporation," advising of the amendment in part of their contracts with
BASECO in the sense that the stipulated charges for use of the BASECO road
network were made payable "upon entry and not anymore subject to monthly
billing as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in
behalf of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of
which the latter undertook to introduce improvements costing approximately
P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor
condition, avowedly to "optimize its utilization and in return maximize the
revenue which would flow into the government coffers," in consideration of
Deltamarine's being granted "priority in using the improved portion of the wharf
ahead of anybody" and exemption "from the payment of any charges for the use
of wharf including the area where it may install its bagging equipments" "until the
improvement remains in a condition suitable for port operations." 5 It seems
however that this contract was never consummated. Capt. Jorge B. Siacunco,
"Head- (PCGG) BASECO Management Team," advised Deltamarine by letter dated
July 30, 1986 that "the new management is not in a position to honor the said

contract" and thus "whatever improvements * * (may be introduced) shall be

deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG
agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards
maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by
conventional methods;" but afterwards, Commissioner Bautista, in representation
of the PCGG, authorized another party, A.T. Abesamis, to operate the quarry,
located at Mariveles, Bataan, an agreement to this effect having been executed
by them on September 17, 1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's
compound," and in this connection, to dispose of or sell "metal scraps" and other
materials, equipment and machineries no longer usable, subject to specified
guidelines and safeguards including audit and verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
Corporation and all their affiliated companies." 9 Diaz invoked the provisions of
Section 3 (c) of Executive Order No. 1, empowering the Commission
* * To provisionally takeover in the public interest or to prevent its disposal
or dissipation, business enterprises and properties taken over by the government
of the Marcos Administration or by entities or persons close to former President
Marcos, until the transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by Capt.
Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of the companies;
4. Ensures that the assets of the companies are not dissipated and used
effectively and efficiently; revenues are duly accounted for; and disburses funds
only as may be necessary;
5. Does actions including among others, seeking of military support as may be
necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good
Government on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza,
Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the
termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify. More
particularly, BASECO prays that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the takeover
order of July 14, 1986 and the termination of the services of the BASECO
executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover
Orders
While BASECO concedes that "sequestration without resorting to judicial action,
might be made within the context of Executive Orders Nos. 1 and 2 before March
25, 1986 when the Freedom Constitution was promulgated, under the principle
that the law promulgated by the ruler under a revolutionary regime is the law of
the land, it ceased to be acceptable when the same ruler opted to promulgate the
Freedom Constitution on March 25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among
others, that "No person shall be deprived of life, liberty and property without due
process of law." (Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as
well as the Sequestration Order * * and Takeover Order * * issued purportedly
under the authority of said Executive Orders, rests on four fundamental
considerations: First, no notice and hearing was accorded * * (it) before its
properties and business were taken over; Second, the PCGG is not a court, but a
purely investigative agency and therefore not competent to act as prosecutor and
judge in the same cause; Third, there is nothing in the issuances which envisions
any proceeding, process or remedy by which petitioner may expeditiously
challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard of the
constitutional presumption of innocence and general rules and procedures, they
constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it
has apparently already complied with, was issued without court authority and
infringed its constitutional right against self-incrimination, and unreasonable
search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of
dominion and management of its business affairs by
1) terminating its contract for security services with Fairways & Anchor, without
the consent and against the will of the contracting parties; and amending the
mode of payment of entry fees stipulated in its Lease Contract with National
Stevedoring & Lighterage Corporation, these acts being in violation of the nonimpairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract"
with Deltamarine Integrated Port Services, Inc., giving the latter free use of
BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate
its rock quarry at Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment,
machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all
their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero;
Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on
May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein.22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration,
takeover and freeze orders have been engendered by misapprehension, or
incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and doubts be
dispelled so that uninformed and useless debates about them may be avoided,
and arguments tainted b sophistry or intellectual dishonesty be quickly exposed
and discarded. Towards this end, this opinion will essay an exposition of the law
on the matter. In the process many of the objections raised by BASECO will be
dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that
the President-in the exercise of legislative power which she was authorized to
continue to wield "(until a legislature is elected and convened under a new
Constitution" "shall give priority to measures to achieve the mandate of the
people," among others to (r)ecover ill-gotten properties amassed by the leaders
and supporters of the previous regime and protect the interest of the people
through orders of sequestration or freezing of assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth,"
and postulates that "vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and close
associates both here and abroad." 25 Upon these premises, the Presidential
Commission on Good Government was created, 26 "charged with the task of
assisting the President in regard to (certain specified) matters," among which was
precisely* * The recovery of all in-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, whether located in the Philippines or abroad, including the takeover or
sequestration of all business enterprises and entities owned or controlled by
them, during his administration, directly or through nominees, by taking undue

advantage of their public office and/or using their powers, authority, influence,
connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in
the fulfillment of its mission, the PCGG was granted "power and authority" to do
the following particular acts, to wit:
1. To sequester or place or cause to be placed under its control or
possession any building or office wherein any ill-gotten wealth or properties may
be found, and any records pertaining thereto, in order to prevent their
destruction, concealment or disappearance which would frustrate or hamper the
investigation or otherwise prevent the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the
disposal or dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos, until the transactions leading to such acquisition by the latter
can be disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by any
person or entity that may render moot and academic, or frustrate or otherwise
make ineffectual the efforts of the Commission to carry out its task under this
order. 28
So that it might ascertain the facts germane to its objectives, it was granted
power to conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29 It was
given power also to promulgate such rules and regulations as may be necessary
to carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in possession of evidence
showing that there are assets and properties purportedly pertaining to former
Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or nominees which
had been or were acquired by them directly or indirectly, through or as a result of
the improper or illegal use of funds or properties owned by the government of the
Philippines or any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines:" and
2) * * said assets and properties are in the form of bank accounts,
deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and
personal properties in the Philippines and in various countries of the world." 31
Upon these premises, the President1) froze "all assets and properties in the Philippines in which former
President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close

relatives, subordinates, business associates, dummies, agents, or nominees have

any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their
close relatives, subordinates, business associates, duties, agents, or nominees
from transferring, conveying, encumbering, concealing or dissipating said assets
or properties in the Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of their official position, authority, relationship,
connection or influence to unjustly enrich themselves at the expense and to the
grave damage and prejudice of the Filipino people and the Republic of the
Philippines;
3) prohibited "any person from transferring, conveying, encumbering or
otherwise depleting or concealing such assets and properties or from assisting or
taking part in their transfer, encumbrance, concealment or dissipation under pain
of such penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or
properties, whether located in the Philippines or abroad, in their names as
nominees, agents or trustees, to make full disclosure of the same to the
Commission on Good Government within thirty (30) days from publication of *
(the) Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG
is empowered, "with the assistance of the Office of the Solicitor General and other
government agencies, * * tofile and prosecute all cases investigated by it * * as
may be warranted by its findings." 34 All such cases, whether civil or criminal, are
to be filed "with the Sandiganbayan which shall have exclusive and original
jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil
suits for restitution, reparation of damages, or indemnification for consequential
damages, forfeiture proceedings provided for under Republic Act No. 1379, or any
other civil actions under the Civil Code or other existing laws, in connection with *
* (said Executive Orders Numbered 1 and 2) may be filed separately from and
proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and
supporters of the previous regime";37
a) more particularly, that ill-gotten wealth (was) accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives, subordinates and
close associates, * * located in the Philippines or abroad, * * (and) business
enterprises and entities (came to be) owned or controlled by them, during * * (the
Marcos) administration, directly or through nominees, by taking undue advantage

of their public office and/or using their powers, authority, influence, Connections
or relationship; 38
b) otherwise stated, that "there are assets and properties purportedly
pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were acquired by them directly
or indirectly, through or as a result of the improper or illegal use of funds or
properties owned by the Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of their office, authority, influence, connections or relationship,
resulting in their unjust enrichment and causing grave damage and prejudice to
the Filipino people and the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank accounts.
deposits, trust. accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and
personal properties in the Philippines and in various countries of the
world;" 40 and
2) that certain "business enterprises and properties (were) taken over by
the government of the Marcos Administration or by entities or persons close to
former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above
described factual premises of the Executive Orders and Proclamation No. 3 to be
true, to be demonstrable by competent evidence, the recovery from Marcos, his
family and his dominions of the assets and properties involved, is not only a right
but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be
sought with the equally compelling necessity that a proper respect be accorded
and adequate protection assured, the fundamental rights of private property and
free enterprise which are deemed pillars of a free society such as ours, and to
which all members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as
its necessary components freedom of conscience, freedom of expression, and
freedom in the pursuit of happiness. Along with these freedoms are included
economic freedom and freedom of enterprise within reasonable bounds and
under proper control. * * Evincing much concern for the protection of property,
the Constitution distinctly recognizes the preferred position which real estate has
occupied in law for ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The Constitution
realizes the indispensable role which property, owned in reasonable quantities
and used legitimately, plays in the stimulation to economic effort and the
formation and growth of a solid social middle class that is said to be the bulwark
of democracy and the backbone of every progressive and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be

assumed. They will have to be duly established by adequate proof in each case, in
a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be
validly and properly adjudged and consummated; although there are some who
maintain that the fact-that an immense fortune, and "vast resources of the
government have been amassed by former President Ferdinand E. Marcos, his
immediate family, relatives, and close associates both here and abroad," and they
have resorted to all sorts of clever schemes and manipulations to disguise and
hide their illicit acquisitions-is within the realm of judicial notice, being of so
extensive notoriety as to dispense with proof thereof, Be this as it may, the
requirement of evidentiary substantiation has been expressly acknowledged, and
the procedure to be followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets Pending
Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of
such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious
and imperative need for preliminary, provisional measures to prevent the
concealment, disappearance, destruction, dissipation, or loss of the assets and
properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar
to cases where "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos."43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester
property claimed to be "ill-gotten" means to place or cause to be placed under its
possession or control said property, or any building or office wherein any such
property and any records pertaining thereto may be found, including "business
enterprises and entities,"-for the purpose of preventing the destruction,
concealment or dissipation of, and otherwise conserving and preserving, the
same-until it can be determined, through appropriate judicial proceedings,
whether the property was in truth will- gotten," i.e., acquired through or as a
result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of official position, authority
relationship, connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State. 44 And this, too, is
the sense in which the term is commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property
alleged to constitute "ill-gotten wealth" "from transferring, conveying,

encumbering or otherwise depleting or concealing such property, or from

assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the property
and conserve it subject to the orders and disposition of the authority decreeing
such freezing. In this sense, it is akin to a garnishment by which the possessor or
ostensible owner of property is enjoined not to deliver, transfer, or otherwise
dispose of any effects or credits in his possession or control, and thus becomes in
a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the
apparent distinction between "ill gotten" "business enterprises and entities"
(going concerns, businesses in actual operation), generally, as to which the
remedy of sequestration applies, it being necessarily inferred that the remedy
entails no interference, or the least possible interference with the actual
management and operations thereof; and "business enterprises which were taken
over by the government government of the Marcos Administration or by entities
or persons close to him," in particular, as to which a "provisional takeover" is
authorized, "in the public interest or to prevent disposal or dissipation of the
enterprises." 48 Such a "provisional takeover" imports something more than
sequestration or freezing, more than the placing of the business under physical
possession and control, albeit without or with the least possible interference with
the management and carrying on of the business itself. In a "provisional
takeover," what is taken into custody is not only the physical assets of the
business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going
activities. But, to repeat, such a "provisional takeover" is allowed only as regards
"business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law plainly
qualifies the remedy of take-over by the adjective, "provisional." These remedies
may be resorted to only for a particular exigency: to prevent in the public interest
the disappearance or dissipation of property or business, and conserve it pending
adjudgment in appropriate proceedings of the primary issue of whether or not the
acquisition of title or other right thereto by the apparent owner was attended by
some vitiating anomaly. None of the remedies is meant to deprive the owner or
possessor of his title or any right to the property sequestered, frozen or taken
over and vest it in the sequestering agency, the Government or other person. This
can be done only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take
over is to be understood and exercised, the language of the executive orders in
question leaves no doubt. Executive Order No. 1 declares that the sequestration
of property the acquisition of which is suspect shall last "until the transactions
leading to such acquisition * * can be disposed of by the appropriate
authorities." 49 Executive Order No. 2 declares that the assets or properties

therein mentioned shall remain frozen "pending the outcome of appropriate

proceedings in the Philippines to determine whether any such assets or
properties were acquired" by illegal means. Executive Order No. 14 makes clear
that judicial proceedings are essential for the resolution of the basic issue of
whether or not particular assets are "ill-gotten," and resultant recovery thereof by
the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The
Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that
sequestration, freezing or provisional takeover is designed to be an end in itself,
that it is the device through which persons may be deprived of their property
branded as "ill-gotten," that it is intended to bring about a permanent, rather than
a passing, transitional state of affairs. That this is not so is quite explicitly
declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the
duration of these provisional remedies. Section 26 of its Transitory
Provisions, 51 lays down the relevant rule in plain terms, apart from extending
ratification or confirmation (although not really necessary) to the institution by
presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under
Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten
wealth shag remain operative for not more thaneighteen months after the
ratification of this Constitution. However, in the national interest, as certified by
the President, the Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima
facie case. The order and the list of the sequestered or frozen properties shall
forthwith be registered with the proper court. For orders issued before the
ratification of this Constitution, the corresponding judicial action or proceeding
shall be filed within six months from its ratification. For those issued after such
ratification, the judicial action or proceeding shall be commenced within six
months from the issuance thereof.
The sequestration or freeze order is deemed automatically lifted if no judicial
action or proceeding is commenced as herein provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin to the
provisional remedy of preliminary attachment, or receivership. 53 By attachment,
a sheriff seizes property of a defendant in a civil suit so that it may stand as
security for the satisfaction of any judgment that may be obtained, and not
disposed of, or dissipated, or lost intentionally or otherwise, pending the
action. 54 By receivership, property, real or personal, which is subject of litigation,
is placed in the possession and control of a receiver appointed by the Court, who
shall conserve it pending final determination of the title or right of possession
over it. 55 All these remedies sequestration, freezing, provisional, takeover,
attachment and receivership are provisional, temporary, designed for-particular
exigencies, attended by no character of permanency or finality, and always
subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not
issued by a court is of no moment. The Solicitor General draws attention to the
writ of distraint and levy which since 1936 the Commissioner of Internal Revenue
has been by law authorized to issue against property of a delinquent
taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence
on sequestration as a purely judicial remedy * * (as it feels) that the law should
not be ossified to a point that makes it insensitive to change." What it insists on,
what it pronounces to be its "unyielding position, is that any change in procedure,
or the institution of a new one, should conform to due process and the other
prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a
proposition on which there can be no disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of
personal property in replevinsuits, sequestration and provisional takeover writs
may issue ex parte. 58 And as in preliminary attachment, receivership, and
delivery of personality, no objection of any significance may be raised to the ex
parte issuance of an order of sequestration, freezing or takeover, given its
fundamental character of temporariness or conditionality; and taking account
specially of the constitutionally expressed "mandate of the people to recover illgotten properties amassed by the leaders and supporters of the previous regime
and protect the interest of the people;" 59 as well as the obvious need to avoid
alerting suspected possessors of "ill-gotten wealth" and thereby cause that
disappearance or loss of property precisely sought to be prevented, and the fact,
just as self-evident, that "any transfer, disposition, concealment or disappearance
of said assets and properties would frustrate, obstruct or hamper the efforts of
the Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and
receivership, there exist a prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and adequate and fair opportunity to
contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of
fairness and due process." 62Executive Order No. 2 declares that with respect to
claims on allegedly "ill-gotten" assets and properties, "it is the position of the new
democratic government that President Marcos * * (and other parties affected) be
afforded fair opportunity to contest these claims before appropriate Philippine
authorities." 63 Section 7 of the Commission's Rules and Regulations provides that
sequestration or freeze (and takeover) orders issue upon the authority of at least
two commissioners, based on the affirmation or complaint of an interested
party, ormotu proprio when the Commission has reasonable grounds to believe
that the issuance thereof is warranted. 64 A similar requirement is now found in
Section 26, Art. XVIII of the 1987 Constitution, which requires that a

"sequestration or freeze order shall be issued only upon showing of a prima

facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure
by which a party may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of
sequestration or freeze or hold order is directed may request the lifting thereof in
writing, either personally or through counsel within five (5) days from receipt of
the writ or order, or in the case of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or
motu proprio for good cause shown, the Commission may lift the writ or order
unconditionally or subject to such conditions as it may deem necessary, taking
into consideration the evidence and the circumstance of the case. The resolution
of the commission may be appealed by the party concerned to the Office of the
President of the Philippines within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten
wealth" were not expressly imposed by some rule or regulation as a condition to
warrant the sequestration or freezing of property contemplated in the executive
orders in question, it would nevertheless be exigible in this jurisdiction in which
the Rule of Law prevails and official acts which are devoid of rational basis in fact
or law, or are whimsical and capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to
the validity and propriety of sequestration, freeze and takeover orders, it should
be dispelled by the fact that these particular remedies and the authority of the
PCGG to issue them have received constitutional approbation and sanction. As
already mentioned, the Provisional or "Freedom" Constitution recognizes the
power and duty of the President to enact "measures to achieve the mandate of
the people to * * * (recover ill- gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the people
through orders of sequestration or freezing of assets or accounts." And as also
already adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats of,
and ratifies the "authority to issue sequestration or freeze orders under
Proclamation No. 3 dated March 25, 1986."
The institution of these provisional remedies is also premised upon the State's
inherent police power, regarded, as t lie power of promoting the public welfare by
restraining and regulating the use of liberty and property," 68 and as "the most
essential, insistent and illimitable of powers * * in the promotion of general
welfare and the public interest," 69 and said to be co-extensive with self-protection
and * * not inaptly termed (also) the'law of overruling necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said that
the PCGG is not, and was never intended to act as, a judge. Its general function is
to conduct investigations in order to collect evidenceestablishing instances of "illgotten wealth;" issue sequestration, and such orders as may be warranted by the
evidence thus collected and as may be necessary to preserve and conserve the

assets of which it takes custody and control and prevent their disappearance, loss
or dissipation; and eventually file and prosecute in the proper court of competent
jurisdiction all cases investigated by it as may be warranted by its findings. It
does not try and decide, or hear and determine, or adjudicate with any character
of finality or compulsion, cases involving the essential issue of whether or not
property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This function is
reserved to the designated court, in this case, the Sandiganbayan. 71 There can
therefore be no serious regard accorded to the accusation, leveled by
BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the
same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by
the record, hereafter to be discussed, the petition cannot succeed. The writs of
certiorari and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled
by President Marcos "during his administration, through nominees, by taking
undue advantage of his public office and/or using his powers, authority, or
influence, " and that it was by and through the same means, that BASECO had
taken over the business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding company *
* incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a
consortium of Filipino shipowners and shipping executives. Its main office is at
Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed,
and its main shipyard is located at Mariveles Bataan." 73 Its Articles of
Incorporation disclose that its authorized capital stock is P60,000,000.00 divided
into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have
been subscribed, and on said subscription, the aggregate sum of P3,035,000.00
has been paid by the incorporators. 74 The same articles Identify the
incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P.
Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6)
Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la
Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel
S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be
stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias
Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this
year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and
Transfer Book. 75 Their names and the number of shares respectively held by
them are as follows:
13 Acquisition of NASSCO by BASECO
Barely six months after its incorporation, BASECO acquired from National
Shipyard & Steel Corporation, or NASSCO, a government-owned or controlled

corporation, the latter's shipyard at Mariveles, Bataan, known as the Bataan

National Shipyard (BNS), and except for NASSCO's Engineer Island Shops and
certain equipment of the BNS, consigned for future negotiation all its
structures, buildings, shops, quarters, houses, plants, equipment and facilities, in
stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with
Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00.
As partial payment thereof, BASECO delivered to NASSCO a cash bond of
P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum, compounded
semi-annually, was stipulated to be paid in equal semi-annual installments over a
term of nine (9) years, payment to commence after a grace period of two (2)
years from date of turnover of the shipyard to BASECO. 76
14. Subsequent Reduction of Price; Intervention of Marcos
Unaccountably, the price of P52,000,000.00 was reduced by more than one-half,
to P24,311,550.00, about eight (8) months later. A document to this effect was
executed on October 9, 1973, entitled "Memorandum Agreement," and was
signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of
Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the
top right corner of the first page, the word "APPROVED" in the handwriting
of President Marcos, followed by his usual full signature. The document recited
that a down payment of P5,862,310.00 had been made by BASECO, and the
balance of P19,449,240.00 was payable in equal semi-annual installments over
nine (9) years after a grace period of two (2) years, with interest at 7% per
annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land in
Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00 was
paid upon its execution, and the balance stipulated to be payable in
installments. 78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again
with the intervention of President Marcos, acquired ownership of the rest of the
assets of NASSCO which had not been included in the first two (2) purchase
documents. This was accomplished by a deed entitled "Contract of Purchase and
Sale," 79which, like the Memorandum of Agreement dated October 9,
1973 supra also bore at the upper right-hand corner of its first page, the
handwritten notation of President Marcosreading, "APPROVED, July 29, 1973," and
underneath it, his usual full signature. Transferred to BASECO were NASSCO's
"ownership and all its titles, rights and interests over all equipment and facilities
including structures, buildings, shops, quarters, houses, plants and expendable or
semi-expendable assets, located at the Engineer Island, known as the Engineer
Island Shops, including all the equipment of the Bataan National Shipyards (BNS)
which were excluded from the sale of NBS to BASECO but retained by BASECO
and all other selected equipment and machineries of NASSCO at J. Panganiban

Smelting Plant." In the same deed, NASSCO committed itself to cooperate with
BASECO for the acquisition from the National Government or other appropriate
Government entity of Engineer Island. Consideration for the sale was set at
P5,000,000.00; a down payment of P1,000,000.00 appears to have been made,
and the balance was stipulated to be paid at 7% interest per annum in equal semi
annual installments over a term of nine (9) years, to commence after a grace
period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together
with the general manager, Mr. David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC,
taken from "the last available Japanese war damage fund of $19,000,000.00," to
pay for "Japanese made heavy equipment (brand new)." 80On September 3, 1975,
it got another loan also from the NDC in the amount of P30,000,000.00 (id.). And
on January 28, 1976, it got still another loan, this time from the GSIS, in the sum
of P12,400,000.00. 81 The claim has been made that not a single centavo has
been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos
regarding BASECO. The first was contained in a letter dated September 5, 1977 of
Hilario M. Ruiz, BASECO president. 83 The second was embodied in a confidential
memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further
disclose the fine hand of Marcos in the affairs of BASECO, and that of a
Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that
there had been "no orders or demands for ship construction" for some time and
expressed the fear that if that state of affairs persisted, BASECO would not be
able to pay its debts to the Government, which at the time stood at the not
inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the
situation," there be a "spin-off (of their) shipbuilding activities which shall be
handled exclusively by an entirely new corporation to be created;" and towards
this end, he informed Marcos that BASECO was
* * inviting NDC and LUSTEVECO to participate by converting the NDC
shipbuilding loan to BASECO amounting to P341.165M and assuming and
converting a portion of BASECO's shipbuilding loans from REPACOM amounting to
P52.2M or a total of P83.365M as NDC's equity contribution in the new
corporation. LUSTEVECO will participate by absorbing and converting a portion of
the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to P32.538M. 86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days
later. It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a
Mission
FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its
loan obligations due chiefly to the fact that "orders to build ships as expected * *
did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres,
(4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * *
is already dead and Mr. Jose A. Rojas had a major heart attack," he made the
following quite revealing, and it may be added, quite cynical and indurate
recommendation, to wit:
* * (that) their replacements (be effected) so we can register their names
in the stock book prior to the implementation of your instructions to pass a board
resolution to legalize the transfers under SEC regulations;
2. By getting their replacements, the families cannot question us later on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following
documents: 88
1. Stock certificates indorsed and assigned in blank with assignments and
waivers; 89
2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering
"Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure
and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of
land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of
P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until
such period when BASECO will have enough orders for ships in order for the
company to meet loan obligations," and that
An LOI may be issued to government agencies using floating equipment,
that a linkage scheme be applied to a certain percent of BASECO's net profit as
part of BASECO's amortization payments tomake it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or
officer of BASECO, yet he has presented a report on BASECO to President Marcos,
and his report demonstrates intimate familiarity with the firm's affairs and
problems.
19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations,

particularly as regards the "spin-off" and the "linkage scheme" relative to
"BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary
Geronimo Velasco of the Philippine National Oil Company and Chairman
Constante Farias of the National Development Company, directing them "to
participate in the formation of a new corporation resulting from the spin-off of the
shipbuilding component of BASECO along the following guidelines:
a. Equity participation of government shall be through LUSTEVECO and
NDC in the amount of P115,903,000 consisting of the following obligations of
BASECO which are hereby authorized to be converted to equity of the said new
corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of nonvoting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twentytwo (22) days after receiving their president's memorandum, Messrs. Hilario M.
Ruiz, Constante L. Farias and Geronimo Z. Velasco, in representation of their
respective corporations, executed a PRE-INCORPORATION AGREEMENT dated
October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be
known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their
president's instructions. It would seem that the new corporation ultimately formed
was actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine National Oil
Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the
National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate observations
as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations
be transferred to NDC subject to reimbursement by NDC to BASECO (of) the
amount of s allegedly representing the handling and incidental expenses incurred
by BASECO in the installation of said equipment (so instead of NDC getting paid
on its loan to BASECO, it was made to pay BASECO instead the amount of
P18.285M); 2) the shipbuilding equipment procured from reparations through
EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking,
Inc.) be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding
equipment (thus) transferred be invested by LUSTEVECO, acting through PNOC
and NDC, as the government's equity participation in a shipbuilding corporation to
be established in partnership with the private sector.
xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's

loan obligation to NDC and REPACOM * * in the total amount of P83.365M and
BSD's REPACOM loan of P32.438M were wiped out and converted into non-voting
preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the
actuality of the control by President Marcos of BASECO has been sufficiently
shown.
Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that
he actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there
were 218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management,
Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil.
Lines, 1,240 shares. The first three corporations, among themselves, own an
aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding
stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of President
Marcos, were certificates corresponding to more than ninety-five percent (95%) of
all the outstanding shares of stock of BASECO, endorsed in blank, together with
deeds of assignment of practically all the outstanding shares of stock of the three
(3) corporations above mentioned (which hold 95.82% of all BASECO stock),
signed by the owners thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG)
were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity
Management Inc. which supposedly owns as aforesaid 65,882 shares of
BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding
shares of Metro Bay Drydock Corporation which allegedly owns 136,370 shares
of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident
Management Co., Inc. which allegedly owns 7,412 shares of BASECO stock,
assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819
outstanding shares of BASECO stock; that is, all but 5 % all endorsed in
blank. 99
While the petitioner's counsel was quick to dispute this asserted fact,
assuring this Court that the BASECO stockholders were still in possession of their
respective stock certificates and had "never endorsed * * them in blank or to
anyone else," 100 that denial is exposed by his own prior and subsequent

recorded statements as a mere gesture of defiance rather than a verifiable factual

declaration.
By resolution dated September 25, 1986, this Court granted BASECO's
counsel a period of 10 days "to SUBMIT,as undertaken by him, * * the certificates
of stock issued to the stockholders of * * BASECO as of April 23, 1986, as listed in
Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his
motion dated October 2, 1986, he declared inter alia that "said certificates of
stock are in the possession of third parties, among whom being the respondents
themselves * * and petitioner is still endeavoring to secure copiesthereof from
them." 102 On the same day he filed another motion praying that he be allowed
"to secure copies of the Certificates of Stock in the name of Metro Bay Drydock,
Inc., and of all other Certificates, of Stock of petitioner's stockholders in
possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of the
stock certificates "confirms the fact that stockholders of petitioner corporation are
not in possession of * * (their) certificates of stock," and the reason, according to
him, was "that 95% of said shares * * have been endorsed in blank and found in
Malacaang after the former President and his family fled the country." To this
manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really
assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on
November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of
the stock certificates alleged to be in its possession or accessible to it, mentioned
and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10)
days from notice." 106 In a motion filed on December 5, 1986,107 BASECO's
counsel made the statement, quite surprising in the premises, that "it will
negotiate with the owners (of the BASECO stock in question) to allow petitioner to
borrow from them, if available, the certificates referred to" but that "it needs a
more sufficient time therefor" (sic). BASECO's counsel however eventually had to
confess inability to produce the originals of the stock certificates, putting up the
feeble excuse that while he had "requested the stockholders to allow * * (him) to
borrow said certificates, * * some of * * (them) claimed that they had delivered
the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of
last national emergency." 108 He has conveniently omitted, nor has he offered to
give the details of the transactions adverted to by him, or to explain why he had
not impressed on the supposed stockholders the primordial importance of
convincing this Court of their present custody of the originals of the stock, or if he
had done so, why the stockholders are unwilling to agree to some sort of
arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that
he could not get the originals from the stockholders for the simple reason that, as
the Solicitor General maintains, said stockholders in truth no longer have them in

their possession, these having already been assigned in blank to then President
Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at
least, the stockholders and directors of BASECO as of April, 1986 109 were mere
"dummies," nominees or alter egos of President Marcos; at any rate, that they are
no longer owners of any shares of stock in the corporation, the conclusion cannot
be avoided that said stockholders and directors have no basis and no standing
whatever to cause the filing and prosecution of the instant proceeding; and to
grant relief to BASECO, as prayed for in the petition, would in effect be to restore
the assets, properties and business sequestered and taken over by the PCGG to
persons who are "dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do
indeed show that the private corporation known as BASECO was "owned or
controlled by former President Ferdinand E. Marcos * * during his administration, *
* through nominees, by taking advantage of * * (his) public office and/or using * *
(his) powers, authority, influence * *," and that NASSCO and other property of the
government had been taken over by BASECO; and the situation justified the
sequestration as well as the provisional takeover of the corporation in the public
interest, in accordance with the terms of Executive Orders No. 1 and 2, pending
the filing of the requisite actions with the Sandiganbayan to cause divestment of
title thereto from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is
correct; accordingly, it sustains the acts of sequestration and takeover by the
PCGG as being in accord with the law, and, in view of what has thus far been set
out in this opinion, pronounces to be without merit the theory that said acts, and
the executive orders pursuant to which they were done, are fatally defective in
not according to the parties affected prior notice and hearing, or an adequate
remedy to impugn, set aside or otherwise obtain relief therefrom, or that the
PCGG had acted as prosecutor and judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are
a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts
punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as
a determination or declaration of guilt. On the contrary, the executive orders,
inclusive of Executive Order No. 14, make it perfectly clear that any judgment of
guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by
a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and
prosecuted by the PCGG. In the second place, no punishment is inflicted by the
executive orders, as the merest glance at their provisions will immediately make
apparent. In no sense, therefore, may the executive orders be regarded as a bill
of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches

and Seizures
BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the Order of April 18, 1986
which required it "to produce corporate records from 1973 to 1986 under pain of
contempt of the Commission if it fails to do so." The order was issued upon the
authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power
to "issue subpoenas requiring * * the production of such books, papers, contracts,
records, statements of accounts and other documents as may be material to the
investigation conducted by the Commission, " and paragraph (3), Executive Order
No. 2 dealing with its power to "require all persons in the Philippines holding * *
(alleged "ill-gotten") assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of
the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to
juridical persons.
While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises, may refuse to show its hand when
charged with an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional protections
which private individuals have. * *They are not at all within the privilege against
self-incrimination, although this court more than once has said that the privilege
runs very closely with the 4th Amendment's Search and Seizure provisions.It is
also settled that an officer of the company cannot refuse to produce its records in
its possession upon the plea that they will either incriminate him or may
incriminate it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186;
emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special privileges and
franchises, and holds them subject to the laws of the state and the limitations of
its charter. Its powers are limited by law. It can make no contract not authorized
by its charter. Its rights to act as a corporation are only preserved to it so long as
it obeys the laws of its creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded its powers. It would
be a strange anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of sovereignty, inquire
how these franchises had been employed, and whether they had been abused,
and demand the production of the corporate books and papers for that purpose.
The defense amounts to this, that an officer of the corporation which is charged
with a criminal violation of the statute may plead the criminality of such
corporation as a refusal to produce its books. To state this proposition is to answer
it. While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises may refuse to show its hand when

charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed.,
771, 780 [emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No.
14 assures protection to individuals required to produce evidence before the
PCGG against any possible violation of his right against self-incrimination. It gives
them immunity from prosecution on the basis of testimony or information he is
compelled to present. As amended, said Section 4 now provides that
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his
privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly derived from
such testimony, or other information) may be used against the witness in any
criminal case, except a prosecution for perjury, giving a false statement, or
otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no
application to the case at bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no seizure on the occasion
thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and
extent of the powers that may be wielded by the PCGG with regard to the
properties or businesses placed under sequestration or provisionally taken over.
Obviously, it is not a question to which an answer can be easily given, much less
one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally taken
over. AS already earlier stressed with no little insistence, the act of sequestration;
freezing or provisional takeover of property does not import or bring about a
divestment of title over said property; does not make the PCGG the owner
thereof. In relation to the property sequestered, frozen or provisionally taken over,
the PCGG is a conservator, not an owner. Therefore, it can not perform acts of
strict ownership; and this is specially true in the situations contemplated by the
sequestration rules where, unlike cases of receivership, for example, no court
exercises effective supervision or can upon due application and hearing, grant
authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question should
entail the least possible interference with business operations or activities so that,
in the event that the accusation of the business enterprise being "ill gotten" be
not proven, it may be returned to its rightful owner as far as possible in the same
condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, 115 such as to bring and defend actions in its own name; receive rents;
collect debts due; pay outstanding debts; and generally do such other acts and

things as may be necessary to fulfill its mission as conservator and administrator.

In this context, it may in addition enjoin or restrain any actual or threatened
commission of acts by any person or entity that may render moot and academic,
or frustrate or otherwise make ineffectual its efforts to carry out its task; punish
for direct or indirect contempt in accordance with the Rules of Court; and seek
and secure the assistance of any office, agency or instrumentality of the
government. 116 In the case of sequestered businesses generally (i.e., going
concerns, businesses in current operation), as in the case of sequestered objects,
its essential role, as already discussed, is that of conservator, caretaker,
"watchdog" or overseer. It is not that of manager, or innovator, much less an
owner.
c. Powers over Business Enterprises Taken Over by Marcos or
Entities or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have
been "taken over by the government of the Marcos Administration or by entities
or persons close to former President Marcos," 117 the PCGG is given power and
authority, as already adverted to, to "provisionally take (it) over in the public
interest or to prevent * * (its) disposal or dissipation;" and since the term is
obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation, running, or
management of the business itself. But even in this special situation, the intrusion
into management should be restricted to the minimum degree necessary to
accomplish the legislative will, which is "to prevent the disposal or dissipation" of
the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or
substitution should be avoided if at all possible, and undertaken only when
justified by demonstrably tenable grounds and in line with the stated objectives of
the PCGG. And it goes without saying that where replacement of management
officers may be called for, the greatest prudence, circumspection, care and
attention - should accompany that undertaking to the end that truly competent,
experienced and honest managers may be recruited. There should be no role to
be played in this area by rank amateurs, no matter how wen meaning. The road
to hell, it has been said, is paved with good intentions. The business is not to be
experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the
ultimate objective of the whole exercise, which is to turn over the business to the
Republic, once judicially established to be "ill-gotten." Reason dictates that it is
only under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over may
legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a

Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG,
"pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of Incorporation,
etc." The Memorandum should be construed in such a manner as to be consistent
with, and not contradictory of the Executive Orders earlier promulgated on the
same matter. There should be no exercise of the right to vote simply because the
right exists, or because the stocks sequestered constitute the controlling or a
substantial part of the corporate voting power. The stock is not to be voted to
replace directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program or practice of the corporation except for
demonstrably weighty and defensible grounds, and always in the context of the
stated purposes of sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors are not to be voted
out simply because the power to do so exists. Substitution of directors is not to be
done without reason or rhyme, should indeed be shunned if at an possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as assure that the
replacements are truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and were
no longer owners of any stock in the firm, if they ever were at all. This is why, in
its Resolution of October 28, 1986;118 this Court declared that
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders' meeting for the
election of directors as authorized by the Memorandum of the President * * (to
the PCGG) dated June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly exercise control and
management over what appear to be properties and assets owned and belonging
to the government itself and over which the persons who appear in this case on
behalf of BASECO have failed to show any right or even any shareholding in said
corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should henceforth
be guided and governed by the norms herein laid down. They should never for a
moment allow themselves to forget that they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree of diligence
and rectitude is, in the premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or
revision, and the execution of certain contracts, inclusive of the termination of the
employment of some of its executives, 119 this Court cannot, in the present state
of the evidence on record, pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial determination in the

appropriate action. But the Court will state that absent any showing of any
important cause therefor, it will not normally substitute its judgment for that of
the PCGG in these individual transactions. It is clear however, that as things now
stand, the petitioner cannot be said to have established the correctness of its
submission that the acts of the PCGG in question were done without or in excess
of its powers, or with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order
issued on October 14, 1986 is lifted.
CASE 7
GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T. vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION
VITUG, J.:
The instant petition seeks a review of the decision rendered by the Court
of Appeals, dated 26 February 1993, in CA-G.R. SP No. 24638 and No. 24648
affirming in toto that of the Securities and Exchange Commission ("SEC") in SEC
AC 254.
The antecedents of the controversy, summarized by respondent Commission and
quoted at length by the appellate court in its decision, are hereunder restated.
The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly
registered in the Mercantile Registry on 4 January 1937 and reconstituted with the
Securities and Exchange Commission on 4 August 1948. The SEC records show
that there were several subsequent amendments to the articles of partnership on
18 September 1958, to change the firm [name] to ROSS, SELPH and
CARRASCOSO; on 6 July 1965 . . . to ROSS, SELPH, SALCEDO, DEL ROSARIO, BITO
& MISA; on 18 April 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 4
December 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 11 March
1977 to DEL ROSARIO, BITO, MISA & LOZADA; on 7 June 1977 to BITO, MISA &
LOZADA; on 19 December 1980, [Joaquin L. Misa] appellees Jesus B. Bito and
Mariano M. Lozada associated themselves together, as senior partners with
respondents-appellees Gregorio F. Ortega, Tomas O. del Castillo, Jr., and Benjamin
Bacorro, as junior partners.
On February 17, 1988, petitioner-appellant wrote the respondentsappellees a letter stating:
I am withdrawing and retiring from the firm of Bito, Misa and Lozada,
effective at the end of this month.
"I trust that the accountants will be instructed to make the proper
liquidation of my participation in the firm."
On the same day, petitioner-appellant wrote respondents-appellees
another letter stating:
"Further to my letter to you today, I would like to have a meeting with all
of you with regard to the mechanics of liquidation, and more particularly, my
interest in the two floors of this building. I would like to have this resolved soon
because it has to do with my own plans."

On 19 February 1988, petitioner-appellant wrote respondents-appellees

another letter stating:
"The partnership has ceased to be mutually satisfactory because of the
working conditions of our employees including the assistant attorneys. All my
efforts to ameliorate the below subsistence level of the pay scale of our
employees have been thwarted by the other partners. Not only have they refused
to give meaningful increases to the employees, even attorneys, are dressed down
publicly in a loud voice in a manner that deprived them of their self-respect. The
result of such policies is the formation of the union, including the assistant
attorneys."
On 30 June 1988, petitioner filed with this Commission's Securities
Investigation and Clearing Department (SICD) a petition for dissolution and
liquidation of partnership, docketed as SEC Case No. 3384 praying that the
Commission:
"1. Decree the formal dissolution and order the immediate liquidation of
(the partnership of) Bito, Misa & Lozada;
"2. Order the respondents to deliver or pay for petitioner's share in the
partnership assets plus the profits, rent or interest attributable to the use of his
right in the assets of the dissolved partnership;
"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada in
any of their correspondence, checks and pleadings and to pay petitioners
damages for the use thereof despite the dissolution of the partnership in the
amount of at least P50,000.00;
"4. Order respondents jointly and severally to pay petitioner attorney's
fees and expense of litigation in such amounts as maybe proven during the trial
and which the Commission may deem just and equitable under the premises but
in no case less than ten (10%) per cent of the value of the shares of petitioner or
P100,000.00;
"5. Order the respondents to pay petitioner moral damages with the
amount of P500,000.00 and exemplary damages in the amount of P200,000.00.
"Petitioner likewise prayed for such other and further reliefs that the
Commission may deem just and equitable under the premises."
On 13 July 1988, respondents-appellees filed their opposition to the
petition.
On 13 July 1988, petitioner filed his Reply to the Opposition.
On 31 March 1989, the hearing officer rendered a decision ruling that:
"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not
dissolve the said law partnership. Accordingly, the petitioner and respondents are
hereby enjoined to abide by the provisions of the Agreement relative to the
matter governing the liquidation of the shares of any retiring or withdrawing
partner in the partnership interest." 1
On appeal, the SEC en banc reversed the decision of the Hearing Officer and held
that the withdrawal of Attorney Joaquin L. Misa had dissolved the partnership of
"Bito, Misa & Lozada." The Commission ruled that, being a partnership at will, the
law firm could be dissolved by any partner at anytime, such as by his withdrawal
therefrom, regardless of good faith or bad faith, since no partner can be forced to

continue in the partnership against his will. In its decision, dated 17 January 1990,
the SEC held:
WHEREFORE, premises considered the appealed order of 31 March 1989 is
hereby REVERSED insofar as it concludes that the partnership of Bito, Misa &
Lozada has not been dissolved. The case is hereby REMANDED to the Hearing
Officer for determination of the respective rights and obligations of the parties. 2
The parties sought a reconsideration of the above decision. Attorney Misa,
in addition, asked for an appointment of a receiver to take over the assets of the
dissolved partnership and to take charge of the winding up of its affairs. On 4
April 1991, respondent SEC issued an order denying reconsideration, as well as
rejecting the petition for receivership, and reiterating the remand of the case to
the Hearing Officer.
The parties filed with the appellate court separate appeals (docketed CA-G.R. SP
No. 24638 and CA-G.R. SP No. 24648).
During the pendency of the case with the Court of Appeals, Attorney Jesus
Bito and Attorney Mariano Lozada both died on, respectively, 05 September 1991
and 21 December 1991. The death of the two partners, as well as the admission
of new partners, in the law firm prompted Attorney Misa to renew his application
for receivership (in CA G.R. SP No. 24648). He expressed concern over the need to
preserve and care for the partnership assets. The other partners opposed the
prayer.
The Court of Appeals, finding no reversible error on the part of respondent
Commission, AFFIRMED in toto the SEC decision and order appealed from. In fine,
the appellate court held, per its decision of 26 February 1993, (a) that Atty. Misa's
withdrawal from the partnership had changed the relation of the parties and
inevitably caused the dissolution of the partnership; (b) that such withdrawal was
not in bad faith; (c) that the liquidation should be to the extent of Attorney Misa's
interest or participation in the partnership which could be computed and paid in
the manner stipulated in the partnership agreement; (d) that the case should be
remanded to the SEC Hearing Officer for the corresponding determination of the
value of Attorney Misa's share in the partnership assets; and (e) that the
appointment of a receiver was unnecessary as no sufficient proof had been shown
to indicate that the partnership assets were in any such danger of being lost,
removed or materially impaired.
In this petition for review under Rule 45 of the Rules of Court, petitioners
confine themselves to the following issues:
1. Whether or not the Court of Appeals has erred in holding that the
partnership of Bito, Misa & Lozada (now Bito, Lozada, Ortega & Castillo) is a
partnership at will;
2. Whether or not the Court of Appeals has erred in holding that the
withdrawal of private respondent dissolved the partnership regardless of his good
or bad faith; and
3. Whether or not the Court of Appeals has erred in holding that private
respondent's demand for the dissolution of the partnership so that he can get a
physical partition of partnership was not made in bad faith; to which matters we
shall, accordingly, likewise limit ourselves.

A partnership that does not fix its term is a partnership at will. That the
law firm "Bito, Misa & Lozada," and now "Bito, Lozada, Ortega and Castillo," is
indeed such a partnership need not be unduly belabored. We quote, with
approval, like did the appellate court, the findings and disquisition of respondent
SEC on this matter; viz:
The partnership agreement (amended articles of 19 August 1948) does not
provide for a specified period or undertaking. The "DURATION" clause simply
states:
"5. DURATION. The partnership shall continue so long as mutually
satisfactory and upon the death or legal incapacity of one of the partners, shall be
continued by the surviving partners."
The hearing officer however opined that the partnership is one for a
specific undertaking and hence not a partnership at will, citing paragraph 2 of the
Amended Articles of Partnership (19 August 1948):
"2. Purpose. The purpose for which the partnership is formed, is to act as
legal adviser and representative of any individual, firm and corporation engaged
in commercial, industrial or other lawful businesses and occupations; to counsel
and advise such persons and entities with respect to their legal and other affairs;
and to appear for and represent their principals and client in all courts of justice
and government departments and offices in the Philippines, and elsewhere when
legally authorized to do so."
The "purpose" of the partnership is not the specific undertaking referred to
in the law. Otherwise, all partnerships, which necessarily must have a purpose,
would all be considered as partnerships for a definite undertaking. There would
therefore be no need to provide for articles on partnership at will as none would
so exist. Apparently what the law contemplates, is a specific undertaking or
"project" which has a definite or definable period of completion. 3
The birth and life of a partnership at will is predicated on the mutual desire
and consent of the partners. The right to choose with whom a person wishes to
associate himself is the very foundation and essence of that partnership. Its
continued existence is, in turn, dependent on the constancy of that mutual
resolve, along with each partner's capability to give it, and the absence of a cause
for dissolution provided by the law itself. Verily, any one of the partners may, at
his sole pleasure, dictate a dissolution of the partnership at will. He must,
however, act in good faith, not that the attendance of bad faith can prevent the
dissolution of the partnership 4 but that it can result in a liability for damages. 5
In passing, neither would the presence of a period for its specific duration
or the statement of a particular purpose for its creation prevent the dissolution of
any partnership by an act or will of a partner. 6 Among partners, 7mutual agency
arises and the doctrine of delectus personae allows them to have thepower,
although not necessarily the right, to dissolve the partnership. An unjustified
dissolution by the partner can subject him to a possible action for damages.
The dissolution of a partnership is the change in the relation of the parties
caused by any partner ceasing to be associated in the carrying on, as might be
distinguished from the winding up of, the business. 8 Upon its dissolution, the

partnership continues and its legal personality is retained until the complete
winding up of its business culminating in its termination. 9
The liquidation of the assets of the partnership following its dissolution is
governed by various provisions of the Civil Code; 10 however, an agreement of the
partners, like any other contract, is binding among them and normally takes
precedence to the extent applicable over the Code's general provisions. We here
take note of paragraph 8 of the "Amendment to Articles of Partnership" reading
thusly:
. . . In the event of the death or retirement of any partner, his interest in
the partnership shall be liquidated and paid in accordance with the existing
agreements and his partnership participation shall revert to the Senior Partners
for allocation as the Senior Partners may determine; provided, however, that with
respect to the two (2) floors of office condominium which the partnership is now
acquiring, consisting of the 5th and the 6th floors of the Alpap Building, 140 Alfaro
Street, Salcedo Village, Makati, Metro Manila, their true value at the time of such
death or retirement shall be determined by two (2) independent appraisers, one
to be appointed (by the partnership and the other by the) retiring partner or the
heirs of a deceased partner, as the case may be. In the event of any
disagreement between the said appraisers a third appraiser will be appointed by
them whose decision shall be final. The share of the retiring or deceased partner
in the aforementioned two (2) floor office condominium shall be determined upon
the basis of the valuation above mentioned which shall be paid monthly within
the first ten (10) days of every month in installments of not less than P20,000.00
for the Senior Partners, P10,000.00 in the case of two (2) existing Junior Partners
and P5,000.00 in the case of the new Junior Partner. 11
The term "retirement" must have been used in the articles, as we so hold,
in a generic sense to mean the dissociation by a partner, inclusive of resignation
or withdrawal, from the partnership that thereby dissolves it.
On the third and final issue, we accord due respect to the appellate court
and respondent Commission on their common factual finding, i.e., that Attorney
Misa did not act in bad faith. Public respondents viewed his withdrawal to have
been spurred by "interpersonal conflict" among the partners. It would not be
right, we agree, to let any of the partners remain in the partnership under such an
atmosphere of animosity; certainly, not against their will. 12Indeed, for as long as
the reason for withdrawal of a partner is not contrary to the dictates of justice and
fairness, nor for the purpose of unduly visiting harm and damage upon the
partnership, bad faith cannot be said to characterize the act. Bad faith, in the
context here used, is no different from its normal concept of a conscious and
intentional design to do a wrongful act for a dishonest purpose or moral obliquity.
WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on
costs.
SO ORDERED.
CASE 8
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,
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 nonstock 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 on- line 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
xxx xxx xxx
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.
xxx xxx xxx
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.
xxx xxx xxx
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.
xxx xxx xxx
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
xxx xxx xxx
2.2. OBJECTIVES
The objectives of PCSO in leasing the Facilities from a private entity are as
follows:
xxx xxx xxx
2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no
expense or risk to the government.
xxx xxx xxx
2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR
xxx xxx xxx
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.
xxx xxx xxx
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
xxx xxx xxx
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
xxx xxx xxx
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.
xxx xxx xxx
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.
xxx xxx xxx
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.
xxx xxx xxx

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:
xxx xxx xxx

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.
xxx xxx xxx
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. . . .
xxx xxx xxx
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:
xxx xxx xxx
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.
xxx xxx xxx

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.
xxx xxx xxx
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.
xxx xxx xxx
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 SO-CALLED "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%
Filipino-owned 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
grantingarguendo 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 [L-40004, 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 well-ordered 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 farreaching 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 health-oriented 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, 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.
MR. DAVIDE.
THE SPEAKER.

We accept the amendment, Mr. Speaker.

Thank you, Mr. 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 proscribedcollaboration 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" meaningitself, 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. 67Howsoever
viewed then, from the very inception, the PCSO and the PGMC mutually
understood that any arrangement between them would necessarily leave to the
PGMC thetechnical, 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 theFacilities 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 online 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
thecoordinating 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.
CASE 9
PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB
S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the trial court's decision was
affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim
requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the rate
of 12% per annum compounded monthly; plus 15% of the amount awarded to
plaintiff as attorney's fees from July 2,1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74

with interest from the filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of P184,878.84 with interest
from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P50,000.00 for each of the two
Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the
Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's
fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is
dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco
and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount
of P4,379.21, per year from 1966 with legal rate of interest up to the time it is
paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the
amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action
was filed in good faith. The fact that the properties of the Bormaheco and the
Cervanteses were attached and that they were required to file a counterbond in
order to dissolve the attachment, is not an act of bad faith. When a man tries to
protect his rights, he should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of Court, and it
was the court that ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the thirdparty defendant, for it only secured the attachment prayed for by the plaintiff
Pioneer. If an insurance company would be liable for damages in performing an
act which is clearly within its power and which is the reason for its being, then
nobody would engage in the insurance business. No further claim or counterclaim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp.
15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2)
DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed
price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with
Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft,
arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit
C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the
aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio
Maglana (respondents in both petitions) contributed some funds used in the

purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1
and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed
by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses
of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on
them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed
in favor of Pioneer as deed of chattel mortgage as security for the latter's
suretyship in favor of the former. It was stipulated therein that Lim transfer and
convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered
with the Office of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil
Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application
for a writ of preliminary attachment against Lim and respondents, the
Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim
and, by way of counterclaim, sought for damages for being exposed to litigation
and for recovery of the sums of money they advanced to Lim for the purchase of
the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects
the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT
CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT

FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE

TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the action
is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To
qualify a person to be a real party in interest in whose name an
action must be prosecuted, he must appear to be the present real
owner of the right sought to be enforced (Moran, Vol. I, Comments
on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real
party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27;
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414;
Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d
667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 the bulk of defendants'
alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds
of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering
that the total amount it had paid to JDA totals to only P298,666.28.
To allow plaintiff Pioneer to recover from defendants the amount in
excess of P298,666.28 would be tantamount to unjust enrichment
as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis

defendant Lim's liability to JDA. Well settled is the rule that no

person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
the court below and in their respective briefs with respondent court; (Rollo, p. 11)
(2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly
between the petitioner and the re-insurer pursuant to section 91 of the Insurance
Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to
recover from respondents Bormaheco and Maglana; and (4) the principle of unjust
enrichment is not applicable considering that whatever amount he would recover
from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to
so much of its obligations to JDA as has been paid with reinsurance
money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record
on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to
collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as the
amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no
right to institute and maintain in its own name an action for the

benefit of the reinsurers. It is well-settled that an action brought by

an attorney-in-fact in his own name instead of that of the principal
will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides
that 'Every action must be prosecuted in the name of
the real party in interest.' This provision is
mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is
the party entitled to the avails of the suit.
This Court has held in various cases that an attorneyin-fact is not a real party in interest, that there is no
law permitting an action to be brought by an
attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19
Phil. Rep. 12; Filipinos Industrial Corporation v. San
Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped
up was the effect of payment made by the reinsurers to the petitioner. Therefore,
the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has
no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses
Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA
650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the real
party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing
the petitioner's complaint as against the respondents for the reason that the
petitioner was not the real party in interest in the complaint and, therefore, has
no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does
not, however, cite any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to
the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines,

they would be mortgaged to Pioneer Insurance to cover the bond,

and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the mortgaged
properties have impaired and rendered insufficient
the security under the chattel mortgage and there is
thus no other sufficient security for the claim sought
to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there
is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage.
These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to
the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the
remedy of foreclosure precludes any further action to recover any
unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned provisions,
Pioneer shall have no further action against the purchaser to
recover any unpaid balance and any agreement to the contrary is
void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the
application of the provision be validly opposed on the ground that
these defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change

of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of
the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments, the
first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding
three months and the last of which shall be due and
payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum
executed by SAL or Lim and JDA, modifying the maturity dates of
the obligations, as follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the first
of which shall be due and payable 4 September
1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months
and the last of which shall be due and payable 4th
June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the
last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic).
Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented
to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a
written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the
case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor
extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the

debt has become due does not of itself constitute

any extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause of
action to recover from these defendants, as supposed indemnitors,
what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within
ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-debtors if
such payment is made after the obligation has
prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the
instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record
on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate vehicle
but who failed to incorporate the entity in which they had chosen to
invest? How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not
through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously
by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and
petitioner Lim to incorporate, a de facto partnership among them was created,
and that as a consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain
amounts given by the respondents to the petitioner as their contributions to the
intended corporation, to wit:
However, defendant Lim should be held liable to pay his codefendants' cross-claims in the total amount of P184,878.74 as

correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses, hence, the total
sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the company
will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where
certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third
the difference in the proportionate value of the land conveyed by
him, and no stock was ever issued in the corporation, it was treated
as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets,
sold, and the proceeds distributed among them in proportion to the
value of the property contributed by each (Shorb v. Beaudry, 56
Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be
implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as

such in an action for settlement of the alleged partnership and

contribution (Ward v. Brigham, 127 Mass. 24). A partnership
relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen,
44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464).
(Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited
for his failure to appear during the pretrial despite notification. In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B. Maglana in
the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This gives
credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then up
to the filing of this answer, Lim has refused, failed and still refuses
to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim.
Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the
agreement among the defendants, defendant Lim in connivance

with the plaintiff, signed and executed the alleged chattel

mortgage and surety bond agreement in his personal capacity as
the alleged proprietor of the SAL. The answering defendants
learned for the first time of this trickery and misrepresentation of
the other, Jacob Lim, when the herein plaintiff chattel mortgage
(sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the
possession of the two planes and their accessories and or return
the amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of accounts, the
latter ignored, omitted and refused to comply with them. (Record
on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not
in behalf of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
CASE 10
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES,
INC., respondent.
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow
money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the form of credit or
industry, not necessarily cash or fixed assets. Being partners, they are all liable
for debts incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation
may lie in a person who may not have directly transacted on its behalf, but
reaped benefits from that contract.
The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV 41477, [1] which
disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same
is hereby affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling,
which was affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this
Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject
to the modifications as hereinafter made by reason of the special and unique
facts and circumstances and the proceedings that transpired during the trial of
this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price of the
floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed
on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the
nets counted from September 20, 1990 (date of attachment) to September 12,
1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for
the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these
items were attached to guarantee any judgment that may be rendered in favor of
the plaintiff but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff was the sole
and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in
court. In effect, the amount of P900,000.00 replaced the attached property as a
guaranty for any judgment that plaintiff may be able to secure in this case with
the ownership and possession of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the public auction sale. It has also
been noted that ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier
ordered the attachment bond filed by plaintiff to guaranty damages to defendants
to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to
serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the amount
ofP900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to

onlyP840,216.92, it would be inequitable, unfair and unjust to award the excess to

the defendants who are not entitled to damages and who did not put up a single
centavo to raise the amount of P900,000.00 aside from the fact that they are not
the owners of the nets and floats. For this reason, the defendants are hereby
relieved from any and all liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession and ownership of the nets
and floats and for the reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED. [3]
The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The
total price of the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation. [4]
The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondent filed a collection suit against Chua, Yao and Petitioner Lim
Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought
against the three in their capacities as general partners, on the allegation that
Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. [5] On September 20,
1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then
docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his
liability and requesting a reasonable time within which to pay. He also turned over
to respondent some of the nets which were in his possession. Peter Yao filed an
Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear
in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.
[6]
The trial court maintained the Writ, and upon motion of private respondent,
ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales proceeds
of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that
Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. [8]
The trial court ruled that a partnership among Lim, Chua and Yao existed
based (1) on the testimonies of the witnesses presented and (2) on a Compromise
Agreement executed by the three [9] in Civil Case No. 1492-MN which Chua and Yao
had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of
nullity of commercial documents; (b) a reformation of contracts; (c) a declaration

of ownership of fishing boats; (d) an injunction and (e) damages. [10] The
Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels
sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00
shall be applied as full payment for P3,250,000.00 in favor of JL Holdings
Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever
the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. [11]
The trial court noted that the Compromise Agreement was silent as to the
nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed
the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua
and Yao in a fishing business and may thus be held liable as a such for the fishing
nets and floats purchased by and for the use of the partnership. The appellate
court ruled:
The evidence establishes that all the defendants including herein appellant Lim
Tong Lim undertook a partnership for a specific undertaking, that is for
commercial fishing x x x. Obviously, the ultimate undertaking of the defendants
was to divide the profits among themselves which is what a partnership
essentially is x x x. By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves (Article 1767, New Civil Code).
[13]

Hence, petitioner brought this recourse before this Court. [14]

The Issues

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

by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Courts Ruling

The Petition is devoid of merit.

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

In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations
were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was
a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated
February 1, 1990, showed that he had merely leased to the two the main asset of
the purported partnership -- the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of
the boat.
We are not persuaded by the arguments of petitioner. The facts as found by
the two lower courts clearly showed that there existed a partnership among Chua,
Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three
existed based on the following factual findings: [15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim
Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing,
dry docking and other expenses for the boats would be shouldered by Chua and
Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to
the partnership in the amount of P1 million secured by a check, because of which,
Yao and Chua entrusted the ownership papers of two other boats, Chuas FB Lady
Anne Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration
of nullity of commercial documents; (b) reformation of contracts; (c) declaration
of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement
executed between the parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and
Lim had decided to engage in a fishing business, which they started by buying
boats worth P3.35 million, financed by a loan secured from Jesus Lim who was
petitioners brother. In their Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of the sale of the boats, and to
divide equally among them the excess or loss. These boats, the purchase and the
repair of which were financed with borrowed money, fell under the term common
fund under Article 1767. The contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats would be divided
equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of
the boat, but also to that of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to involve himself so much in
buying the boat but not in the acquisition of the aforesaid equipment, without
which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua
and Yao, a partnership engaged in the fishing business. They purchased the
boats, which constituted the main assets of the partnership, and they agreed that
the proceeds from the sales and operations thereof would be divided among
them.
We stress that under Rule 45, a petition for review like the present case
should involve only questions of law. Thus, the foregoing factual findings of the
RTC and the CA are binding on this Court, absent any cogent proof that the
present action is embraced by one of the exceptions to the rule. [16] In assailing the
factual findings of the two lower courts, petitioner effectively goes beyond the
bounds of a petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also claims that
the settlement was entered into only to end the dispute among them, but not to
adjudicate their preexisting rights and obligations. His arguments are
baseless. The Agreement was but an embodiment of the relationship extant
among the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review
and thoroughly appraise all relevant facts. Both lower courts have done so and
have found, correctly, a preexisting partnership among the parties. In implying
that the lower courts have decided on the basis of one piece of document alone,

petitioner fails to appreciate that the CA and the RTC delved into the history of
the document and explored all the possible consequential combinations in
harmony with law, logic and fairness. Verily, the two lower courts factual findings
mentioned above nullified petitioners argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor
of the boats to Chua and Yao, not a partner in the fishing venture. His argument
allegedly finds support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B Lourdes where the nets
were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided amongthe three of them. No lessor would do
what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business
agreement with Chua and Yao, in which debts were undertaken in order to finance
the acquisition and the upgrading of the vessels which would be used in their
fishing business. The sale of the boats, as well as the division among the three of
the balance remaining after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his own property but an
asset of the partnership. It is not uncommon to register the properties acquired
from a loan in the name of the person the lender trusts, who in this case is the
petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell
his property to pay a debt he did not incur, if the relationship among the three of
them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability

can be imputed only to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence. The
reason behind this doctrine is obvious - an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power
and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to

act as its representatives or agents do so without authority and at their own

risk. And as it is an elementary principle of law that a person who acts as an
agent without authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a person
acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent. [17]
The doctrine of corporation by estoppel may apply to the alleged corporation
and to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal
defects, may be held liable for contracts they impliedly assented to or took
advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether
petitioner should be held jointly[18] liable with Chua and Yao. Petitioner contests
such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the
contracts and since he never directly transacted with the respondent corporation,
ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat which has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of the nets, because the Writ
has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao
decided to form a corporation. Although it was never legally formed for unknown
reasons, this fact alone does not preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the law on estoppel, those acting on
behalf of a corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to
be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:
[19]

A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position , entraps and destroys the

other.It is, rather, a contest in which each contending party fully and fairly lays
before the court the facts in issue and then, brushing aside as wholly trivial and
indecisive all imperfections of form and technicalities of procedure, asks that
justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a
rapiers thrust.Technicality, when it deserts its proper office as an aid to justice
and becomes its great hindrance and chief enemy, deserves scant consideration
from courts. There should be no vested rights in technicalities.
Third Issue: Validity of Attachment

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