G.R. NOS. 166299-300 December 13, 2005 4.02 In addition . . .
4.02 In addition . . . the joint venture/partnership … had also acquired [various other assets], but Eduardo caused to
AURELIO K. LITONJUA, JR., Petitioner,
vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC.,
LITONJUA SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER, INC., E & L REALTY,
(formerly E & L INT’L SHIPPING CORP.), FNP CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV.
REALTY CO., INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP., "L" DEV. CORP, LCM
THEATRICAL ENTERPRISES, INC., LITONJUA SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP.,
SARATOGA REALTY, INC., ACT THEATER INC. (formerly General Theatrical & Film Exchange, INC.),
AVENUE REALTY, INC., AVENUE THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF
PHILIPPINES), Respondents.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K. Litonjua, Jr. seeks to nullify and
set aside the Decision of the Court of Appeals (CA) dated March 31, 20041 in consolidated cases C.A. G.R. Sp. No.
76987 and C.A. G.R. SP. No 78774 and its Resolution dated December 07, 2004,2 denying petitioner’s motion for
reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers.
The legal dispute between them started when, on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City,
Aurelio filed a suit against his brother Eduardo and herein respondent Robert T. Yang (Yang) and several
corporations for specific performance and accounting. In his complaint, 3 docketed as Civil Case No. 69235 and
eventually raffled to Branch 68 of the court,4 Aurelio alleged that, since June 1973, he and Eduardo are into a joint
venture/partnership arrangement in the Odeon Theater business which had expanded thru investment in Cineplex,
Inc., LCM Theatrical Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue Realty,
Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint as petitioner’s and
Eduardo’s partner in their Odeon Theater investment.5 The same complaint also contained the following material
averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint venture/partnership for the continuation of
their family business and common family funds ….
3.01.1 This joint venture/[partnership] agreement was contained in a memorandum addressed by Eduardo to his
siblings, parents and other relatives. Copy of this memorandum is attached hereto and made an integral part
as Annex "A" and the portion referring to [Aurelio] submarked as Annex "A-1".
3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio’s] retaining his share in
the remaining family businesses (mostly, movie theaters, shipping and land development) and contributing his
industry to the continued operation of these businesses, [Aurelio] will be given P1 Million or 10% equity in all these
businesses and those to be subsequently acquired by them whichever is greater. . . .
4.01 … from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio] and Eduardo had accumulated
in their joint venture/partnership various assets including but not limited to the corporate defendants and [their]
respective assets.
be registered in the names of other parties….
xxx xxx xxx
4.04 The substantial assets of most of the corporate defendants consist of real properties …. A list of some of these
real properties is attached hereto and made an integral part as Annex "B".
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio] requested for an
accounting and liquidation of his share in the joint venture/partnership [but these demands for complete accounting
and liquidation were not heeded].
xxx xxx xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate defendants as well
as Bobby [Yang], are transferring . . . various real properties of the corporations belonging to the joint
venture/partnership to other parties in fraud of [Aurelio]. In consequence, [Aurelio] is therefore causing at this time
the annotation on the titles of these real properties… a notice of lis pendens …. (Emphasis in the original;
underscoring and words in bracket added.)
For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to have been meant for him by his
brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married. ….
I am trying my best to mold you the way I work so you can follow the pattern …. You will be the only one left with the
company, among us brothers and I will ask you to stay as I want you to run this office every time I am away. I want
you to run it the way I am trying to run it because I will be all alone and I will depend entirely to you (sic). My sons will
not be ready to help me yet until about maybe 15/20 years from now. Whatever is left in the corporation, I will make
sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two
will gamble the whole thing of what I have and what you are entitled to. …. It will be you and me alone on this. If ever
I pass away, I want you to take care of all of this. You keep my share for my two sons are ready take over but give
them the chance to run the company which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give you first ONE HUNDRED THOUSANDS PESOS: (P100,
000.00) in cash or asset, like Lt. Artiaga so you can live better there. The rest I will give you in form of stocks which
you can keep. This stock I assure you is good and saleable. I will also gladly give you the share of Wack-Wack
…and Valley Golf … because you have been good. The rest will be in stocks from all the corporations which I repeat,
ten percent (10%) equity. 6
On December 20, 2002, Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER With
Compulsory Counterclaim denying under oath the material allegations of the complaint, more particularly that portion
thereof depicting petitioner and Eduardo as having entered into a contract of partnership. As affirmative defenses,
Eduardo, et al., apart from raising a jurisdictional matter, alleged that the complaint states no cause of action, since
no cause of action may be derived from the actionable document, i.e., Annex "A-1", being void under the terms of
Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further alleged that whatever undertaking Eduardo Hence, petitioner’s present recourse, on the contention that the CA erred:
agreed to do, if any, under Annex "A-1", are unenforceable under the provisions of the Statute of Frauds.7
A. When it ruled that there was no partnership created by the actionable document because this was not a public
For his part, Yang - who was served with summons long after the other defendants submitted their answer – moved instrument and immovable properties were contributed to the partnership.
to dismiss on the ground, inter alia, that, as to him, petitioner has no cause of action and the complaint does not
state any.8 Petitioner opposed this motion to dismiss.
B. When it ruled that the actionable document did not create a demandable right in favor of petitioner.

On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.9 To this motion, petitioner
C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and
interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.10

D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done was to support
Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order dated March 5,
his pleaded cause of action by another legal perspective/argument.
2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial on April 10, 2003.11

The petition lacks merit.

In another Omnibus Order of April 2, 2003, the same court denied the motion of Eduardo, et al., for
reconsideration12 and Yang’s motion to dismiss. The following then transpired insofar as Yang is concerned:
Petitioner’s demand, as defined in the petitory portion of his complaint in the trial court, is for delivery or payment to
him, as Eduardo’s and Yang’s partner, of his partnership/joint venture share, after an accounting has been duly
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of the April 2,
conducted of what he deems to be partnership/joint venture property.19
2003 Omnibus Order and to pursue his failed motion to dismiss13 to its full resolution.

2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2, 2003, but his motion was denied
in an Order of July 4, 2003.14
3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition for certiorari under Rule 65 of the Rules
of Court, docketed as CA-G.R. SP No. 78774,15 to nullify the separate orders of the trial court, the first denying his
motion to dismiss the basic complaint and, the second, denying his motion for reconsideration.
A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful
commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses
between them.20 A contract of partnership is defined by the Civil Code as one where two or more persons bound
themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits
among themselves.21 A joint venture, on the other hand, is hardly distinguishable from, and may be likened to, a
partnership since their elements are similar, i.e., community of interests in the business and sharing of profits and
losses. Being a form of partnership, a joint venture is generally governed by the law on partnership. 22

Earlier, Eduardo and the corporate defendants, on the contention that grave abuse of discretion and injudicious
haste attended the issuance of the trial court’s aforementioned Omnibus Orders dated March 5, and April 2, 2003,
sought relief from the CA via similar recourse. Their petition for certiorari was docketed as CA G.R. SP No. 76987.
Per its resolution dated October 2, 2003,16 the CA’s 14th Division ordered the consolidation of CA G.R. SP No.
78774 with CA G.R. SP No. 76987.
The underlying issue that necessarily comes to mind in this proceedings is whether or not petitioner and respondent
Eduardo are partners in the theatre, shipping and realty business, as one claims but which the other denies. And the
issue bearing on the first assigned error relates to the question of what legal provision is applicable under the
premises, petitioner seeking, as it were, to enforce the actionable document - Annex "A-1" - which he depicts in his
complaint to be the contract of partnership/joint venture between himself and Eduardo. Clearly, then, a look at the
legal provisions determinative of the existence, or defining the formal requisites, of a partnership is indicated.
Foremost of these are the following provisions of the Civil Code:

Following the submission by the parties of their respective Memoranda of Authorities, the appellate court came out
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
with the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang, as lead petitioners therein,
contributed thereto, in which case a public instrument shall be necessary.
disposing as follows:

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these consolidated
appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.
cases annulling, reversing and setting aside the assailed orders of the court a quo dated March 5, 2003, April 2,
2003 and July 4, 2003 and the complaint filed by private respondent [now petitioner Aurelio] against all the
petitioners [now herein respondents Eduardo, et al.] with the court a quo is hereby dismissed. Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and
the members thereof to third persons.
SO ORDERED.17 (Emphasis in the original; words in bracket added.)
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of
said property is not made, signed by the parties, and attached to the public instrument.
Explaining its case disposition, the appellate court stated, inter alia, that the alleged partnership, as evidenced by the
actionable documents, Annex "A" and "A-1" attached to the complaint, and upon which petitioner solely predicates
his right/s allegedly violated by Eduardo, Yang and the corporate defendants a quo is "void or legally inexistent". Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As an unsigned
document, there can be no quibbling that Annex "A-1" does not meet the public instrumentation requirements
exacted under Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership
In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally assailed Resolution
involving more than P3,000.00 in money or property, Annex "A-1" cannot be presented for notarization, let alone
of December 7, 2004.18 .
registered with the Securities and Exchange Commission (SEC), as called for under the Article 1772 of the Code.
And inasmuch as the inventory requirement under the succeeding Article 1773 goes into the matter of validity when
immovable property is contributed to the partnership, the next logical point of inquiry turns on the nature of
petitioner’s contribution, if any, to the supposed partnership.
The CA, addressing the foregoing query, correctly stated that petitioner’s contribution consisted of immovables and
real rights. Wrote that court:
A further examination of the allegations in the complaint would show that [petitioner’s] contribution to the so-called
"partnership/joint venture" was his supposed share in the family business that is consisting of movie theaters,
shipping and land development under paragraph 3.02 of the complaint. In other words, his contribution as a partner
in the alleged partnership/joint venture consisted of immovable properties and real rights. …. 23
Significantly enough, petitioner matter-of-factly concurred with the appellate court’s observation that, prescinding
from what he himself alleged in his basic complaint, his contribution to the partnership consisted of his share in the
Litonjua family businesses which owned variable immovable properties. Petitioner’s assertion in his motion for
reconsideration24 of the CA’s decision, that "what was to be contributed to the business [of the partnership] was
[petitioner’s] industry and his share in the family [theatre and land development] business" leaves no room for
speculation as to what petitioner contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as
long real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his brother Eduardo, contributed immovables. In context, the
more important consideration is that real property was contributed, in which case an inventory of the contributed
property duly signed by the parties should be attached to the public instrument, else there is legally no partnership to
speak of.
Petitioner, in an obvious bid to evade the application of Article 1773, argues that the immovables in question were
not contributed, but were acquired after the formation of the supposed partnership. Needless to stress, the Court
cannot accord cogency to this specious argument. For, as earlier stated, petitioner himself admitted contributing his
share in the supposed shipping, movie theatres and realty development family businesses which already owned
immovables even before Annex "A-1" was allegedly executed.
Considering thus the value and nature of petitioner’s alleged contribution to the purported partnership, the Court,
even if so disposed, cannot plausibly extend Annex "A-1" the legal effects that petitioner so desires and pleads to be
given. Annex "A-1", in fine, cannot support the existence of the partnership sued upon and sought to be enforced.
The legal and factual milieu of the case calls for this disposition. A partnership may be constituted in any form, save
when immovable property or real rights are contributed thereto or when the partnership has a capital of at least
₱3,000.00, in which case a public instrument shall be necessary. 25 And if only to stress what has repeatedly been
articulated, an inventory to be signed by the parties and attached to the public instrument is also indispensable to the
validity of the partnership whenever immovable property is contributed to it.
Given the foregoing perspective, what the appellate court wrote in its assailed Decision26 about the probative value
and legal effect of Annex "A-1" commends itself for concurrence:
Considering that the allegations in the complaint showed that [petitioner] contributed immovable properties to the
alleged partnership, the "Memorandum" (Annex "A" of the complaint) which purports to establish the said
"partnership/joint venture" is NOT a public instrument and there was NO inventory of the immovable property duly
signed by the parties. As such, the said "Memorandum" … is null and void for purposes of establishing the existence
of a valid contract of partnership. Indeed, because of the failure to comply with the essential formalities of a valid
contract, the purported "partnership/joint venture" is legally inexistent and it produces no effect whatsoever.
Necessarily, a void or legally inexistent contract cannot be the source of any contractual or legal right. Accordingly,
the allegations in the complaint, including the actionable document attached thereto, clearly demonstrates that
[petitioner] has NO valid contractual or legal right which could be violated by the [individual respondents] herein. As a
consequence, [petitioner’s] complaint does NOT state a valid cause of action because NOT all the essential
elements of a cause of action are present. (Underscoring and words in bracket added.)
Likewise well-taken are the following complementary excerpts from the CA’s equally assailed Resolution of
December 7, 200427 denying petitioner’s motion for reconsideration:
Further, We conclude that despite glaring defects in the allegations in the complaint as well as the actionable
document attached thereto (Rollo, p. 191), the [trial] court did not appreciate and apply the legal provisions which
were brought to its attention by herein [respondents] in the their pleadings. In our evaluation of [petitioner’s]
complaint, the latter alleged inter alia to have contributed immovable properties to the alleged partnership but the
actionable document is not a public document and there was no inventory of immovable properties signed by the
parties. Both the allegations in the complaint and the actionable documents considered, it is crystal clear that
[petitioner] has no valid or legal right which could be violated by [respondents]. (Words in bracket added.)
Under the second assigned error, it is petitioner’s posture that Annex "A-1", assuming its inefficacy or nullity as a
partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts it in this
petition:
43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable
contract even though it may not be a partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).
44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights and
obligations of the parties and which rights and obligations may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically labeled or pigeonholed into a category of nominate
contract does not mean it is void or unenforceable.
Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA after he
experienced a reversal of fortune thereat - as an afterthought. The appellate court, however, cannot really be faulted
for not yielding to petitioner’s dubious stratagem of altering his theory of joint venture/partnership to an innominate
contract. For, at bottom, the appellate court’s certiorari jurisdiction was circumscribed by what was alleged to have
been the order/s issued by the trial court in grave abuse of discretion. As respondent Yang pointedly
observed,28 since the parties’ basic position had been well-defined, that of petitioner being that the actionable
document established a partnership/joint venture, it is on those positions that the appellate court exercised its
certiorari jurisdiction. Petitioner’s act of changing his original theory is an impermissible practice and constitutes, as
the CA aptly declared, an admission of the untenability of such theory in the first place.
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended that the
actionable instrument may be considered an innominate contract. xxx Verily, this now changes [petitioner’s] theory
of the case which is not only prohibited by the Rules but also is an implied admission that the very theory he himself
… has adopted, filed and prosecuted before the respondent court is erroneous.
Be that as it may . …. We hold that this new theory contravenes [petitioner’s] theory of the actionable document
being a partnership document. If anything, it is so obvious we do have to test the sufficiency of the cause of action on
the basis of partnership law xxx.29 (Emphasis in the original; Words in bracket added).
But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected innominate contract, petitioner’s
complaint would still be dismissible as against Eduardo and, more so, against Yang. It cannot be over-emphasized
that petitioner points to Eduardo as the author of Annex "A-1". Withal, even on this consideration alone, petitioner’s
claim against Yang is doomed from the very start.
As it were, the only portion of Annex "A-1" which could perhaps be remotely regarded as vesting petitioner with a
right to demand from respondent Eduardo the observance of a determinate conduct, reads:
xxx You will be the only one left with the company, among us brothers and I will ask you to stay as I want you to run
this office everytime I am away. I want you to run it the way I am trying to run it because I will be alone and I will
depend entirely to you, My sons will not be ready to help me yet until about maybe 15/20 years from now. Whatever
is left in the corporation, I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%)
equity, whichever is greater. (Underscoring added)
[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a "partner" of [Eduardo] and the
[petitioner] in the Odeon Theater Investment which expanded through reinvestments of profits and direct investments
in several corporations, thus:
xxx xxx xxx

It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed
Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with petitioner and the …respondent.
wrote Annex "A-1", is a promise which is not to be performed within one year from "contract" execution on June 22,
However, there was NO allegation in the complaint which directly alleged how the supposed contractual relation was
1973. Accordingly, the agreement embodied in Annex "A-1" is covered by the Statute of Frauds
created between [petitioner] and …Yang. More importantly, however, the foregoing ruling of this Court that the
and ergo unenforceable for non-compliance therewith.30 By force of the statute of frauds, an agreement that by its
purported partnership between [Eduardo] is void and legally inexistent directly affects said claim against …Yang.
terms is not to be performed within a year from the making thereof shall be unenforceable by action, unless the
Since [petitioner] is trying to establish his claim against … Yang by linking him to the legally inexistent partnership . . .
same, or some note or memorandum thereof, be in writing and subscribed by the party charged. Corollarily, no
such attempt had become futile because there was NOTHING that would contractually connect [petitioner] and …
action can be proved unless the requirement exacted by the statute of frauds is complied with. 31
Yang. To establish a valid cause of action, the complaint should have a statement of fact upon which to connect
[respondent] Yang to the alleged partnership between [petitioner] and respondent [Eduardo], including their alleged
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family businesses investment in the Odeon Theater. A statement of facts on those matters is pivotal to the complaint as they would
supposedly promised by Eduardo to give in the near future. Any suggestion that the stated amount or the equity constitute the ultimate facts necessary to establish the elements of a cause of action against … Yang. 35
component of the promise was intended to go to a common fund would be to read something not written
in Annex "A-1". Thus, even this angle alone argues against the very idea of a partnership, the creation of which
Pressing its point, the CA later stated in its resolution denying petitioner’s motion for reconsideration the following:
requires two or more contracting minds mutually agreeing to contribute money, property or industry to a common
fund with the intention of dividing the profits between or among themselves.32
xxx Whatever the complaint calls it, it is the actionable document attached to the complaint that is controlling. Suffice
it to state, We have not ignored the actionable document … As a matter of fact, We emphasized in our decision …
In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance anchored on an
that insofar as [Yang] is concerned, he is not even mentioned in the said actionable document. We are therefore
actionable document of partnership which is legally inexistent or void or, at best, unenforceable does not state a
puzzled how a person not mentioned in a document purporting to establish a partnership could be considered a
cause of action as against respondent Eduardo and the corporate defendants. And if no of action can successfully
partner.36 (Words in bracket ours).
be maintained against respondent Eduardo because no valid partnership existed between him and petitioner, the
Court cannot see its way clear on how the same action could plausibly prosper against Yang. Surely, Yang could not
have become a partner in, or could not have had any form of business relationship with, an inexistent partnership. The last issue raised by petitioner, referring to whether or not he changed his theory of the case, as peremptorily
determined by the CA, has been discussed at length earlier and need not detain us long. Suffice it to say that after
the CA has ruled that the alleged partnership is inexistent, petitioner took a different tack. Thus, from a joint
As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to him as his
venture/partnership theory which he adopted and consistently pursued in his complaint, petitioner embraced the
partner. In fact, attendant circumstances would indicate the contrary. Consider:
innominate contract theory. Illustrative of this shift is petitioner’s statement in par. #8 of his motion for reconsideration
of the CA’s decision combined with what he said in par. # 43 of this petition, as follows:
1. Petitioner asserted in his complaint that his so-called joint venture/partnership with Eduardo was "for the
continuation of their family business and common family funds which were theretofore being mainly managed by
8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal matter. What
Eduardo." 33 But Yang denies kinship with the Litonjua family and petitioner has not disputed the disclaimer.
is determinative for purposes of sufficiency of the complainant’s allegations, is whether the actionable document
bears out an actionable contract – be it a partnership, a joint venture or whatever or some innominate contract … It
2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with Eduardo and may be noted that one kind of innominate contract is what is known as du ut facias (I give that you may do).37
what his share in the businesses will be. No allegation is made whatsoever about what Yang contributed, if any, let
alone his proportional share in the profits. But such allegation cannot, however, be made because, as aptly observed
43. Contrariwise, this actionable document, especially its above-quoted provisions, established an actionable
by the CA, the actionable document did not contain such provision, let alone mention the name of Yang. How,
contract even though it may not be a partnership. This actionable contract is what is known as an innominate
indeed, could a person be considered a partner when the document purporting to establish the partnership contract
contract (Civil Code, Article 1307).38
did not even mention his name.

Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due process;
3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business partners in the [respondent]
hence, the proscription against a party shifting from one theory at the trial court to a new and different theory in the
corporations," while "Bobby is his and Eduardo’s partner in their Odeon Theater investment’ (par. 2.03). This means
appellate court.39 On the same rationale, an issue which was neither averred in the complaint cannot be raised for
that the partnership between petitioner and Eduardo came first; Yang became their partner in their Odeon Theater
the first time on appeal.40 It is not difficult, therefore, to agree with the CA when it made short shrift of petitioner’s
investment thereafter. Several paragraphs later, however, petitioner would contradict himself by alleging that his
innominate contract theory on the basis of the foregoing basic reasons.
"investment and that of Eduardo and Yang in the Odeon theater business has expanded through a reinvestment of
profit income and direct investments in several corporation including but not limited to [six] corporate respondents"
This simply means that the "Odeon Theatre business" came before the corporate respondents. Significantly enough, Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case of changing
petitioner refers to the corporate respondents as "progeny" of the Odeon Theatre business. 34 theories but of supporting his pleaded cause of action – that of the existence of a partnership - by another legal
perspective/argument, strikes the Court as a strained attempt to rationalize an untenable position. Paragraph 12 of
his motion for reconsideration of the CA’s decision virtually relegates partnership as a fall-back theory. Two
Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence he sourced
paragraphs later, in the same notion, petitioner faults the appellate court for reading, with myopic eyes, the
his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured and formulated the legal
actionable document solely as establishing a partnership/joint venture. Verily, the cited paragraphs are a study of a
situation in the following wise:
party hedging on whether or not to pursue the original cause of action or altogether abandoning the same, thus:
12. Incidentally, assuming that the actionable document created a partnership between [respondent] Eduardo, Sr. 3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area
and [petitioner], no immovables were contributed to this partnership. xxx 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;
14. All told, the Decision takes off from a false premise that the actionable document attached to the complaint does
not establish a contractual relationship between [petitioner] and … Eduardo, Sr. and Roberto T Yang simply because 4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
his document does not create a partnership or a joint venture. This is … a myopic reading of the actionable improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
document.
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
Per the Court’s own count, petitioner used in his complaint the mixed words "joint venture/partnership" nineteen (19) improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
times and the term "partner" four (4) times. He made reference to the "law of joint venture/partnership [being
applicable] to the business relationship … between [him], Eduardo and Bobby [Yang]" and to his "rights in all specific
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage
properties of their joint venture/partnership". Given this consideration, petitioner’s right of action against respondents
their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of
Eduardo and Yang doubtless pivots on the existence of the partnership between the three of them, as purportedly
such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
evidenced by the undated and unsigned Annex "A-1". A void Annex "A-1", as an actionable document of partnership,
their behalf, and to endorse and deposit all notes and checks for them;
would strip petitioner of a cause of action under the premises. A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is dismissible for failure to state of action.
So, in gist, said the Court of Appeals. The Court agrees. 7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;
WHEREFORE, the instant petition is DENIED and the impugned Decision and Resolution of the Court of
Appeals AFFIRMED. 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;
G.R. No. L-9996 October 15, 1957

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,
deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
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.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo
R. Rosete for Respondents. 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:
CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a INCOME TAXES
decision of the Court of Tax Appeals, the dispositive part of which reads:
1945 14.84
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 1946 1,144.71
review filed by petitioner is hereby dismissed with costs against petitioners.
1947 10.34
It appears from the stipulation submitted by the parties:
1948 1,912.30
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,. 1949 1,575.90

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. Total including surcharge and compromise P6,157.09
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
REAL ESTATE DEALER'S FIXED TAX
 SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
1946 P37.50 companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compañias colectivas).
1947 150.00
Article 1767 of the Civil Code of the Philippines provides:
1948 150.00
By the contract of partnership two or more persons bind themselves to contribute money, properly, or
1949 150.00 industry to a common fund, with the intention of dividing the profits among themselves.

Total including penalty P527.00 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
RESIDENCE TAXES OF CORPORATION 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
1945 P38.75 engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1946 38.75 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.
1947 38.75

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
1948 38.75 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
1949 38.75 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
Total including surcharge P193.75 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
TOTAL TAXES DUE P6,878.34. business transactions engaged in the purpose of gain.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
from the payment of the taxes in question, with costs against the respondent. not even suggest that there has been any change in the utilization thereof.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned 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:
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.

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding taxable year from all sources by every corporation organized
in, or existing under the laws of the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the
following: . . .
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; emphasis supplied.) .
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.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of
engaging in real estate business for profit. The series of transactions which they had undertaken attest to this. This
appears in the following portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for P18,000. This was soon
followed on April 23, 1944, by the acquisition of another real state for P108,825. 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 petitioner in February, 1943,
 In other words, we cannot but perceive a character of habitually peculiar to business transactions engaged This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not suffice to
in for purposes of gain. establish the intent necessary to constitute a partnership, the collective effect of these circumstances (referring to the
series of transactions) such as to leave no room for doubt on the existence of said intent in petitioners herein."
I wish however to make to make the following observation:
G.R. No. 136448 November 3, 1999
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides: LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish partnership, whether or not the person sharing
them have a joint or common right or interest in any property from which the returns are derived; PANGANIBAN, J.:

From the above it appears that the fact that those who agree to form a co-ownership shared or do not share any
profits made by the use of property held in common does not convert their venture into a partnership. Or the sharing
of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint
or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence
of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence
of a judicial personality different from that of the individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I,
1953 ed., pp. 635- 636).
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide
the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed
assets. Being partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who
may not have directly transacted on its behalf, but reaped benefits from that contract.
The Case

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court
profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership.
of Appeals in CA-GR CV
41477, 1 which disposed as follows:
Persons who contribute property or funds for a common enterprise and agree to share the gross returns of
that enterprise in proportion to their contribution, but who severally retain the title to their respective
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
contribution, are not thereby rendered partners. They have no common stock or capital, and no community
affirmed. 2
of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the law of
Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as
follows:
A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does
not agreement to share the profits and loses on the sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.) WHEREFORE, the Court rules:

Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, holding as 1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled September 20, 1990;
to share in plaintiff's commissions, no partnership existed as between the parties, whatever relation may
have been as to third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)
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
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally a and the proceedings that transpired during the trial of this case;
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole
property. (Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.) 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;
The common ownership of property does not itself create a partnership between the owners, though they
may use it for purpose of making gains; and they may, without becoming partners, agree among
b. 12% interest per annum counted from date of plaintiff's invoices and
themselves as to the management and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.) computed on their respective amounts as follows:
 i. Accrued interest of P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No.
14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426
for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing
P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on
the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration of the nets
during the pendency of this case, it was ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of
the sale paid for by plaintiff was deposited in court. In effect, the amount of
P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for the P900,000.00 cash bidded and
paid for by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may
be entitled to in this case will have to be satisfied from the amount of P900,000.00 as
this amount replaced the attached nets and floats. Considering, however, that the total
judgment obligation as computed above would amount to only P840,216.92, it would
be inequitable, unfair and unjust to award the excess to the defendants who are not
entitled to damages and who did not put up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not the owners of the nets and floats.
For this reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to retain
possession and ownership of the nets and floats and for the reimbursement of the
P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who
however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred
pieces of floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing
Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange
Commission. 5 On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas,
Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable
time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter
Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present
evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand,
filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial
court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of
P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which
Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an
injunction and (e) damages. 10 The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of
JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may
thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing . . . . Oviously,
the ultimate undertaking of the defendants was to divide the profits among themselves which is
what a partnership essentially is . . . . By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE
CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court must
resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the
CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of
the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua
and Yao, for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased to the two the main
asset of the purported partnership — the fishing boat F/B Lourdes. The lease was for six months, with a monthly
rental of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that
there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 — By the contract of partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual
findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing
to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale
over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking
and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chua's FB Lady Anne Mel and Yao's
FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the
parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who
was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan
with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under
Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided
equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of
their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the
fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus,
the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the
present action is embraced by one of the exceptions to the rule. 16 In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them,
but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual findings
mentioned above nullified petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration
papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats
to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor
would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among
all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts
were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their
fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the
name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao,
and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary
principle of law that a person who 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 rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court
of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners
owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the
payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets
remained with Respondent Philippine Fishing Gear, until full payment thereof.
G.R. No. L-45425 April 29, 1939
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of P1,863.44,
with legal interest thereon, which they paid under protest by way of income tax. They appealed from the decision
rendered in the case on October 23, 1936 by the Court of First Instance of the City of Manila, which dismissed the
action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned attorneys, and
hereby agree to respectfully submit to this Honorable Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector
of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes ticket
valued at two pesos (P2), subscribed and paid therefor the amounts as follows:
1. Jose Gatchalian .................................................................................................... P0.18
2. Gregoria Cristobal ............................................................................................... .18
3. Saturnina Silva .................................................................................................... .08
4. Guillermo Tapia ................................................................................................... .13
5. Jesus Legaspi ...................................................................................................... .15
6. Jose Silva ............................................................................................................. .07
7. Tomasa Mercado ................................................................................................ .08
8. Julio Gatchalian ................................................................................................... .13
9. Emiliana Santiago ................................................................................................ .13
10. Maria C. Legaspi ............................................................................................... .16
11. Francisco Cabral ............................................................................................... .13
12. Gonzalo Javier .................................................................................................... .14
13. Maria Santiago ................................................................................................... .17
14. Buenaventura Guzman ...................................................................................... .13
15. Mariano Santos ................................................................................................. .14
Total ........................................................................................................ 2.00
3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary course
of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket
bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the name of
Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned ticket
bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the corresponding
check covering the above-mentioned prize of P50,000 was drawn by the National Charity Sweepstakes
Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which check was
cashed during the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file
the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that on
December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is enclosed as
Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said amount
requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan, and requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof;
giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said amount of but that on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of
P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof; which is attached and marked Exhibit P and made a part hereof; and

7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of 16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight hundred
which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them but that defendant
income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.
separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to D-
15, respectively, in order of their names listed in the caption of this case and made parts hereof; a
17. The parties hereto reserve the right to present other and additional evidence if necessary.
statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover
up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by
Jose Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof; Exhibit E referred to in the stipulation is of the following tenor:

8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed, To whom it may concern:
denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated his
demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935
within which to pay the said tax; I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of
August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount indicated
below and the part of may share remaining is also shown to wit:
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on
March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a Purchaser Amount Address
warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I
is enclosed and made a part hereof; 1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.

10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said 2. Buenaventura Guzman ............................... .13 - Do -
plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under
3. Maria Santiago ............................................ .17 - Do -
protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan,
as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part
4. Gonzalo Javier .............................................. .14 - Do -
hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and
penalties by monthly installments;
5. Francisco Cabral .......................................... .13 - Do -

11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject to 6. Maria C. Legaspi .......................................... .16 - Do -
the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt
payment of each installments as it becomes due; 7. Emiliana Santiago ......................................... .13 - Do -

8. Julio Gatchalian ............................................ .13 - Do -

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a
part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly installments at 9. Jose Silva ...................................................... .07 - Do -
the rate of P118.70 a month, the first payment under protest to be effected on or before July 31, 1935;
10. Tomasa Mercado ....................................... .08 - Do -
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51,
a copy of which protest is attached and marked Exhibit L, but that defendant in his letter dated August 1, 11. Jesus Legaspi ............................................. .15 - Do -
1935 overruled the protest and denied the request for refund of the plaintiffs;
12. Guillermo Tapia ........................................... .13 - Do -
14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the terms 13. Saturnina Silva ............................................ .08 - Do -
and conditions of bond filed by them, the defendant in his letter dated July 23, 1935, copy of which is
attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute within five 14. Gregoria Cristobal ....................................... .18 - Do -
days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;
15. Jose Gatchalian ............................................ .18 - Do -
15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the
plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano
Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93 2.00 Total cost of said
representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by
income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and that on
 ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize that might
...........................
be won by said ticket.
15. Mariano Santos
D-15 .14 3,325 360 2,965
Pulilan, Bulacan, P.I. ........................................

<="" td="" style="font-size:

(Sgd.) JOSE GATCHALIAN 14px; text-decoration: none;
2.00 50,000 color: rgb(0, 0, 128); font-
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows: family: arial, verdana;">

RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19,
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two following:
1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
(1) Whether the plaintiffs formed a partnership, or merely a community of property without a personality of its own; in
the first case it is admitted that the partnership thus formed is liable for the payment of income tax, whereas if there
was merely a community of property, they are exempt from such payment; and (2) whether they should pay the tax
Exhibit Purchase Price Net collectively or whether the latter should be prorated among them and paid individually.
Name Expenses
No. Price Won prize

1. Jose Gatchalian The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2
D-1 P0.18 P4,425 P 480 3,945 of Act No. 3761, reading as follows:
..........................................

2. Gregoria Cristobal
D-2 .18 4,575 2,000 2,575 SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income
......................................
received in the preceding calendar year from all sources by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association or insurance company, organized in the
3. Saturnina Silva
D-3 .08 1,875 360 1,515 Philippine Islands, no matter how created or organized, but not including duly registered general
.............................................
copartnership (compañias colectivas), a tax of three per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the total net income received in the preceding
4. Guillermo Tapia
D-4 .13 3,325 360 2,965 calendar year from all sources within the Philippine Islands by every corporation, joint-stock company,
..........................................
partnership, joint account (cuenta en participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other
5. Jesus Legaspi by Maria
D-5 .15 3,825 720 3,105 interest-bearing obligations of residents, corporate or otherwise: Provided, however, That nothing in this
Cristobal .........
section shall be construed as permitting the taxation of the income derived from dividends or net profits on
which the normal tax has been paid.
6. Jose Silva
D-6 .08 1,875 360 1,515
....................................................
The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company,
7. Tomasa Mercado partnership, joint account (cuenta en participacion), association, or insurance company, or property, real,
D-7 .07 1,875 360 1,515
....................................... personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of section two of Act
Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine
8. Julio Gatchalian by Beatriz hundred and twenty-six.
D-8 .13 3,150 240 2,910
Guzman .......

9. Emiliana Santiago The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock
D-9 .13 3,325 360 2,965 company, partnership, joint account (cuenta en participacion), association, or insurance company in the
......................................
calendar year nineteen hundred and twenty and in each year thereafter.
10. Maria C. Legaspi
D-10 .16 4,100 960 3,140
...................................... There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of
income tax under the law. But according to the stipulation facts the plaintiffs organized a partnership of a civil nature
11. Francisco Cabral because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize
D-11 .13 3,325 360 2,965
...................................... which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not
only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in
12. Gonzalo Javier the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the
D-12 .14 3,325 360 2,965
.......................................... office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same
capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a
13. Maria Santiago community of property only.
D-13 .17 4,350 360 3,990
..........................................

14. Buenaventura Guzman D-14 .13 3,325 360 2,965 Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income
tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act
No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually,
resulting in their exemption from the tax. Loans on promissory notes.............. 4,258.55

Salaries.................................... 1,095.00
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs appellants.
So ordered. Miscellaneous............................... 1,686.10

G.R. No. 31057 September 7, 1929 85,012.90

ADRIANO ARBES, ET AL., plaintiffs-appellees, Cash on hand........................................ 24,607.80

vs.
VICENTE POLISTICO, ET AL., defendants-appellants.
The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the
objection, found the same sufficiently explained in the report and the evidence, and accepting it, rendered judgment,
Marcelino Lontok and Manuel dela Rosa for appellants. holding that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and
Sumulong & Lavides for appellees. severally to return the amount of P24,607.80, as well as the documents showing the uncollected credits of the
association, to the plaintiffs in this case, and to the rest of the members of the said association represented by said
VILLAMOR, J.: plaintiffs, with costs against the defendants.

This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to two
Co." The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, points, to wit: (1) That not all persons having an interest in this association are included as plaintiffs or defendants;
directors and secretary of said association. (2) that the objection to the commissioner's report should have been admitted by the court below.

It is well to remember that this case is now brought before the consideration of this court for the second time. The
first one was when the same plaintiffs appeared from the order of the court below sustaining the defendant's
demurrer, and requiring the former to amend their complaint within a period, so as to include all the members of
"Turnuhan Polistico & Co.," either as plaintiffs or as a defendants. This court held then that in an action against the
officers of a voluntary association to wind up its affairs and enforce an accounting for money and property in their
possessions, it is not necessary that all members of the association be made parties to the action. (Borlasa vs.
Polistico, 47 Phil., 345.) The case having been remanded to the court of origin, both parties amend, respectively,
their complaint and their answer, and by agreement of the parties, the court appointed Amadeo R. Quintos, of the
Insular Auditor's Office, commissioner to examine all the books, documents, and accounts of "Turnuhan Polistico &
Co.," and to receive whatever evidence the parties might desire to present.
The commissioner rendered his report, which is attached to the record, with the following resume:
Income:
Member's shares............................ 97,263.70
Credits paid................................ 6,196.55
Interest received........................... 4,569.45
Miscellaneous............................... 1,891.00
As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of opinion
that, the trial court having examined all the evidence touching the grounds for the objection and having found that
they had been explained away in the commissioner's report, the conclusion reached by the court below, accepting
and adopting the findings of fact contained in said report, and especially those referring to the disposition of the
association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a
referee appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis,
when approved by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37
Phil., 474), the court held: "Under section 140 of the Code of Civil Procedure it is made the duty of the court to render
judgment in accordance with the report of the referee unless the court shall unless for cause shown set aside the
report or recommit it to the referee. This provision places upon the litigant parties of the duty of discovering and
exhibiting to the court any error that may be contained therein." The appellants stated the grounds for their objection.
The trial examined the evidence and the commissioner's report, and accepted the findings of fact made in the report.
We find no convincing arguments on the appellant's brief to justify a reversal of the trial court's conclusion admitting
the commissioner's findings.
There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but
the appellants allege that because it is so, some charitable institution to whom the partnership funds may be ordered
to be turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code,
which provides:

P109,620.70 A partnership must have a lawful object, and must be established for the common benefit of the partners.
Expenses:
When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable
Premiums to members....................... 68,146.25 institutions of the domicile of the partnership, or, in default of such, to those of the province.

Loans on real-estate....................... 9,827.00 Appellant's contention on this point is untenable. According to said article, no charitable institution is a necessary
party in the present case of determination of the rights of the parties. The action which may arise from said article, in
the case of unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of
the administration of said partnership, and it is not necessary for the said parties to base their action to the existence
of the partnership, but on the fact that of having contributed some money to the partnership capital. And hence, the
charitable institution of the domicile of the partnership, and in the default thereof, those of the province are not
necessary parties in this case. The article cited above permits no action for the purpose of obtaining the earnings
made by the unlawful partnership, during its existence as result of the business in which it was engaged, because for
the purpose, as Manresa remarks, the partner will have to base his action upon the partnership contract, which is to
annul and without legal existence by reason of its unlawful object; and it is self evident that what does not exist
cannot be a cause of action. Hence, paragraph 2 of the same article provides that when the dissolution of the
unlawful partnership is decreed, the profits cannot inure to the benefit of the partners, but must be given to some
charitable institution.
We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the
scope and spirit of the provision of the Civil Code which we are concerned. Commenting on said article Manresa,
among other things says:
When the subscriptions of the members have been paid to the management of the partnership, and
employed by the latter in transactions consistent with the purposes of the partnership may the former
demand the return of the reimbursement thereof from the manager or administrator withholding them?
Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-
existent, the contract entered into can have no legal effect; and in that case, how can it give rise to an
action in favor of the partners to judicially demand from the manager or the administrator of the partnership
capital, each one's contribution?
The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all
doubts thereon. He holds that the partner who limits himself to demanding only the amount contributed by
him need not resort to the partnership contract on which to base his action. And he adds in explanation
that the partner makes his contribution, which passes to the managing partner for the purpose of carrying
on the business or industry which is the object of the partnership; or in other words, to breathe the breath
of life into a partnership contract with an objection forbidden by law. And as said contrast does not exist in
the eyes of the law, the purpose from which the contribution was made has not come into existence, and
the administrator of the partnership holding said contribution retains what belongs to others, without any
consideration; for which reason he is not bound to return it and he who has paid in his share is entitled to
recover it.
But this is not the case with regard to profits earned in the course of the partnership, because they do not
constitute or represent the partner's contribution but are the result of the industry, business or speculation
which is the object of the partnership, and therefor, in order to demand the proportional part of the said
profits, the partner would have to base his action on the contract which is null and void, since this partition
or distribution of the profits is one of the juridical effects thereof. Wherefore considering this contract
as non-existent, by reason of its illicit object, it cannot give rise to the necessary action, which must be the
basis of the judicial complaint. Furthermore, it would be immoral and unjust for the law to permit a profit
from an industry prohibited by it.
Hence the distinction made in the second paragraph of this article of this Code, providing that the profits
obtained by unlawful means shall not enrich the partners, but shall upon the dissolution of the partnership,
be given to the charitable institutions of the domicile of the partnership, or, in default of such, to those of
the province.
This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former law,
which did not describe the purpose to which those profits denied the partners were to be applied, nor state
what to be done with them.
The profits are so applied, and not the contributions, because this would be an excessive and unjust
sanction for, as we have seen, there is no reason, in such a case, for depriving the partner of the portion of
the capital that he contributed, the circumstances of the two cases being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts
contributed are to be returned by the partners, because it only deals with the disposition of the profits; but
the fact that said contributions are not included in the disposal prescribed profits, shows that in
consequences of said exclusion, the general law must be followed, and hence the partners should
reimburse the amount of their respective contributions. Any other solution is immoral, and the law will not
consent to the latter remaining in the possession of the manager or administrator who has refused to
return them, by denying to the partners the action to demand them. (Manresa, Commentaries on the
Spanish Civil Code, vol. XI, pp. 262-264)
The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with costs against
the appellants; provided, however, the defendants shall pay the legal interest on the sum of P24,607.80 from the
date of the decision of the court, and provided, further, that the defendants shall deposit this sum of money and other
documents evidencing uncollected credits in the office of the clerk of the trial court, in order that said court may
distribute them among the members of said association, upon being duly identified in the manner that it may deem
proper. So ordered.
G.R. No. 112675 January 25, 1999
AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.;
CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED
INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINE; EASTERN ASSURANCE COMPANY & SURETY CORP; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU
INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS'
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.;
MALAYAN ZURICH INSURANCE CO.; INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN
INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO.,
LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE'S
TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE
BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE &
SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-
EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.;
STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA
INSURANCE CO., INC. — all assessed as "POOL OF MACHINERY INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE, respondent.
PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to
facilitate the handling of business contracted with a nonresident foreign insurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation
under the National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to
the said foreign firm be taxable as dividends? Under the facts of this case, has the goverment's right to assess and
collect said tax prescribed?
 The Case Dividend paid to Munich

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11, Reinsurance Company P3,728,412.00
1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners' appeal of the October
19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously sustained petitioners' liability for
——————
deficiency income tax, interest and withholding tax. The Court of Appeals ruled:

5 35% withholding tax at

WHEREFORE, the petition is DISMISSED, with costs against petitioner

source due thereon P1,304,944.20

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

Add: 25% surcharge 326,236.05

The Facts

14% interest from

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

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

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of
the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Compromise penalty-
Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool non-filing of return 300.00
composed of the petitioners was formed on the same day.
late payment 300.00
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
"Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on ——————
the basis of which it was assessed by the Commissioner of Internal Revenue deficiency
corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. TOTAL AMOUNT DUE & P1,768,799.39
These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo
and Co. COLLECTIBLE ===========

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the Dividend paid to Pool Members P655,636.00
petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest,
and with [h]olding tax, itemized as follows:
===========

Net income per information return P3,737,370.00

10% withholding tax at

===========
source due thereon P65,563.60

Income tax due thereon P1,298,080.00

Add: 25% surcharge 16,390.90

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

14% interest from

to 4/15/79 545,193.60
1/25/76 to 1/25/79 6,884.18

——————
Compromise penalty-

TOTAL AMOUNT DUE & P1,843,273.60

non-filing of return 300.00

COLLECTIBLE
 late payment 300.00
——————
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the
latter's collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because "the taxpayer
cannot be located at the address given in the information return filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
"dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing House had
already prescribed. 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation,
and that the government's right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were
written by them "individually and separately," and that their liability was limited to the extent of their allocated share in
the original risk thus reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12 Its role was limited to
its principal function of "allocating and distributing the risk(s) arising from the original insurance among the
signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same
risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a corporation; 16 and (4) the pool or clearing
house "was not and could not possibly have engaged in the business of reinsurance from which it could have derived
income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with
the enforcement of tax law, is accorded much weight and even finality, when there is no showing. that it is patently
wrong, 18 particularly in this case where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and
the Court of Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise
of its authority. 20
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-partnership (compañias
colectivas), general professional partnerships, private educational institutions, and building and
loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such
as unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such entities in the tax on
corporations was made even clearer by the tax Reform Act of 1997, 21 which amended the Tax Code. Pertinent
provisions of the new law read as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22 (B) of
this Code, and taxable under this Title as a corporation . . . .
Sec. 22. — Definition. — When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract without the Government. "General professional
partnerships" are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. *** (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more persons bind
themselves to contribute money, property, or Industry to a common fund, with the intention of dividing the profits
among themselves." 25 Its requisites are: "(1) mutual contribution to a common stock, and (2) a joint interest in the
profits." 26 In other words, a partnership is formed when persons contract "to devote to a common purpose either
money, property, or labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction
of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that would handle
all the insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance
treaty32 with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of
the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit
of the pool. 33 This common fund pays for the administration and operation expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate an antecedent
fact, that of the pool being used in the transaction of business for profit. It is apparent, and
petitioners admit, that their association or coaction was indispensable [to] the transaction of the
business, . . . If together they have conducted business, profit must have been the object as,
indeed, profit was earned. Though the profit was apportioned among the members, this is only a
matter of consequence, as it implies that profit actually resulted. 37
The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts obtaining therein are not on
all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which
took up only two isolated transactions. 39 The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and "would
be tantamount to an illegal double taxation as it would result in taxing the same taxpayer" 40 Moreover, petitioners
argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot
be deemed dividends. 41 They add that even if such remittances were treated as dividends, they would have been
exempt under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of paragraph 1 43 and
Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed
only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing" 46 In the instant
case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or
right." 47 Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the subject information
return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid
the tax . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity
distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former
as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type
of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is manifest
from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 of the
Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in
effect. 54 Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial
notice that it took effect only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They claim
that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981.
Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed,
and that the internal revenue commissioner was already barred by prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled
under then Section 333 of the NIRC, 57 because "the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the assessment." 58 Indeed, whether the
government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the
lower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pool's information return filed in 1980 indicated therein its "present
address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Cost against petitioners.1âwphi1.nêt
G.R. No. 127347 November 25, 1999
ALFREDO N. AGUILA, JR., petitioner,
vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated November 29, 1990, which
reversed the decision of the Regional Trial Court, Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial
court dismissed the petition for declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de
Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities. Private respondent
and her late husband, Ruben M. Abrogar, were the registered owners of a house and lot, covered by Transfer
Certificate of Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent, with the consent of
her late husband, and A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of
Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described property
from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this agreement, a Deed
of Absolute Sale shall be executed by the FIRST PARTY conveying the property to the
SECOND PARTY for and in consideration of the sum of Two Hundred Thousand Pesos
(P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the
said property within a period of ninety (90) days from the execution of this memorandum of
agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY THOUSAND
PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said property
within a period of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully the
possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of
the said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or
whatever claims on the property nor shall be cause the annotation of say claim at the back of the
title to the said property;
(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her ownership
of the property and shall defend the rights of the SECOND PARTY against any party whom may
have any interests over the property;
(6) All expenses for documentation and other incidental expenses shall be for the account of the
FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND
PARTY after the expiration of the 15-day grace period given in paragraph 3 above, the FIRST
PARTY shall pay an amount equivalent to Five Percent of the principal amount of TWO
HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and
liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety
(90) days period above-mentioned, this memorandum of agreement shall be deemed cancelled
and the Deed of Absolute Sale, executed by the parties shall be the final contract considered as
entered between the parties and the SECOND PARTY shall proceed to transfer ownership of
the property above described to its name free from lines and encumbrances. 2
On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale, 3 dated June 11, 1991,
wherein private respondent, with the consent of her late husband, sold the subject property to A.C. Aguila & Sons,
Co., represented by petitioner, for P200,000,00. In a special power of attorney dated the same day, April 18, 1991,
private respondent authorized petitioner to cause the cancellation of TCT No. 195101 and the issuance of a new
certificate of title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject property as
provided in the Memorandum of Agreement. 4
Private respondent failed to redeem the property within the 90-day period as provided in the Memorandum of
Agreement. Hence, pursuant to the special power of attorney mentioned above, petitioner caused the cancellation of
TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons, Co. 5
Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil, counsel for A.C.
Aguila & Sons, Co., demanding that she vacate the premises within 15 days after receipt of the letter and surrender
its possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring the appropriate action in
court. 6
Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co. filed an ejectment
case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3,
1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that private respondent did
not redeem the subject property before the expiration of the 90-day period provided in the Memorandum of
Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to
the Court of Appeals, and later to this Court, but she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale with the Regional Trial Court,
Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that the signature of her husband on the
deed of sale was a forgery because he was already dead when the deed was supposed to have been executed on
June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for falsification against petitioner with the
Office of the Prosecutor of Quezon City which was dismissed in a resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiff's claim therefore that the Deed of Absolute Sale is a forgery because they could not
personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her
husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution of
the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center
recuperating from wounds which she suffered at the same vehicular accident on May 8, 1991,
cannot be sustained. The Court is convinced that the three required documents, to wit: the
Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were
all signed by the parties on the same date on April 18, 1991. It is a common and accepted
business practice of those engaged in money lending to prepare an undated absolute deed of
sale in loans of money secured by real estate for various reasons, foremost of which is the
evasion of taxes and surcharges. The plaintiff never questioned receiving the sum of
P200,000.00 representing her loan from the defendant. Common sense dictates that an
established lending and realty firm like the Aguila & Sons, Co. would not part with P200,000.00
to the Abrogar spouses, who are virtual strangers to it, without the simultaneous
accomplishment and signing of all the required documents, more particularly the Deed of
Absolute Sale, to protect its interest.
xxx xxx xxx
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED
DISMISSED, with costs against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-appellant and defendant-
appellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong
application in the case at bar in the light of the following circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually inadequate.
The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff-
appellant stands. The property is inside a subdivision/village. The property is situated in Marikina
which is already part of Metro Manila. The alleged sale took place in 1991 when the value of the
land had considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square
meter for both the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant is
obliged to deliver peacefully the possession of the property to the SECOND PARTY within
fifteen (15) days after the expiration of the said ninety (90) day grace period. Otherwise stated,
plaintiff-appellant is to retain physical possession of the thing allegedly sold.
In fact, plaintiff-appellant retained possession of the property "sold" as if they were still the
absolute owners. There was no provision for maintenance or expenses, much less for payment
of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property
"sold". It is well-known that payment of taxes accompanied by actual possession of the land
covered by the tax declaration, constitute evidence of great weight that a person under whose
name the real taxes were declared has a claim of right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602 of the New
Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable
mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate,
has retained possession of the subject property and has continued paying the realty taxes over
the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New
Civil Code), it must be conclusively presumed that the transaction the parties actually entered
into is an equitable mortgage, not a sale with right to repurchase. The factors cited are in support
to the finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is in
actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was executed by reason
of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan being the
same with the amount of the purchase price.
xxx xxx xxx
Since the real intention of the party is to secure the payment of debt, now deemed to be
repurchase price: the transaction shall then be considered to be an equitable mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of a pactum
commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of
the New Civil Code reads:
Art. 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and
void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of
security for the payment of principal obligation; and (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged and mortgaged in the event of non-
payment of the principal obligation within the stipulated period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant
secured by a mortgage on the property of plaintiff-appellant. The loan was payable within ninety
(90) days, the period within which plaintiff-appellant can repurchase the property. Plaintiff-
appellant will pay P230,000.00 and not P200,000.00, the P30,000.00 excess is the interest for
the loan extended. Failure of plaintiff-appellee to pay the P230,000.00 within the ninety (90)
 days period, the property shall automatically belong to defendant-appellee by virtue of the deed LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B.
of sale executed. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Clearly, the agreement entered into by the parties is in the nature of pactum commissorium.
Therefore, the deed of sale should be declared void as we hereby so declare to be invalid, for
being violative of law. Orlando Velasco for petitioners.

xxx xxx xxx Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET
ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in
favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendant-
appellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby
BARREDO, J.:p
ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby
ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety (90)
days from the finality of this decision. In case of failure to pay the amount of P230,000.00 from Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
the period therein stated, the property shall be sold at public auction to satisfy the mortgage debt holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of
and costs and if there is an excess, the same is to be given to the owner. the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for
the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December
15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case
Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
should have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for
reconsideration of said decision.
declaration of nullity of a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and private
respondent is a pacto de retro sale and not an equitable mortgage as held by the appellate court.
The facts are stated in the decision of the Tax Court as follows:
The petition is meritorious.
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña
and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of
Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that "every action
Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was
must be prosecuted and defended in the name of the real party in interest." A real party in interest is one who would
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April
be benefited or injured by the judgment, or who is entitled to the avails of the suit. 7 This ruling is now embodied in
14, 1949, the administrator submitted the project of partition, which was approved by the Court
Rule 3, §2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real
on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo,
party in interest in the case cannot be executed. 8 Hence, a complaint filed against such a person should be
Jr., all surnamed Oña, were still minors when the project of partition was approved, Lorenzo T.
dismissed for failure to state a cause of action. 9
Oña, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the
Court of First Instance of Manila for appointment as guardian of said minors. On November 14,
Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and distinct from that of each of 1949, the Court appointed him guardian of the persons and property of the aforenamed minors
the partners." The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal (See p. 3, BIR rec.).
fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes. 10 In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent,
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00,
the Memorandum of Agreement was executed between private respondent, with the consent of her late husband,
six houses with a total assessed value of P17,590.00 and an undetermined amount to be
and A.C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which
collected from the War Damage Commission. Later, they received from said Commission the
should be impleaded in any litigation involving property registered in its name. A violation of this rule will result in the
amount of P50,000.00, more or less. This amount was not divided among them but was used in
dismissal of the complaint. 11 We cannot understand why both the Regional Trial Court and the Court of Appeals
the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of
sidestepped this issue when it was squarely raised before them by petitioner.
land aforementioned, two were acquired after the death of the decedent with money borrowed
from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-
Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted makes it 34 BIR rec.).
unnecessary to discuss the other issues raised by him in this appeal.
The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint against petitioner is administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter
DISMISSED. with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

G.R. No. L-19342 May 25, 1972 Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them
 and investing the income derived therefrom and the proceeds from the sales thereof in real Net income as per investigation ................ P40,209.89
properties and securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the Income tax due thereon ............................... 8,042.00
following year-end balances: 25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
Ye Investme Land Buildin
ar nt g 1956
Account Accou Accou
nt nt Net income as per investigation ................ P69,245.23

1949 — P87,860.00 P17,590.00 Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
1950 P24,657.65 128,566.72 96,076.26 Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
1951 51,301.31 120,349.28 110,605.11
(See Exhibit 13, page 50, BIR records)
1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83 Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling
of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6,
1958, so that the questioned assessment refers solely to the income tax proper for the years
1954 63,623.37 99,001.20 167,962.04
1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring to the
compromise in lieu of the criminal liability for failure of petitioners to file the corporate income tax
1955 100,786.00 120,249.78 169,262.52 returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

1956 175,028.68 135,714.68 169,262.52

Petitioners have assigned the following as alleged errors of the Tax Court:

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104) I.

From said investments and properties petitioners derived such incomes as profits from THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests AN UNREGISTERED PARTNERSHIP;
(see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the
books of account kept by Lorenzo T. Oña where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax II.
purposes their shares in the net income derived from said properties and securities and/or from
transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out, invested them in TRANSACTIONS THEREFROM (sic);
real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided
that petitioners formed an unregistered partnership and therefore, subject to the corporate
income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he
assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86,
BIR rec.). Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE
FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V. It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners
rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the
partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs,
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY
status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is
THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF
easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding
THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
said shares under the common management of the administrator or executor or of anyone chosen by them and
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of
Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants
Julia Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed
therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found
an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2)
already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to
Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a
argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided,
common fund the profits earned by the properties owned by them in common and the loans granted to them upon
there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited
the security of the said properties, with the result that as far as their respective shares in the inheritance are
properties is automatically converted into an unregistered partnership the moment the said common properties
concerned, the total income thereof should be considered as that of co-owners and not of the unregistered
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in
partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various
proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for
shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate
this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of
taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?
the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in after such partition, he allows his share to be held in common with his co-heirs under a single management to be
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is
those dates admittedly under the administration or management of the head of the family, the widower and father formed. This is exactly what happened to petitioners in this case.
Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered
of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or
them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier
common right or interest in any property from which the returns are derived," and, for that matter, on any other
assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is
provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the
easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the
concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as
purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion,
they were not similarly assessed earlier by the Bureau of Internal Revenue.
now Chief Justice, elucidated on this point thus:

The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who
are distinct and different from "partnerships". When our Internal Revenue Code includes
used said properties in business by leasing or selling them and investing the income derived therefrom and the
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
proceed from the sales thereof in real properties and securities," as a result of which said properties and investments
therefore, to organizations which are not necessarily "partnerships", in the technical sense of the
steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to
term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
registered general partnerships," which constitute precisely one of the most typical forms of
And all these became possible because, admittedly, petitioners never actually received any share of the income or
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
profits from Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the common fund
corporation includes partnerships, no matter how created or organized." This qualifying
for their ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the
expression clearly indicates that a joint venture need not be undertaken in any of the standard
profits of their common business as reported by the said Lorenzo T. Oña.
forms, or in confirmity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said participacion)" and "associations", none of which has a legal personality of its own, independent
properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided condition essential to the existence of the partnerships therein referred to. In fact, as above
among petitioners proportionately in accordance with their respective shares in the inheritance. In these stated, "duly registered general co-partnerships" — which are possessed of the aforementioned
circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their personality — have been expressly excluded by law (sections 24 and 84[b]) from the
respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a connotation of the term "corporation." ....
common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by
them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect,
xxx xxx xxx
they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax
Code.
 Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes
in question, of their inherited properties from those acquired by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership,
the holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the inherited
properties and the income derived therefrom were used in the business of buying and selling
other real properties and corporate securities. Accordingly, the partnership income must include
not only the income derived from the purchase and sale of other properties but also the income
of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but
the moment their respective known shares are used as part of the common assets of the heirs to be used in making
profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently,
the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective
shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable
to the partners (petitioners herein) should be reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the petitioners in his individual capacity overpaid
his income tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual
income tax cannot be credited as part payment of the taxes herein in question. It is argued that to sanction the view
of the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse, considering the
time that has lapsed since they paid their individual income taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do not agree. As We see it, the case of petitioners as
regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure
to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed
what he has erroneously paid, but the law is very clear that the claim and action for such reimbursement are subject
to the bar of prescription. And since the period for the recovery of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem right to virtually disregard prescription merely upon the ground that
the reason for the delay is precisely because the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor
of persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had
acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and
963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children,
the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for
P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show
that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the
sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an
income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not
a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit
among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation
and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them
as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not
engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y
existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun
y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en
nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica
señala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la
sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol,
Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any property from which the
returns are derived". There must be an unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed
small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The
ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña
vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the
'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or invest
additional ' capital to increase or expand the inherited properties; they merely continued
dedicating the property to the use to which it had been put by their forebears; they individually
reported in their tax returns their corresponding shares in the income and expenses of the
'hacienda', and they continued for many years the status of co-ownership in order, as conceded
by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual
relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case
No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own
properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does
not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738,
September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the
co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves,
it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the
net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista
sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to
the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It
might have already prescribed.
.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the
issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966,
they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners
in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes
and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken
by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed
by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the
partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of
this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income
tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS,
THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-
13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with full power to
lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several
years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots
for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in February, 1943.
In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases
are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when
they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining
three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership share or
do not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership,
the existence of a juridical personality different from that of the individual partners, and the
freedom to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83,
p. 74.)
 A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor
does an agreement to share the profits and losses on the sale of land create a partnership; the
parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed.,
1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123
N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
6
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.)
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the freedom of each party to transfer or assign the
whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid
obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual
taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs
G.R. No. 172690 March 3, 2010
HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,
vs.
JULIET VILLA LIM, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure, assailing the
Court of Appeals (CA) Decision2 dated June 29, 2005, which reversed and set aside the decision3 of the Regional
Trial Court (RTC) of Lucena City, dated April 12, 2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia Palad (Cresencia); and their
children Elenito, Evelia, Imelda, Edelyna and Edison, all surnamed Lim (petitioners), represented by Elenito Lim
(Elenito). They filed a Complaint4 for Partition, Accounting and Damages against respondent Juliet Villa Lim
(respondent), widow of the late Elfledo Lim (Elfledo), who was the eldest son of Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay, Mauban, Quezon. Sometime in
1980, Jose, together with his friends Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership to engage
in the trucking business. Initially, with a contribution of ₱50,000.00 each, they purchased a truck to be used in the
hauling and transport of lumber of the sawmill. Jose managed the operations of this trucking business until his death
on August 15, 1981. Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue the business under
the management of Elfledo. The shares in the partnership profits and income that formed part of the estate of Jose
were held in trust by Elfledo, with petitioners' authority for Elfledo to use, purchase or acquire properties using said
funds.
Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate serving as his father’s driver in the
trucking business. He was never a partner or an investor in the business and merely supervised the purchase of
additional trucks using the income from the trucking business of the partners. By the time the partnership ceased, it
had nine trucks, which were all registered in Elfledo's name. Petitioners asseverated that it was also through
Elfledo’s management of the partnership that he was able to purchase numerous real properties by using the profits
derived therefrom, all of which were registered in his name and that of respondent. In addition to the nine trucks,
Elfledo also acquired five other motor vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir. Petitioners claimed that respondent
took over the administration of the aforementioned properties, which belonged to the estate of Jose, without their
consent and approval. Claiming that they are co-owners of the properties, petitioners required respondent to submit
an accounting of all income, profits and rentals received from the estate of Elfledo, and to surrender the
administration thereof. Respondent refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself a partner of Norberto and Jimmy.
Respondent also claimed that per testimony of Cresencia, sometime in 1980, Jose gave Elfledo ₱50,000.00 as the
latter's capital in an informal partnership with Jimmy and Norberto. When Elfledo and respondent got married in
1981, the partnership only had one truck; but through the efforts of Elfledo, the business flourished. Other than this
trucking business, Elfledo, together with respondent, engaged in other business ventures. Thus, they were able to
buy real properties and to put up their own car assembly and repair business. When Norberto was ambushed and
killed on July 16, 1993, the trucking business started to falter. When Elfledo died on May 18, 1995 due to a heart
attack, respondent talked to Jimmy and to the heirs of Norberto, as she could no longer run the business. Jimmy
suggested that three out of the nine trucks be given to him as his share, while the other three trucks be given to the
heirs of Norberto. However, Norberto's wife, Paquita Uy, was not interested in the vehicles. Thus, she sold the same
to respondent, who paid for them in installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and the partnership with Jimmy and
Norberto ceased upon his demise. Respondent also stressed that Jose left no properties that Elfledo could have held
in trust. Respondent maintained that all the properties involved in this case were purchased and acquired through
her and her husband’s joint efforts and hard work, and without any participation or contribution from petitioners or
from Jose. Respondent submitted that these are conjugal partnership properties; and thus, she had the right to
refuse to render an accounting for the income or profits of their own business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor of petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1) Ordering the partition of the above-mentioned properties equally between the plaintiffs and heirs of Jose
Lim and the defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an accounting of all incomes, profits and rentals received by her from
said properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.
On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing petitioners' complaint for lack of
merit. Undaunted, petitioners filed their Motion for Reconsideration,5 which the CA, however, denied in its
Resolution6 dated May 8, 2006.
Hence, this Petition, raising the sole question, viz.:
IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE PARTIES, CAN THE
TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN THAT BY A FORMER
PARTNER ON THE ISSUE OF THE IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP?7
In essence, petitioners argue that according to the testimony of Jimmy, the sole surviving partner, Elfledo was not a
partner; and that he and Norberto entered into a partnership with Jose. Thus, the CA erred in not giving that
testimony greater weight than that of Cresencia, who was merely the spouse of Jose and not a party to the
partnership.8
Respondent counters that the issue raised by petitioners is not proper in a petition for review on certiorari under Rule
45 of the Rules of Civil Procedure, as it would entail the review, evaluation, calibration, and re-weighing of the factual
findings of the CA. Moreover, respondent invokes the rationale of the CA decision that, in light of the admissions of
Cresencia and Edison and the testimony of respondent, the testimony of Jimmy was effectively refuted; accordingly,
the CA's reversal of the RTC's findings was fully justified.9
We resolve first the procedural matter regarding the propriety of the instant Petition.
Verily, the evaluation and calibration of the evidence necessarily involves consideration of factual issues — an
exercise that is not appropriate for a petition for review on certiorari under Rule 45. This rule provides that the parties
may raise only questions of law, because the Supreme Court is not a trier of facts. Generally, we are not duty-bound
to analyze again and weigh the evidence introduced in and considered by the tribunals below.10 When supported by
substantial evidence, the findings of fact of the CA are conclusive and binding on the parties and are not reviewable
by this Court, unless the case falls under any of the following recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners' main and reply briefs are not
disputed by the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on the supposed absence of evidence
and contradicted by the evidence on record.11
We note, however, that the findings of fact of the RTC are contrary to those of the CA. Thus, our review of such
findings is warranted.
On the merits of the case, we find that the instant Petition is bereft of merit.
A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful
commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses
among them. A contract of partnership is defined by the Civil Code as one where two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.12
Undoubtedly, the best evidence would have been the contract of partnership or the articles of partnership.
Unfortunately, there is none in this case, because the alleged partnership was never formally organized.
Nonetheless, we are asked to determine who between Jose and Elfledo was the "partner" in the trucking business.
A careful review of the records persuades us to affirm the CA decision. The evidence presented by petitioners falls
short of the quantum of proof required to establish that: (1) Jose was the partner and not Elfledo; and (2) all the
properties acquired by Elfledo and respondent form part of the estate of Jose, having been derived from the alleged
partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of evidence against respondent. It
must be considered and weighed along with petitioners' other evidence vis-à-vis respondent's contrary evidence. In
civil cases, the party having the burden of proof must establish his case by a preponderance of evidence.
"Preponderance of evidence" is the weight, credit, and value of the aggregate evidence on either side and is usually
considered synonymous with the term "greater weight of the evidence" or "greater weight of the credible evidence."
"Preponderance of evidence" is a phrase that, in the last analysis, means probability of the truth. It is evidence that is
more convincing to the court as worthy of belief than that which is offered in opposition thereto. 13 Rule 133, Section 1
of the Rules of Court provides the guidelines in determining preponderance of evidence, thus:
SECTION I. Preponderance of evidence, how determined. In civil cases, the party having burden of proof must
establish his case by a preponderance of evidence. In determining where the preponderance or superior weight of
evidence on the issues involved lies, the court may consider all the facts and circumstances of the case, the
witnesses' manner of testifying, their intelligence, their means and opportunity of knowing the facts to which they are
testifying, the nature of the facts to which they testify, the probability or improbability of their testimony, their interest
or want of interest, and also their personal credibility so far as the same may legitimately appear upon the trial. The
court may also consider the number of witnesses, though the preponderance is not necessarily with the greater
number.
At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals 14 is enlightening. Therein, we cited Article
1769 of the Civil Code, which provides:
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as
to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a
partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments
or otherwise.
Applying the legal provision to the facts of this case, the following circumstances tend to prove that Elfledo was
himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo ₱50,000.00, as share in the
partnership, on a date that coincided with the payment of the initial capital in the partnership; 15 (2) Elfledo ran the
affairs of the partnership, wielding absolute control, power and authority, without any intervention or opposition
whatsoever from any of petitioners herein;16 (3) all of the properties, particularly the nine trucks of the partnership,
were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not receive wages or salaries from the
partnership, indicating that what he actually received were shares of the profits of the business; 17 and (5) none of the
petitioners, as heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his lifetime. As
repeatedly stressed in Heirs of Tan Eng Kee,18 a demand for periodic accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties acquired and
registered in the names of Elfledo and respondent formed part of the estate of Jose, having been derived from Jose's
alleged partnership with Jimmy and Norberto. They failed to refute respondent's claim that Elfledo and respondent
engaged in other businesses. Edison even admitted that Elfledo also sold Interwood lumber as a
sideline.19 Petitioners could not offer any credible evidence other than their bare assertions. Thus, we apply the basic
rule of evidence that between documentary and oral evidence, the former carries more weight. 20
Finally, we agree with the judicious findings of the CA, to wit:
The above testimonies prove that Elfledo was not just a hired help but one of the partners in the trucking business,
active and visible in the running of its affairs from day one until this ceased operations upon his demise. The extent
of his control, administration and management of the partnership and its business, the fact that its properties were
placed in his name, and that he was not paid salary or other compensation by the partners, are indicative of the fact
that Elfledo was a partner and a controlling one at that. It is apparent that the other partners only contributed in the
initial capital but had no say thereafter on how the business was ran. Evidently it was through Elfredo’s efforts and
hard work that the partnership was able to acquire more trucks and otherwise prosper. Even the appellant
participated in the affairs of the partnership by acting as the bookkeeper sans salary.1avvphi1
It is notable too that Jose Lim died when the partnership was barely a year old, and the partnership and its business
not only continued but also flourished. If it were true that it was Jose Lim and not Elfledo who was the partner, then
upon his death the partnership should have
been dissolved and its assets liquidated. On the contrary, these were not done but instead its operation continued
under the helm of Elfledo and without any participation from the heirs of Jose Lim.
Whatever properties appellant and her husband had acquired, this was through their own concerted efforts and hard
work. Elfledo did not limit himself to the business of their partnership but engaged in other lines of businesses as
well.
In sum, we find no cogent reason to disturb the findings and the ruling of the CA as they are amply supported by the
law and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision dated June 29, 2005 is
AFFIRMED. Costs against petitioners.
G.R. No. 143340 August 15, 2001
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,
vs.
LAMBERTO T. CHUA, respondent.
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision 1 of the Court of
Appeals dated January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth Sunga Chan and Cecilia Sunga"
and of the Resolution dated May 23, 2000 denying the motion for reconsideration of herein petitioners Lilibeth Sunga
and Cecilia Sunga (hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan (hereafter
petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of the deceased
Jacinto L. Sunga (hereafter Jacinto), for "Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of
Shares and Damages with Writ of Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan,
Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of Shellane
Liquefied Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto allegedly agreed to
register the business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under
the name of Jacinto as a sole proprietorship. Respondent allegedly delivered his initial capital contribution of
P100,000.00 to Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had Jacinto as manager,
assisted by Josephine Sy (hereafter Josephine), a sister of the wife respondent, Erlinda Sy. As compensation,
Jacinto would receive a manager's fee or remuneration of 10% of the gross profit and Josephine would receive 10%
of the net profits, in addition to her wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite and was
profitable. Respondent claimed that he could attest to success of their business because of the volume of orders and
deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished
respondent with the merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989,
respondent however suspected that the amount indicated in these documents were understated and undervalued by
Jacinto and Josephine for their own selfish reasons and for tax avoidance.
Upon Jacinto's death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his daughter,
petitioner Lilibeth, took over the operations, control, custody, disposition and management of Shellite without
respondent's consent. Despite respondent's repeated demands upon petitioners for accounting, inventory, appraisal,
winding up and restitution of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth
allegedly continued the operations of Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out the alibis and reasons to evade
respondent's demands, she disbursed out of the partnership funds the amount of P200,000.00 and partially paid the
same to respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00 represented partial
payment of the latter's share in the partnership, with a promise that the former would make the complete inventory
and winding up of the properties of the business establishment. Despite such commitment, petitioners allegedly
failed to comply with their duty to account, and continued to benefit from the assets and income of Shellite to the
damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange
Commission (SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte had jurisdiction over the action.
Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in from and substance denied the motion to
dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counter-claims, contending that they are not
liable for partnership shares, unreceived income/profits, interests, damages and attorney's fees, that respondent
does not have a cause of action against them, and that the trial court has no jurisdiction over the nature of the action,
the SEC being the agency that has original and exclusive jurisdiction over the case. As counterclaim, petitioner
sought attorney's fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for winding up
of partnership affairs, accounting and recovery of shares in partnership affairs, accounting and recovery of shares in
partnership assets/properties should be dismissed and prosecuted against the estate of deceased Jacinto in a
probate or intestate proceeding.
On August 16, 1993, the trial denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with the Court of
Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as petitioners failed to
show that a reversible error was committed by the appellate court."2
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the trial
court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case of January
17, 1996. Respondent presented his evidence while petitioners were considered to have waived their right to present
evidence for their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive of the Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as
follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting procedures
and standards of the properties, assets, income and profits of the Shellite Gas Appliance Center
Since the time of death of Jacinto L. Sunga, from whom they continued the business operations
including all businesses derived from Shellite Gas Appliance Center, submit an inventory, and
appraisal of all these properties, assets, income, profits etc. to the Court and to plaintiff for
approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties, assets,
income and profits they misapplied and converted to their own use and advantage the legally
pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of
this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff ½ shares and interest of the plaintiff in
the partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on
pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the
sum of P35,000.00 per month, with legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its business
activities pursuant to law, after delivering to the plaintiff all the ½ interest, shares, participation
and equity in the partnership, or the value thereof in money or money's worth, if the properties
are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and
hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic) and
P25,000.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED."3
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court of
Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision reads:
 "WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects." 4 2. The action is against an executor or administrator or other representative of a deceased person or a
person of unsound mind;
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
3. The subject-matter of the action is a claim or demand against the estate of such deceased person or
against person of unsound mind;
Hence, this petition wherein petitioner relies upon following grounds:

4. His testimony refers to any matter of fact of which occurred before the death of such deceased person
"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between
or before such person became of unsound mind."10
respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latter'' invitation and offer and that
upon his death the partnership assets and business were taken over by petitioners.
Two reasons forestall the application of the "Dead Man's Statute" to this case.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply
in the instant case. First, petitioners filed a compulsory counterclaim11 against respondents in their answer before the trial court, and with
the filing of their counterclaim, petitioners themselves effectively removed this case from the ambit of the "Dead
Man's Statute".12 Well entrenched is the rule that when it is the executor or administrator or representatives of the
3. The Court of Appeals erred in making the legal conclusion that there was competent and credible
estates that sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of
evidence to warrant the finding of a partnership, and assuming arguendo that indeed there was a
the deceased to defeat the counterclaim.13 Moreover, as defendant in the counterclaim, respondent is not disqualified
partnership, the finding of highly exaggerated amounts or values in the partnership assets and profits."5
from testifying as to matters of facts occurring before the death of the deceased, said action not having been brought
against but by the estate or representatives of the deceased.14
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a partnership
existed between respondent and Jacinto from 1977 until Jacinto's death. In the absence of any written document to
Second, the testimony of Josephine is not covered by the "Dead Man's Statute" for the simple reason that she is not
show such partnership between respondent and Jacinto, petitioners argues that these courts were proscribes from
"a party or assignor of a party to a case or persons in whose behalf a case is prosecuted." Records show that
hearing the testimonies of respondent and his witness, Josephine, to prove the alleged partnership three years after
respondent offered the testimony of Josephine to establish the existence of the partnership between respondent and
Jacinto's death. To support this argument, petitioners invoke the "Dead Man's Statute' or "Survivorship Rule" under
Jacinto. Petitioners' insistence that Josephine is the alter ego of respondent does not make her an assignor because
Section 23, Rule 130 of the Rules of Court that provides:
the term "assignor" of a party means "assignor of a cause of action which has arisen, and not the assignor of a right
assigned before any cause of action has arisen."15 Plainly then, Josephine is merely a witness of respondent, the
"SEC. 23. Disqualification by reason of death or insanity of adverse party. – Parties or assignors of parties latter being the party plaintiff.
to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator or other
representative of a deceased person, or against a person of unsound mind, upon a claim or demand
We are not convinced by petitioners' allegation that Josephine's testimony lacks probative value because she was
against the estate of such deceased person, or against such person of unsound mind, cannot testify as to
allegedly coerced coerced by respondent, her brother-in-law, to testify in his favor, Josephine merely declared in
any matter of fact occurring before the death of such deceased person or before such person became of
court that she was requested by respondent to testify and that if she were not requested to do so she would not have
unsound mind."
testified. We fail to see how we can conclude from this candid admission that Josephine's testimony is involuntary
when she did not in any way categorically say that she was forced to be a witness of respondent.
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should not
have been admitted to prove certain claims against a deceased person (Jacinto), now represented by petitioners.
Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her testimony since
relationship per se, without more, does not affect the credibility of witnesses.16
We are not persuaded.
Petitioners' reliance alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail over the factual
A partnership may be constituted in any form, except where immovable property of real rights are contributed findings of the trial court and the Court of Appeals that a partnership was established between respondent and
thereto, in which case a public instrument shall necessary.6 Hence, based on the intention of the parties, as gathered Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the trial court and the
from the facts and ascertained from their language and conduct, a verbal contract of partnership may arise.7 The Court of Appeals considered the evidence for respondent as sufficient to prove the formation of partnership, albeit an
essential profits that must be proven to that a partnership was agreed upon are (1) mutual contribution to a common informal one.
stock, and (2) a joint interest in the profits.8 Understandably so, in view of the absence of the written contract of
partnership between respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial
Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial precedents, a
evidence to prove said partnership. The crucial issue to settle then is to whether or not the "Dead Man's Statute"
factual matter like the finding of the existence of a partnership between respondent and Jacinto cannot be inquired
applies to this case so as to render inadmissible respondent's testimony and that of his witness, Josephine.
into by this Court on review.17 This Court can no longer be tasked to go over the proofs presented by the parties and
analyze, assess and weigh them to ascertain if the trial court and the appellate court were correct in according
The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from testifying by death, superior credit to this or that piece of evidence of one party or the other. 18 It must be also pointed out that petitioners
insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving his own failed to attend the presentation of evidence of respondent. Petitioners cannot now turn to this Court to question the
uncontradicted and unexplained account of the transaction.9 But before this rule can be successfully invoked to bar admissibility and authenticity of the documentary evidence of respondent when petitioners failed to object to the
the introduction of testimonial evidence, it is necessary that: admissibility of the evidence at the time that such evidence was offered.19

"1. The witness is a party or assignor of a party to case or persons in whose behalf a case in prosecuted. With regard to petitioners' insistence that laches and/or prescription should have extinguished respondent's claim, we
agree with the trial court and the Court of Appeals that the action for accounting filed by respondents three (3) years
after Jacinto's death was well within the prescribed period. The Civil Code provides that an action to enforce an oral
contract prescribes in six (6) years20 while the right to demand an accounting for a partner's interest as against the
person continuing the business accrues at the date of dissolution, in the absence of any contrary
agreement.21 Considering that the death of a partner results in the dissolution of the partnership 22 , in this case, it was
Jacinto's death that respondent as the surviving partner had the right to an account of his interest as against
petitioners. It bears stressing that while Jacinto's death dissolved the partnership, the dissolution did not immediately
terminate the partnership. The Civil Code23 expressly provides that upon dissolution, the partnership continues and
its legal personality is retained until the complete winding up of its business, culminating in its termination.24
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance
with law, but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax Appeals,
which court, after trial, rendered a decision, on 11 November 1965, reversing that of the Commissioner of Internal
Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's aforesaid
decision. It raises these issues:

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto, petitioners
maintain that said partnership that had initial capital of P200,000.00 should have been registered with the Securities
and Exchange Commission (SEC) since registration is mandated by the Civil Code, True, Article 1772 of the Civil
Code requires that partnerships with a capital of P3,000.00 or more must register with the SEC, however, this
registration requirement is not mandatory. Article 1768 of the Civil Code25 explicitly provides that the partnership
retains its juridical personality even if it fails to register. The failure to register the contract of partnership does not
invalidate the same as among the partners, so long as the contract has the essential requisites, because the main
purpose of registration is to give notice to third parties, and it can be assumed that the members themselves knew of
the contents of their contract.26 In the case at bar, non-compliance with this directory provision of the law will not
invalidate the partnership considering that the totality of the evidence proves that respondent and Jacinto indeed
forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.
G.R. No. L-25532 February 28, 1969
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for
income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a
single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter and
Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of
P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their
subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited
partnership, and if they did not, the fiction of juridical personality of the partnership should be disregarded for income
tax purposes because the spouses have exclusive ownership and control of the business; consequently the income
tax return of respondent Suter for the years in question should have included his and his wife's individual incomes
and that of the limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which
provides as follows:

(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents, only
COMMISSIONER OF INTERNAL REVENUE, petitioner,
one consolidated return for the taxable year shall be filed by either spouse to cover the income of both
vs.
spouses; ....
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for
Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
dissolution of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
personality had not been affected and since, as a limited partnership, as contra distinguished from a duly registered
general partnership, it is taxable on its income similarly with corporations, Suter was not bound to include in his
REYES, J.B.L., J.: individual return the income of the limited partnership.

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein We find the Commissioner's appeal unmeritorious.
respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The
partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1 October 1947,
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law
the limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among
because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one
other activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television
year after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in
sets and amusement machines, their parts and accessories. It had an office and held itself out as a limited
Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as
partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its trade-name,
follows:
maintaining its own books of accounts and bank accounts, and had a quota allocation with the Central Bank.

A husband and a wife may not enter into a contract of general copartnership, because under the Civil
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December
Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited
1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded with
from making donations to each other are prohibited from entering into universal partnerships. (2 Echaverri
the Securities and Exchange Commission on 20 December 1948.
196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing
partnership. (1 Guy de Montella 58)
The limited partnership had been filing its income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a
income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of
universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of
a deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
1889 (which was the law in force when the subject firm was organized in 1947), a universal partnership requires
either that the object of the association be all the present property of the partners, as contributed by them to the
common fund, or else "all that the partners may acquire by their industry or work during the existence of the
partnership". William J. Suter "Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the
partners were fixed sums of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses
were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva
de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los
prohibe, y hay que estar a la norma general segun la que toda persona es capaz para contratar mientras
no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros fue favorable a
esta misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de
marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the causes
provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally
erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and
contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their
respective separate property under the Spanish Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common property
of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own,
distinct and separate from that of its partners (unlike American and English law that does not recognize such
separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only be
done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited partnership's
separate individuality makes it impossible to equate its income with that of the component members. True, section 24
of the Internal Revenue Code merges registered general co-partnerships (compañias colectivas) with the personality
of the individual partners for income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of
our partnership laws, and can not be extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution of
30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal
personality of the corporations involved therein are not applicable to the present case. In the cited cases, the
corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present
case, to do so would exempt the limited partnership from income taxation but would throw the tax burden upon the
partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax
purposes. This is not true in the present case. Here, the limited partnership is not a mere business conduit of the
partner-spouses; it was organized for legitimate business purposes; it conducted its own dealings with its customers
prior to appellee's marriage, and had been filing its own income tax returns as such independent entity. The change
in its membership, brought about by the marriage of the partners and their subsequent acquisition of all interest
therein, is no ground for withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to
pay income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy the
interests of the remaining partner with the premeditated scheme or design to use the partnership as a business
conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be included in the
individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict
with what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal treatment,
tax wise, of a general copartnership (compañia colectiva) and a limited partnership, when the code plainly
differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case
of compañias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend
or share of the profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. &
Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nêt
But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and
forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil.
779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become
conjugal only when no longer needed to defray the expenses for the administration and preservation of the
paraphernal capital of the wife. Then again, the appellant's argument erroneously confines itself to the question of
the legal personality of the limited partnership, which is not essential to the income taxability of the partnership since
the law taxes the income of even joint accounts that have no personality of their own. 1 Appellant is, likewise,
mistaken in that it assumes that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is
the "income of both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of
the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year,
their consequences would be different, as their contributions in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and when split
from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently
stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.
FIRST DIVISION
G.R. No. 167379 June 27, 2006
PRIMELINK PROPERTIES AND DEVELOPMENT CORPORATION and RAFAELITO W. LOPEZ, Petitioners,
vs.
MA. CLARITA T. LAZATIN-MAGAT, JOSE SERAFIN T. LAZATIN, JAIME TEODORO T. LAZATIN and JOSE
MARCOS T. LAZATIN, Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the Decision 1 of
the Court of Appeals (CA) in CA-G.R. CV No. 69200 and its Resolution2 denying petitioners’ motion for
reconsideration thereof.
The factual and procedural antecedents are as follows:
Primelink Properties and Development Corporation (Primelink for brevity) is a domestic corporation engaged in real
estate development. Rafaelito W. Lopez is its President and Chief Executive Officer. 3
Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose Marcos T. Lazatin
(the Lazatins for brevity), are co-owners of two (2) adjoining parcels of land, with a combined area of 30,000 square
meters, located in Tagaytay City and covered by Transfer Certificate of Title (TCT) No. T-108484 of the Register of 2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or income of the Joint
Deeds of Tagaytay City. Venture project, after deducting all the above-mentioned expenses.8

On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as President, entered into a Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:
Joint Venture Agreement5 (JVA) for the development of the aforementioned property into a residential subdivision to
be known as "Tagaytay Garden Villas." Under the JVA, the Lazatin siblings obliged themselves to contribute the two
SALES-INCOME-COST PROJECTION
parcels of land as their share in the joint venture. For its part, Primelink undertook to contribute money, labor,
personnel, machineries, equipment, contractor’s pool, marketing activities, managerial expertise and other needed
resources to develop the property and construct therein the units for sale to the public. Specifically, Primelink bound lawphil.net
itself to accomplish the following, upon the execution of the deed:
SELLING PRICE COST PRICE DIFFERENCE INCOME

a.) Survey the land, and prepare the projects master plans, engineering designs, structural and CLUSTER:
architectural plans, site development plans, and such other need plans in accordance with existing laws
A1 3,200,000 - A2 1,260,000 = 1,940,000 x 24 = P 46,560,000.00
and the rules and regulations of appropriate government institutions, firms or agencies;
TWIN:
b.) Secure and pay for all the licenses, permits and clearances needed for the projects;
B1 2,500,000 - B2 960,000 = 1,540,000 x 24 = 36,960,000.00

c.) Furnish all materials, equipment, labor and services for the development of the land in preparation for SINGLE:
the construction and sale of the different types of units (single-detached, duplex/twin, cluster and row
house); C1 3,500,000 - C2 1,400,000 = 2,100,000 x 16 = 33,600,000.00

ROW-TYPE TOWNHOMES:
d.) Guarantee completion of the land development work if not prevented by force majeure or fortuitous
event or by competent authority, or other unavoidable circumstances beyond the DEVELOPER’S control, D1 1,600,000 - D2 700,000 = 900,000 x 24 = 21,600,000.00
not to exceed three years from the date of the signing of this Joint Venture Agreement, except the
installation of the electrical facilities which is solely MERALCO’S responsibility;
₱138,720,000.00

e.) Provide necessary manpower resources, like executive and managerial officers, support personnel and (GROSS) Total Cash Price (A1+B1+C1+D1) = ₱231,200,000.00
marketing staff, to handle all services related to land and housing development (administrative and
construction) and marketing (sales, advertising and promotions). 6 Total Building Expense (A2+B2+C2+D2) = 92,480,000.00

COMPUTATION OF ADD’L. INCOME ON INTEREST

The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as follows:
TCP x 30% D/P = P 69,360,000 P 69,360,000.00
1. During the first two years of the Project, the DEVELOPER and the LANDOWNER can draw allowances Balance = 70% = 161,840,000
or make advances not exceeding a total of twenty percent (20%) of the net revenue for that period, on the
basis of sixty percent (60%) for the DEVELOPER and forty percent (40%) for the LANDOWNERS. x .03069 x 48 = P238,409,740 238,409,740.00

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

The drawing allowances/advances are limited to twenty percent (20%) of the net revenue for the first two
years, in order to have sufficient reserves or funds to protect and/or guarantee the construction and EXPENSES:
completion of the different types of units mentioned above.
less: A Building expenses P 92,480,000.00
2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to drawing allowances B Commission (8% of TCP) 18,496,000.00
and/or advances equivalent to sixty percent (60%) and forty percent (40%), respectively, of the total net
revenue or income of the sale of the units.7 C Admin. & Mgmt. expenses (2% of TCP) 4,624,000.00

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

They also agreed to share in the profits from the joint venture, thus:
E Building expenses for the open
1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or income of the Joint spaces and Amenities (Development
Venture project, after deducting all expenses incurred in connection with the land development (such as cost not incl. Housing) 400 x 30,000 sqms. 12,000,000.00
administrative management and construction expenses), and marketing (such as sales, advertising and
promotions), and
TOTAL EXPENSES (A+B+C+D+E) P132,224,000.00
 RECONCILIATION OF INCOME VS. EXPENSES WHEREFORE, it is respectfully prayed of this Honorable Court that a temporary restraining order be forthwith issued
enjoining the defendants to immediately stop their land development, construction and marketing of the housing units
Total Projected Income (incl. income from interest earn.) P307,769,740.00 in the aforesaid project; after due proceedings, to issue a writ of preliminary injunction enjoining and prohibiting said
land development, construction and marketing of housing units, pending the disposition of the instant case.

less: 132,224,000.00
After trial, a decision be rendered:
Total Expenses P175,545,740.009
1. Rescinding the Joint Venture Agreement executed between the plaintiffs and the defendants;
The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions between the parties
relative to the interpretation, scope and reach, and the enforcement/implementation of any provision of the 2. Immediately restoring to the plaintiffs possession of the subject parcels of land;
agreement shall be referred to Voluntary Arbitration in accordance with the Arbitration Law. 10
3. Ordering the defendants to render an accounting of all income generated as well as expenses incurred
The Lazatins agreed to subject the title over the subject property to an escrow agreement. Conformably with the and disbursement made in connection with the project;
escrow agreement, the owner’s duplicate of the title was deposited with the China Banking Corporation. 11 However,
Primelink failed to immediately secure a Development Permit from Tagaytay City, and applied the permit only on 4. Making the Writ of Preliminary Injunction permanent;
August 30, 1995. On October 12, 1995, the City issued a Development Permit to Primelink.12

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount Forty Million Pesos
In a Letter13 dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply with its obligations (P40,000,000.00) in actual and/or compensatory damages;
under the JVA, otherwise the appropriate action would be filed against it to protect their rights and interests. This
impelled the officers of Primelink to meet with the Lazatins and enabled the latter to review its business
records/papers. In another Letter14 dated October 22, 1997, the Lazatins informed Primelink that they had decided to 6. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of Two Million Pesos
rescind the JVA effective upon its receipt of the said letter. The Lazatins demanded that Primelink cease and desist (P2,000,000.00) in exemplary damages;
from further developing the property.
7. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount equivalent to ten percent
Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC) of Tagaytay City, Branch (10%) of the total amount due as and for attorney’s fees; and
18, a complaint for rescission accounting and damages, with prayer for temporary restraining order and/or
preliminary injunction against Primelink and Lopez. The case was docketed as Civil Case No. TG-1776. Plaintiffs 8. To pay the costs of this suit.
alleged, among others, that, despite the lapse of almost four (4) years from the execution of the JVA and the delivery
of the title and possession of the land to defendants, the land development aspect of the project had not yet been
completed, and the construction of the housing units had not yet made any headway, based on the following facts, Other reliefs and remedies as are just and equitable are likewise being prayed for. 16
namely: (a) of the 50 housing units programmed for Phase I, only the following types of houses appear on the site in
these condition: (aa) single detached, one completed and two units uncompleted; (bb) cluster houses, one unit Defendants opposed plaintiffs’ plea for a writ of preliminary injunction on the ground that plaintiffs’ complaint was
nearing completion; (cc) duplex, two units completed and two units unfinished; and (dd) row houses, two units, premature, due to their failure to refer their complaint to a Voluntary Arbitrator pursuant to the JVA in relation to
completed; (b) in Phase II thereof, all that was done by the defendants was to grade the area; the units so far Section 2 of Republic Act No. 876 before filing their complaint in the RTC. They prayed for the dismissal of the
constructed had been the object of numerous complaints by their owners/purchasers for poor workmanship and the complaint under Section 1(j), Rule 16 of the Rules of Court:
use of sub-standard materials in their construction, thus, undermining the project’s marketability. Plaintiffs also
alleged that defendants had, without justifiable reason, completely disregarded previously agreed accounting and
auditing procedures, checks and balances system installed for the mutual protection of both parties, and the WHEREFORE, it is respectfully prayed that an Order be issued:
scheduled regular meetings were seldom held to the detriment and disadvantage of plaintiffs. They averred that they
sent a letter through counsel, demanding compliance of what was agreed upon under the agreement but defendants
a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited Rules of Court, or, in the
refused to heed said demand. After a succession of letters with still no action from defendants, plaintiffs sent a letter
alternative,
on October 22, 1997, a letter formally rescinding the JVA.

b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to arbitrate, and then
Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by defendants, they (plaintiffs) asking the parties to resolve their controversies, pursuant to the Arbitration Law, or in the alternative;
stood to receive the amount of P70,218,296.00 as their net share in the joint venture project; to date, however, after
almost four (4) years and despite the undertaking in the JVA that plaintiffs shall initially get 20% of the agreed net
revenue during the first two (2) years (on the basis of the 60%-40% sharing) and their full 40% share thereafter, c) staying or suspending the proceedings in captioned case until the completion of the arbitration, and
defendants had yet to deliver these shares to plaintiffs which by conservative estimates would amount to no less
than P40,000,000.00.15
d) denying the plaintiffs’ prayer for the issuance of a temporary restraining order or writ of preliminary
injunction.
Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:
Other reliefs and remedies just and equitable in the premises are prayed for.17
In the meantime, before the expiration of the reglementary period to answer the complaint, defendants, invoking their themselves have their own separate gripes against the defendants as typified by the letters (Exhibits "G" and "H") of
counsel’s heavy workload, prayed for a 15-day extension18 within which to file their answer. The additional time Mr. Emmanuel Enciso.
prayed for was granted by the RTC.19 However, instead of filing their answer, defendants prayed for a series of 15-
day extensions in eight (8) successive motions for extensions on the same justification. 20 The RTC again granted the
xxxx
additional time prayed for, but in granting the last extension, it warned against further extension. 21 Despite the
admonition, defendants again moved for another 15-day extension,22 which, this time, the RTC denied. No answer
having been filed, plaintiffs moved to declare the defendants in default,23 which the RTC granted in its Order24 dated Rummaging through the evidence presented in the course of the testimony of Mrs. Maminta on August 6, 1998
June 24, 1998. (Exhibits "N," "O," "P," "Q" and "R" as well as submarkings, pp. 60 to 62, TSN August 6, 1998) this court has
observed, and is thus convinced, that a pattern of what appears to be a scheme or plot to reduce and eventually blot
out the net income generated from sales of housing units by defendants, has been established. Exhibit "P-2" is
On June 25, 1998, defendants filed, via registered mail, their "Answer with Counterclaim and Opposition to the
explicit in declaring that, as of September 30, 1995, the joint venture project earned a net income of
Prayer for the Issuance of a Writ of Preliminary Injunction."25 On July 8, 1998, defendants filed a Motion to Set Aside
about P2,603,810.64. This amount, however, was drastically reduced in a subsequent financial report submitted by
the Order of Default.26 This was opposed by plaintiffs.27 In an Order28 dated July 14, 1998, the RTC denied
the defendants to P1,954,216.39. Shortly thereafter, and to the dismay of the plaintiffs, the defendants submitted an
defendants’ motion to set aside the order of default and ordered the reception of plaintiffs’ evidence ex parte.
income statement and a balance sheet (Exhibits "R" and "R-1") indicating a net loss of P5,122,906.39 as of June 30,
Defendants filed a motion for reconsideration29 of the July 14, 1998 Order, which the RTC denied in its Order30 dated
1997.
October 21, 1998.

Of the reported net income of P2,603,810.64 (Exhibit "P-2") the plaintiffs should have received the sum
Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in default, as well as the
of P1,041,524.26 representing their 40% share under paragraph II and V of the JVA. But this was not to be so. Even
Order denying their motion to set aside the order of default, alleging that these were contrary to facts of the case, the
before the plaintiffs could get hold of their share as indicated above, the defendants closed the chance altogether by
law and jurisprudence.31 On September 16, 1999, the appellate court issued a Resolution32 dismissing the appeal on
declaring a net loss. The court perceives this to be one calculated coup-de-grace that would put to thin air plaintiffs’
the ground that the Orders appealed from were interlocutory in character and, therefore, not appealable. No motion
hope of getting their share in the profit under the JVA.
for reconsideration of the Order of the dismissal was filed by defendants.

That this matter had reached the court is no longer a cause for speculation. The way the defendants treated the JVA
In the meantime, plaintiffs adduced ex parte their testimonial and documentary evidence. On April 17, 2000, the RTC
and the manner by which they handled the project itself vis-à-vis their partners, the plaintiffs herein, there is bound to
rendered a Decision, the dispositive part of which reads:
be certain conflict as the latter repeatedly would received the losing end of the bargain.

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as follows:
Under the intolerable circumstances, the plaintiffs could not have opted for some other recourse but to file the
present action to enforce their rights. x x x34
1. Ordering the rescission of the Joint Venture Agreement as of the date of filing of this complaint;
On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal35 alleging defendants’ dilatory tactics for its
2. Ordering the defendants to return possession, including all improvements therein, of the real estate allowance. This was opposed by defendants.36
property belonging to the plaintiffs which is described in, and covered by Transfer Certificate of Title No. T-
10848 of the Register of Deeds of Tagaytay City, and located in Barangay Anulin, City of Tagaytay;
On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of plaintiffs. 37 Upon posting a
bond of P1,000,000.00 by plaintiffs, a writ of execution pending appeal was issued on June 20, 2000.38
3. Ordering the defendants to turn over all documents, records or papers that have been executed,
prepared and retained in connection with any contract to sell or deed of sale of all lots/units sold during the
Defendants appealed the decision to the CA on the following assignment of errors:
effectivity of the joint venture agreement;

I
4. Ordering the defendants to pay the plaintiffs the sum of P1,041,524.26 representing their share of the
net income of the P2,603,810.64 as of September 30, 1995, as stipulated in the joint venture agreement;
THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST REFERRING THE COMPLAINT FOR
VOLUNTARY ARBITRATION (RA NO. 876), CONTRARY TO THE MANDATED VOLUNTARY ARBITRATION
5. Ordering the defendants to pay the plaintiffs’ attorney’s fees in the amount of P104,152.40;
CLAUSE UNDER THE JOINT VENTURE AGREEMENT, AND THE DOCTRINE IN "MINDANAO PORTLAND
CEMENT CORPORATION V. MCDONOUGH CONSTRUCTION COMPANY OF FLORIDA" (19 SCRA 814-815).
6. Ordering the defendants to pay the costs.
II
SO ORDERED.33
THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING APPEAL EVEN IN THE ABSENCE
The trial court anchored its decision on the following findings: OF GOOD AND COMPELLING REASONS TO JUSTIFY SAID ISSUANCE, AND DESPITE PRIMELINK’S STRONG
OPPOSITION THERETO.
x x x Evidence on record have shown patent violations by the defendants of the stipulations particularly paragraph II
covering Developer’s (defendant) undertakings, as well as paragraph III and paragraph V of the JVA. These III
violations are not limited to those made against the plaintiffs alone as it appears that some of the unit buyers
THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINK’S MOTION TO QUASH THE WRIT OF
EXECUTION PENDING APPEAL AND THE MOTION FOR RECONSIDERATION, ALTHOUGH THE COURT HAS
RETAINED ITS JURISDICTION TO RULE ON ALL QUESTIONS RELATED TO EXECUTION.
IV
THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT ALTHOUGH PRIMELINK HAS
SUBSTANTIALLY DEVELOPED THE PROJECT AND HAS SPENT MORE OR LESS FORTY MILLION PESOS,
AND DESPITE APPELLEES’ FAILURE TO PRESENT SUFFICIENT EVIDENCE JUSTIFYING THE SAID
RESCISSION.
V than P500.00 per square meter, the "price tag" agreed upon the parties for the purpose of the JVA. Moreover, before
THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE RIGHT TO TAKE OVER THE
SUBDIVISION AND TO APPROPRIATE FOR THEMSELVES ALL THE EXISTING IMPROVEMENTS
INTRODUCED THEREIN BY PRIMELINK, ALTHOUGH SAID RIGHT WAS NEITHER ALLEGED NOR PRAYED
FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING THE EX PARTE HEARING, AND EVEN WITHOUT
ORDERING APPELLEES TO FIRST REIMBURSE PRIMELINK OF THE SUBSTANTIAL DIFFERENCE BETWEEN
THE MARKET VALUE OF APPELLEES’ RAW, UNDEVELOPED AND UNPRODUCTIVE LAND (CONTRIBUTED
TO THE PROJECT) AND THE SUM OF MORE OR LESS FORTY MILLION PESOS WHICH PRIMELINK HAD
SPENT FOR THE HORIZONTAL AND VERTICAL DEVELOPMENT OF THE PROJECT, THEREBY ALLOWING
APPELLEES TO UNJUSTLY ENRICH THEMSELVES AT THE EXPENSE OF PRIMELINK. 39
The appeal was docketed in the CA as CA-G.R. CV No. 69200.
On August 9, 2004, the appellate court rendered a decision affirming, with modification, the appealed decision. The
fallo of the decision reads:
WHEREFORE, in view of the foregoing, the assailed decision of the Regional Trial Court of Tagaytay City, Branch
18, promulgated on April 17, 2000 in Civil Case No. TG-1776, is hereby AFFIRMED. Accordingly, Transfer Certificate
of Title No. T-10848 held for safekeeping by Chinabank pursuant to the Escrow Agreement is ordered released for
return to the plaintiffs-appellees and conformably with the affirmed decision, the cancellation by the Register of
Deeds of Tagaytay City of whatever annotation in TCT No. 10848 by virtue of the Joint Venture Agreement, is now
proper.
SO ORDERED.40
Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation,41 the appellate court ruled
that, under Philippine law, a joint venture is a form of partnership and is to be governed by the laws of partnership.
The aggrieved parties filed a motion for reconsideration,42 which the CA denied in its Resolution43 dated March 7,
2005.
Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:
1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND REVERSIBLE LEGAL ERROR
AND/OR GRAVE ABUSE OF DISCRETION IN ORDERING THE RETURN TO THE RESPONDENTS OF
THE PROPERTY WITH ALL IMPROVEMENTS THEREON, EVEN WITHOUT ORDERING/REQUIRING
THE RESPONDENTS TO FIRST PAY OR REIMBURSE PRIMELINK OF ALL EXPENSES INCURRED IN
DEVELOPING AND MARKETING THE PROJECT, LESS THE ORIGINAL VALUE OF THE PROPERTY,
AND THE SHARE DUE RESPONDENTS FROM THE PROFITS (IF ANY) OF THE JOINT VENTURE
PROJECT?
2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE AND
UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD HUMAN RELATIONS AND VIOLATIVE
OF EXISTING LAWS AND JURISPRUDENCE ON JUDICIAL NOTICE, DEFAULT, UNJUST
ENRICHMENT AND RESCISSION OF CONTRACT WHICH REQUIRES MUTUAL RESTITUTION, NOT
UNILATERAL APPROPRIATION, OF PROPERTY BELONGING TO ANOTHER?44
Petitioners maintain that the aforesaid portion of the decision which unconditionally awards to respondents "all
improvements" on the project without requiring them to pay the value thereof or to reimburse Primelink for all
expenses incurred therefore is inherently and essentially illegal and confiscatory, oppressive and unconscionable,
contrary to the tenets of good human relations, and will allow respondents to unjustly enrich themselves at
Primelink’s expense. At the time respondents contributed the two parcels of land, consisting of 30,000 square meters
to the joint venture project when the JVA was signed on March 10, 1994, the said properties were worth not more
respondents rescinded the JVA sometime in October/November 1997, the property had already been substantially
developed as improvements had already been introduced thereon; petitioners had likewise incurred administrative
and marketing expenses, among others, amounting to more or less P40,000,000.00.45
Petitioners point out that respondents did not pray in their complaint that they be declared the owners and entitled to
the possession of the improvements made by petitioner Primelink on the property; neither did they adduce evidence
to prove their entitlement to said improvements. It follows, petitioners argue, that respondents were not entitled to the
improvements although petitioner Primelink was declared in default.
They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to the extent necessary to
cover the damages caused and that, under Article 1385 of the same Code, rescission creates the obligation to return
the things which were not object of the contract, together with their fruits, and the price with its interest; consequently,
it can be effected only when respondents can return whatever they may be obliged to return. Respondents who
sought the rescission of the JVA must place petitioner Primelink in the status quo. They insist that respondents
cannot rescind and, at the same time, retain the consideration, or part of the consideration received under the JVA.
They cannot have the benefits of rescission without assuming its burden. All parties must be restored to their original
positions as nearly as possible upon the rescission of a contract. In the event that restoration to the status quo is
impossible, rescission may be granted if the Court can balance the equities and fashion an appropriate remedy that
would be equitable to both parties and afford complete relief.
Petitioners insist that being defaulted in the court a quo would in no way defeat their claim for reimbursement
because "[w]hat matters is that the improvements exist and they cannot be denied." 46 Moreover, they point out, the
ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation47 cited by the CA is not in point.
On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not specifically pray for their
takeover of the property and for the possession of the improvements on the parcels of land, nevertheless,
respondents were entitled to said relief as a necessary consequence of the ruling of the trial court ordering the
rescission of the JVA. The appellate court cited the ruling of this Court in the Aurbach case and Article 1838 of the
New Civil Code, to wit:
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is
silent on any particular issue, the general principles of partnership may be resorted to. 48
Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with rescissible contracts.
What applies is Article 1191 of the New Civil Code, which reads:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
It is not amiss to state that title to the land or TCT No. T-10848 which is now held by Chinabank for safekeeping
pursuant to the Escrow Agreement executed between Primelink Properties and Development Corporation and Ma.
Clara T. Lazatin-Magat should also be returned to the LAZATINs as a necessary consequence of the order of
rescission of contract. The reason for the existence of the Escrow Agreement has ceased to exist when the joint
venture agreement was rescinded.49

Respondents stress that petitioners must bear any damages or losses they may have suffered. They likewise stress
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
that they did not enrich themselves at the expense of petitioners.
with articles 1385 and 1388 and the Mortgage Law.

In reply, petitioners assert that it is unjust and inequitable for respondents to retain the improvements even if their
They insist that petitioners are not entitled to rescission for the improvements because, as found by the RTC and the
share in the P1,041,524.26 of the net income of the property and the sale of the land were to be deducted from the
CA, it was petitioner Primelink that enriched itself at the expense of respondents. Respondents reiterate the ruling of
value of the improvements, plus administrative and marketing expenses in the total amount of P40,000,000.00.
the CA, and argue as follows:
Petitioners will still be entitled to an accounting from respondents. Respondents cannot deny the existence and
nature of said improvements as they are visible to the naked eye.
PRIMELINK argued that the LAZATINs in their complaint did not allege, did not prove and did not pray that they are
and should be entitled to take over the development of the project, and that the improvements and existing structures
The threshold issues are the following: (1) whether respondents are entitled to the possession of the parcels of land
which were introduced by PRIMELINK after spending more or less Forty Million Pesos – be awarded to them. They
covered by the JVA and the improvements thereon introduced by petitioners as their contribution to the JVA; (2)
merely asked in the complaint that the joint venture agreement be rescinded, and that the parcels of land they
whether petitioners are entitled to reimbursement for the value of the improvements on the parcels of land.
contributed to the project be returned to them.

The petition has no merit.

PRIMELINK’s argument lacks merit. The order of the court for PRIMELINK to return possession of the real estate
property belonging to the LAZATINs including all improvements thereon was not a judgment that was different in kind
than what was prayed for by the LAZATINs. The order to return the property with all the improvements thereon is just On the first issue, we agree with petitioners that respondents did not specifically pray in their complaint below that
a necessary consequence to the order of rescission. possession of the improvements on the parcels of land which they contributed to the JVA be transferred to them.
Respondents made a specific prayer in their complaint that, upon the rescission of the JVA, they be placed in
possession of the parcels of land subject of the agreement, and for other "reliefs and such other remedies as are just
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the agreement is
and equitable in the premises." However, the trial court was not precluded from awarding possession of the
silent on any particular issue, the general principles of partnership may be resorted to. In Aurbach v. Sanitary Wares
improvements on the parcels of land to respondents in its decision. Section 2(c), Rule 7 of the Rules of Court
Manufacturing Corporation, the Supreme Court discussed the following points regarding joint ventures and
provides that a pleading shall specify the relief sought but it may add as general prayer for such further or other relief
partnership:
as may be deemed just and equitable. Even without the prayer for a specific remedy, proper relief may be granted by
the court if the facts alleged in the complaint and the evidence introduced so warrant.50 The court shall grant relief
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been warranted by the allegations and the proof even if no such relief is prayed for. 51 The prayer in the complaint for other
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. reliefs equitable and just in the premises justifies the grant of a relief not otherwise specifically prayed for. 52
811 [1920]) It is, in fact, hardly distinguishable from the partnership, since elements are similar – community of
interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F.2d
The trial court was not proscribed from placing respondents in possession of the parcels of land and the
498 [1949]; Carboneau v. Peterson, 95 P.2d 1043 [1939]; Buckley v. Chadwick, 45 Cal.2d 183, 288 P.2d 12, 289
improvements on the said parcels of land. It bears stressing that the parcels of land, as well as the improvements
P.2d 242 [1955]) The main distinction cited by most opinions in common law jurisdictions is that the partnership
made thereon, were contributed by the parties to the joint venture under the JVA, hence, formed part of the assets of
contemplates a general business with some degree of continuity, while the joint venture is formed for the execution
the joint venture.53 The trial court declared that respondents were entitled to the possession not only of the parcels of
of a single transaction, and is thus of a temporary nature. (Tuffs v. Mann, 116 Cal.App. 170, 2 P.2d 500 [1931];
land but also of the improvements thereon as a consequence of its finding that petitioners breached their agreement
Harmon v. Martin, 395 III. 595, 71 N.E.2d 74 [1947]; Gates v. Megargel, 266 Fed. 811 [1920]) This observation is not
and defrauded respondents of the net income under the JVA.
entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore
that, under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of On the second issue, we agree with the CA ruling that petitioner Primelink and respondents entered into a joint
partnership. The Supreme Court has, however, recognized a distinction between these two business forms, and has venture as evidenced by their JVA which, under the Court’s ruling in Aurbach, is a form of partnership, and as such is
held that although a corporation cannot enter into a partnership contract, it may, however, engage in a joint venture to be governed by the laws on partnership.
with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]; Campos and Lopez – Campos Comments, Notes and
Selected Cases, Corporation Code 1981) (Emphasis Supplied)
When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that petitioners
willfully and persistently committed a breach of the JVA, the court thereby dissolved/cancelled the partnership.54 With
The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the words of the court a quo, was a the rescission of the JVA on account of petitioners’ fraudulent acts, all authority of any partner to act for the
pattern of what appears to be a scheme or plot to reduce and eventually blot out the net incomes generated from partnership is terminated except so far as may be necessary to wind up the partnership affairs or to complete
sales of housing units by the defendants. Under Article 1838 of the Civil Code, where the partnership contract is transactions begun but not yet finished.55 On dissolution, the partnership is not terminated but continues until the
rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind winding up of partnership affairs is completed.56 Winding up means the administration of the assets of the
is, without prejudice to any other right is entitled to a lien on, or right of retention of, the surplus of the partnership partnership for the purpose of terminating the business and discharging the obligations of the partnership.
property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase
of an interest in the partnership and for any capital or advance contributed by him. In the instant case, the joint
The transfer of the possession of the parcels of land and the improvements thereon to respondents was only for a
venture still has outstanding liabilities to third parties or the buyers of the property.
specific purpose: the winding up of partnership affairs, and the partition and distribution of the net partnership assets
as provided by law.57 After all, Article 1836 of the New Civil Code provides that unless otherwise agreed by the And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to any other right,
parties in their JVA, respondents have the right to wind up the partnership affairs: entitled:

Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the legal (1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the
representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs, provided, partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in
however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the the partnership and for any capital or advances contributed by him;
court.
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the
It must be stressed, too, that although respondents acquired possession of the lands and the improvements thereon, partnership for any payments made by him in respect of the partnership liabilities; and
the said lands and improvements remained partnership property, subject to the rights and obligations of the parties,
inter se, of the creditors and of third parties under Articles 1837 and 1838 of the New Civil Code, and subject to the
(3) To be indemnified by the person guilty of the fraud or making the representation against all debts and
outcome of the settlement of the accounts between the parties as provided in Article 1839 of the New Civil Code,
liabilities of the partnership.
absent any agreement of the parties in their JVA to the contrary.58 Until the partnership accounts are determined, it
cannot be ascertained how much any of the parties is entitled to, if at all.
The accounts between the parties after dissolution have to be settled as provided in Article 1839 of the New Civil
Code:
It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of the
improvements on the parcels of land owned by the joint venture/partnership. Notably, the JVA of the parties does not
contain any provision designating any party to wind up the affairs of the partnership. Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be observed, subject to
any agreement to the contrary:
Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is caused in contravention
of the partnership agreement are as follows: (1) The assets of the partnership are:

(1) Each partner who has not caused dissolution wrongfully shall have: (a) The partnership property,

(a) All the rights specified in the first paragraph of this article, and (b) The contributions of the partners necessary for the payment of all the liabilities specified in
No. 2.
(b) The right, as against each partner who has caused the dissolution wrongfully, to damages for
breach of the agreement. (2) The liabilities of the partnership shall rank in order of payment, as follows:

(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business (a) Those owing to creditors other than partners,
in the same name either by themselves or jointly with others, may do so, during the agreed term for the
partnership and for that purpose may possess the partnership property, provided they secure the payment
by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value (b) Those owing to partners other than for capital and profits,
of his interest in the partnership at the dissolution, less any damages recoverable under the second
paragraph, No. 1(b) of this article, and in like manner indemnify him against all present or future (c) Those owing to partners in respect of capital,
partnership liabilities.
(d) Those owing to partners in respect of profits.
(3) A partner who has caused the dissolution wrongfully shall have:
(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the satisfaction of
(a) If the business is not continued under the provisions of the second paragraph, No. 2, all the the liabilities.
rights of a partner under the first paragraph, subject to liability for damages in the second
paragraph, No. 1(b), of this article.
(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the
liabilities.
(b) If the business is continued under the second paragraph, No. 2, of this article, the right as
against his co-partners and all claiming through them in respect of their interests in the
partnership, to have the value of his interest in the partnership, less any damage caused to his (5) An assignee for the benefit of creditors or any person appointed by the court shall have the right to
co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by a enforce the contributions specified in the preceding number.
bond approved by the court, and to be released from all existing liabilities of the partnership; but
in ascertaining the value of the partner’s interest the value of the good-will of the business shall (6) Any partner or his legal representative shall have the right to enforce the contributions specified in No.
not be considered. 4, to the extent of the amount which he has paid in excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the contributions specified in No. 4.
 (8) When partnership property and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property and separate creditors on
individual property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate
property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 69200 are AFFIRMED insofar as they conform to this Decision of the Court.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO,
GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES
CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG,
AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP Nos.
05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate Appellate Court
and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares),
American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino stockholders shall not
interfere in ASI's choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate
only six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall vote only among
themselves to determine who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage
primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary
wares. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated
enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and election of
the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall
consist of nine individuals. As long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine directors shall be designated by
American-Standard, and the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including the
grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member of
the Executive Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of
Investments for availment of incentives with the condition that at least 60% of the capital stock of the corporation
shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations between
the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand the export
operations of the company to which ASI objected as it apparently had other subsidiaries of joint joint venture groups
in the countries where Philippine exports were contemplated. On March 8, 1983, the annual stockholders' meeting
was held. The meeting was presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the agenda, the stockholders then proceeded to the election of the The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding the
members of the board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group
and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's decision.
Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano
E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
nominations out of order on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by
the past annual stockholders' meetings to nominate only nine persons as nominees for the nine-member board of
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court in
directors, and the legal advice of Saniwares' legal counsel. The following events then, transpired:
its decision ordered the remand of the case to the Securities and Exchange Commission with the directive that a new
stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the supervision of the
... There were protests against the action of the Chairman and heated arguments ensued. An Commission.
appeal was made by the ASI representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of Appeals)
order and no vote on the ruling was taken. The Chairman then instructed the Corporate
rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and
Secretary to cast all the votes present and represented by proxy equally for the 6 nominees of
Charles Chamsay in G.R. No. 75875 assign the following errors:
the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional
persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative,
Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing to ASI I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN
for the three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote. FACT THERE WAS NO ELECTION AT ALL.
Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted
cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
instructed the Secretary to cast all votes equally in favor of the three ASI nominees, namely,
Wolfgang Aurbach, John Griffin and David Whittingham and the six originally nominated by SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.
Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the election of
the following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr., III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT
The representative of ASI then moved to recess the meeting which was duly seconded. There LEGALLY DO. (p. 17, Rollo-75875)
was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn was
accepted by the Chairman, Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment were registered and having Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:
been ignored, Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but
only recessed and that the meeting would be reconvened in the next room. The Chairman then 11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements
threatened to have the stockholders who did not agree to the decision of the Chairman on the entered into by stockholders and the replacement of the conditions of such agreements with
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders, terms never contemplated by the stockholders but merely dictated by the CA .
allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the meeting at
the elevator lobby of the American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative 11.2. The Amended decision would likewise sanction the deprivation of the property rights of
votes cast earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang stockholders without due process of law in order that a favored group of stockholders may be
Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar voted for illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp.
himself, thus the said five directors were certified as elected directors by the Acting Secretary, 14-15, Rollo-75975-76)
Andres Gatmaitan, with the explanation that there was a tie among the other six (6) nominees
for the four (4) remaining positions of directors and that the body decided not to break the tie. On the other hand, the petitioners in G.R. No. 75951 contend that:
(pp. 37-39, Rollo of 75975-76)
I
These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT
Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second petition was for quo THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO
warranto and application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.
and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417) and Avelino F.
Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the II
legitimate directors of the corporation.
 THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH
1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer this question the following factors should be determined:
(1) the nature of the business established by the parties whether it was a joint venture or a corporation and (2)
whether or not the ASI Group may vote their additional 10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance with the rules
governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC
MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties should be
viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties' intention was to
form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto partners or
joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to establish a
joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the parol evidence rule
under section 7, Rule 130 of the Revised Rules of Court. According to them, the Lagdameo and Young Group never
pleaded in their pleading that the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced to writing,
it is to be considered as containing all such terms, and therefore, there can be, between the
parties and their successors in interest, no evidence of the terms of the agreement other than
the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties or the validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to Counterclaim
in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two distinct groups of stockholders in
Saniwares one of which (the Philippine Investors) shall constitute the majority, and the other ASI
shall constitute the minority stockholder. In any event, the evident intention of the Philippine
Investors and ASI in entering into the Agreement is to enter into ajoint venture enterprise, and if
some words in the Agreement appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful ones that sense which may result
from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No.
2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined their efforts
in furtherance of an enterprise for their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other relation is a question of fact for
the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.)
238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence
presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint venture and not a
corporation. The history of the organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with
ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the condition that the Agreement
should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in certain
enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually entitled to
designate a member of the Executive Committee and the vote of this member is required for
certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the articles and
by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of
Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products otherwise than through ASI's Export Marketing Services
[Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology and know-how to
Saniwares and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the
board of directors for certain actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate
certain officers of the corporation; the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms case, the provision that ASI shall
designate 3 out of the 9 directors and the other stockholders shall designate the other 6, clearly
 indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the
capital stock and the Philippine National stockholders who own the balance of 60%, and that 2)
ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of stockholders
who established a corporation with provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of the
nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified that
Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the possibility of the
enterprise being treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local
firm are constrained to seek the technology and marketing assistance of huge multinational corporations of the
developed world. Arrangements are formalized where a foreign group becomes a minority owner of a firm in
exchange for its manufacturing expertise, use of its brand names, and other such assistance. However, there is
always a danger from such arrangements. The foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine
waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its operations and
becomes profitable, the foreign group undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve controlling ownership to
Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be voted
as therein provided, or as they may agree, or as determined in accordance with a procedure
agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the disputed stockholders
meeting, these 95 stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees and lawyers count for
13 of the 95 stockholders. The YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9 stockholders, the Dy family for 7
stockholders, etc. If the members of one family and/or business or interest group are considered
as one (which, it is respectfully submitted, they should be for purposes of determining how
closely held Saniwares is there were as of 8 March 1983, practically only 17 stockholders of
Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated
11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture corporations
and have not rigidly applied principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express arrangements between corporate joint
ventures should be construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the agreement between the
joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry
v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d
903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v.
Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev.
p. 680,1958). These American cases dealt with legal questions as to the extent to which the
requirements arising from the corporate form of joint venture corporations should control, and
the courts ruled that substantial justice lay with those litigants who relied on the joint venture
agreement rather than the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture corporations often contain
provisions which do one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of shareholders power
to select a specified number of directors; (3) give to the shareholders control over the selection
and retention of employees; and (4) set up a procedure for the settlement of disputes by
arbitration (See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations. As
Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as defined by
the Code? Suppose that a corporation has twenty five stockholders, and therefore cannot qualify
as a close corporation under section 96, can some of them enter into an agreement to vote as a
unit in the election of directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the Code limits the legal meaning
of close corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come within the
definition. In such case, its stockholders should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination
of directors restricts the right of the Agreement's signatories to vote for directors, such
 contractual provision, as correctly held by the SEC, is valid and binding upon the signatories
thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board seats is obviously in consonance with the minority
position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the parties should
honor and adhere to their respective rights and obligations thereunder. Appellants seem to
contend that any allocation of board seats, even in joint venture corporations, are null and void
to the extent that such may interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should not be prepared to hold that
any agreement which curtails in any way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced businessmen and do not prejudice
those who are not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that cumulative
voting rights may be voluntarily waived by stockholders who enter into special relationships with
each other to pursue and implement specific purposes, as in joint venture relationships between
foreign and local stockholders, so long as such agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
rights and obligations which the parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the contractual allocation
of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
further reflection, we feel that the proper and just solution to give due consideration to both
factors suggests itself quite clearly. This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of the stockholders within
each group to cumulative voting in the process of determining who the group's nominees would
be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if
the Filipino stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino stockholder can
cumulate his votes. ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108,
as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation the
right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI Group
would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or governing
body of corporations or associations engaging in partially nationalized activities shall be allowed
in proportion to their allowable participation or share in the capital of such entities. (amendments
introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of query,
however, is whether or not that provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal definition but
it has been generally understood to mean an organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership,
since their elements are similar community of interest in the business, sharing of profits and
losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau
v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P.
2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdictions is that
the partnership contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary nature.
(Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate
in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint venture
with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos
Comments, Notes and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of
joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not the
ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation of
director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of the "Agreement."
As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating the members of the
board of directors while Section 3 (a) (1) relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members of the board of
directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to
them would obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties.
 Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108,
as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as regards the
possible domination by the foreign investors of the enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is
that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in the capital of the
entity. It is to be noted, however, that the same law also limits the election of aliens as members of the board of
directors in proportion to their allowance participation of said entity. In the instant case, the foreign Group ASI was
limited to designate three directors. This is the allowable participation of the ASI Group. Hence, in future dealings,
this limitation of six to three board seats should always be maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed upon
and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign
investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the
appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative voting
during the election of the board of directors of the enterprise as ruled by the appellate court and submits that the six
(6) directors allotted the Filipino stockholders should be selected by consensus pursuant to section 5 (a) of the
Agreement which uses the word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino stockholders are
allowed to select their nominees separately and not as a common slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be
interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we stated
earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative voting while section
5(a) relates to the manner of nominating the members of the board of directors. The petitioners in G.R. No. 75951
agreed to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure
cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the directors thus
elected being genuine members of the Filipino group, not voters whose interest is to increase the ASI share in the
management of Saniwares. The joint venture character of the enterprise must always be taken into account, so long
as the company exists under its original agreement. Cumulative voting may not be used as a device to enable ASI to
achieve stealthily or indirectly what they cannot accomplish openly. There are substantial safeguards in the
Agreement which are intended to preserve the majority status of the Filipino investors as well as to maintain the
minority status of the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R. No.
75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang
Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R.
Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs
against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
G.R. No. 159333 July 31, 2006
ARSENIO T. MENDIOLA, petitioner,
vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST RESOURCES,
PHILS., INC. and/or CELLMARK AB, respondents.
DECISION
PUNO, J.:
On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated January 30, 2003 and July 30, 2003,
respectively, in CA-G.R. SP No. 71028, affirming the ruling3 of the National Labor Relations Commission (NLRC),
which in turn set aside the July 30, 2001 Decision4 of the labor arbiter. The labor arbiter declared illegal the dismissal
of petitioner from employment and awarded separation pay, moral and exemplary damages, and attorney's fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized and existing under the
laws of California, USA. It is a subsidiary of Cellulose Marketing International, a corporation duly organized under the
laws of Sweden, with principal office in Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side Agreement on Representative Office known as Pacific Forest
Resources (Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM), effective May 1, 1995, "assuming that Pacfor-
Phils. is already approved by the Securities and Exchange Commission [SEC] on the said date." 6 The Side
Agreement outlines the business relationship of the parties with regard to the Philippine operations of Pacfor. Private
respondent will establish a Pacfor representative office in the Philippines, to be known as Pacfor Phils, and petitioner
ATM will be its President. Petitioner's base salary and the overhead expenditures of the company shall be borne by
the representative office and funded by Pacfor/ATM, since Pacfor Phils. is equally owned on a 50-50 equity by ATM
and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to transact business in
the Philippines under the name of Pacfor or Pacfor Phils.7 In its application, private respondent Pacfor proposed to
establish its representative office in the Philippines with the purpose of monitoring and coordinating the market
activities for paper products. It also designated petitioner as its resident agent in the Philippines, authorized to accept
summons and processes in all legal proceedings, and all notices affecting the corporation. 8
In March 1997, the Side Agreement was amended through a "Revised Operating and Profit Sharing Agreement for
the Representative Office Known as Pacific Forest Resources (Philippines)," 9 where the salary of petitioner was
increased to $78,000 per annum. Both agreements show that the operational expenses will be borne by the
representative office and funded by all parties "as equal partners," while the profits and commissions will be shared
among them.
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking confirmation of his 50% equity
of Pacfor Phils.10 Private respondent Pacfor, through William Gleason, its President, replied that petitioner is not a
part-owner of Pacfor Phils. because the latter is merely Pacfor-USA's representative office and not an entity separate
and distinct from Pacfor-USA. "It's simply a 'theoretical company' with the purpose of dividing the income 50-
50."11 Petitioner presumably knew of this arrangement from the start, having been the one to propose to private
respondent Pacfor the setting up of a representative office, and "not a branch office" in the Philippines to save on
taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint venture with them. He alleged he
would have been better off remaining as an independent agent or representative of Pacfor-USA as ATM Marketing
Corp.13 Had he known that no joint venture existed, he would not have allowed Pacfor to take the profitable business
of his own company, ATM Marketing Corp.14 Petitioner raised other issues, such as the rentals of office furniture,
salary of the employees, company car, as well as commissions allegedly due him. The issues were not resolved,
hence, in October 2000, petitioner wrote Pacfor-USA demanding payment of unpaid commissions and office furniture
and equipment rentals, amounting to more than one million dollars.15
On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn over to it all papers,
documents, files, records, and other materials in his or ATM Marketing Corporation's possession that belong to
Pacfor or Pacfor Phils.16 On December 18, 2000, private respondent Pacfor also required petitioner to remit more
than three hundred thousand-peso Christmas giveaway fund for clients of Pacfor Phils.17 Lastly, private respondent
Pacfor withdrew all its offers of settlement and ordered petitioner to transfer title and turn over to it possession of the
service car.18
Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them not to deal with Pacfor
Phils. In its letter to Intercontinental Paper Industries, Inc., dated November 21, 2000, private respondent Pacfor
stated:
Until further notice, please course all inquiries and communications for Pacific Forest Resources
(Philippines) to:
Pacific Forest Resources
200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax
Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the offices of ATM
Marketing Corporation at Room 504, Concorde Building, Legaspi Village, Makati City, Philippines. 19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December 2000, private
respondent directed said client "to please communicate directly with us on any further questions associated with
these payments or any future business. Do not communicate with [Pacfor] and/or [ATM]." 20
Petitioner construed these directives as a severance of the "unregistered partnership" between him and Pacfor, and
the termination of his employment as resident manager of Pacfor Phils. 21 In a memorandum to the employees of
Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all records to them
effective December 19, 2000. The company records were turned over only on January 26, 2001. This
means our jobs with Pacific Forest were terminated effective December 19, 2000. I am concerned about
your welfare. I would like to help you by offering you to work with ATM Marketing Corporation.
Please let me know if you are interested.22
On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own Pacfor Phils. Thus, it follows
that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.' office furniture and equipment and the service car.
He also reiterated his demand for unpaid commissions, and proposed to offset these with the remaining Christmas
giveaway fund in his possession.23 Furthermore, he did not renew the lease contract with Pulp and Paper, Inc., the
lessor of the office premises of Pacfor Phils., wherein he was the signatory to the lease agreement. 24
On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension and ordered him to
show cause why no disciplinary action should be taken against him. Private respondent Pacfor charged petitioner
with willful disobedience and serious misconduct for his refusal to turn over the service car and the Christmas
giveaway fund which he applied to his alleged unpaid commissions. Private respondent also alleged loss of
confidence and gross neglect of duty on the part of petitioner for allegedly allowing another corporation owned by
petitioner's relatives, High End Products, Inc. (HEPI), to use the same telephone and facsimile numbers of Pacfor, to
possibly steal and divert the sales and business of private respondent for HEPI's principal, International Forest
Products, a competitor of private respondent.25
Petitioner denied the charges. He reiterated that he considered the import of Pacfor President William Gleason's
letters as a "cessation of his position and of the existence of Pacfor Phils." He likewise informed private respondent
Pacfor that ATM Marketing Corp. now occupies Pacfor Phils.' office premises,26 and demanded payment of his
separation pay.27 On February 15, 2001, petitioner filed his complaint for illegal dismissal, recovery of separation
pay, and payment of attorney's fees with the NLRC.28
In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a memorandum dated March
5, 2001, private respondent directed petitioner to explain why he should not be disciplined for serious misconduct
and conflict of interest. Private respondent charged petitioner anew with serious misconduct for the latter's alleged
act of fraud and misrepresentation in authorizing the release of an additional peso salary for himself, besides the
dollar salary agreed upon by the parties. Private respondent also accused petitioner of disloyalty and representation
of conflicting interests for having continued using the Pacfor Phils.' office for operations of HEPI. In addition,
petitioner allegedly solicited business for HEPI from a competitor company of private respondent Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal. By directing petitioner to
turn over all office records and materials, regardless of whether he may have retained copies, private respondent
Pacfor virtually deprived petitioner of his job by the gradual diminution of his authority as resident manager.
Petitioner's position as resident manager whose duty, among others, was to maintain the security of its business
transactions and communications was rendered meaningless. The dispositive portion of the decision of the Labor
Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein respondents Cellmark
AB and Pacific Forest Resources, Inc., jointly and severally to compensate complainant Arsenio T.
Mendiola separation pay equivalent to at least one month for every year of service, whichever is
higher (sic), as reinstatement is no longer feasible by reason of the strained relations of the parties
equivalent to five (5) months in the amount of $32,000.00 plus the sum of P250,000.00; pay complainant
the sum of P500,000.00 as moral and exemplary damages and ten percent (10%) of the amounts awarded
as and for attorney's fees.
All other claims are dismissed for lack of basis.
SO ORDERED.30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20, 2001, the NLRC set
aside the July 30, 2001 decision of the labor arbiter, for lack of jurisdiction and lack of merit. 31 It held there was no
employer-employee relationship between the parties. Based on the two agreements between the parties, it
concluded that petitioner is not an employee of private respondent Pacfor, but a full co-owner (50/50 equity).
The NLRC denied petitioner's Motion for Reconsideration.32
Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld the ruling of the
NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:
A. The Respondent Court of Appeals committed reversible error and abused its discretion in rendering
judgment against petitioner since jurisdiction has been acquired over the subject matter of the case as
there exists employer-employee relationship between the parties.
B. The Respondent Court of Appeals committed reversible error and abused its discretion in ruling that
jurisdiction over the subject matter cannot be waived and may be alleged even for the first time on appeal
or considered by the court motu prop[r]io.35
The first issue is whether an employer-employee relationship exists between petitioner and private respondent
Pacfor.
various memoranda it issued against petitioner, placing the latter on preventive suspension while charging him with
various offenses, including willful disobedience, serious misconduct, and gross neglect of duty, and ordering him to
show cause why no disciplinary action should be taken against him.
Lastly and most important, private respondent Pacfor has the power of control over the means and method of
petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual exercise thereof. The principal
consideration is whether the employer has the right to control the manner of doing the work, and it is not the actual
exercise of the right by interfering with the work, but the right to control, which constitutes the test of the existence of
an employer-employee relationship.44 In the case at bar, private respondent Pacfor, as employer, clearly possesses
such right of control. Petitioner, as private respondent Pacfor's resident agent in the Philippines, is, exactly so, only
an agent of the corporation, a representative of Pacfor, who transacts business, and accepts service on its behalf.

Petitioner argues that he is an industrial partner of the partnership he formed with private respondent Pacfor, and
also an employee of the partnership. Petitioner insists that an industrial partner may at the same time be an
employee of the partnership, provided there is such an agreement, which, in this case, is the "Side Agreement" and
the "Revised Operating and Profit Sharing Agreement." The Court of Appeals denied the appeal of petitioner, holding
that "the legal basis of the complaint is not employment but perhaps partnership, co-ownership, or independent
contractorship." Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that no partnership or co-ownership exists
between the parties.
This right of control was exercised by private respondent Pacfor during the period of November to December 2000,
when it directed petitioner to turn over to it all records of Pacfor Phils.; when it ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor Phils.; and, when it withdrew all its offers of settlement and
ordered petitioner to transfer title and turn over to it the possession of the service car. It was also during this period
when private respondent Pacfor sent letters to its clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, advising them not to deal with petitioner and/or Pacfor Phils. In its letter to DAVCOR,
private respondent Pacfor replied to the client's request for an invoice payment extension, and formulated a revised
payment program for DAVCOR. This is one unmistakable proof that private respondent Pacfor exercises control over
the petitioner.

In a partnership, the members become co-owners of what is contributed to the firm capital and of all property that Next, we shall determine if petitioner was constructively dismissed from employment.
may be acquired thereby and through the efforts of the members.36 The property or stock of the partnership forms a
community of goods, a common fund, in which each party has a proprietary interest.37 In fact, the New Civil Code
The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and would not quit however,
regards a partner as a co-owner of specific partnership property.38 Each partner possesses a joint interest in the
private respondent Pacfor began to systematically deprive petitioner of his duties and benefits to make him feel that
whole of partnership property. If the relation does not have this feature, it is not one of partnership. 39 This essential
his presence in the company was no longer wanted. First, private respondent Pacfor directed petitioner to turn over
element, the community of interest, or co-ownership of, or joint interest in partnership property is absent in the
to it all records of Pacfor Phils. This would certainly make the work of petitioner very difficult, if not impossible.
relations between petitioner and private respondent Pacfor. Petitioner is not a part-owner of Pacfor Phils. William
Second, private respondent Pacfor ordered petitioner to remit the Christmas giveaway fund intended for clients of
Gleason, private respondent Pacfor's President established this fact when he said that Pacfor Phils. is simply a
Pacfor Phils. Then it ordered petitioner to transfer title and turn over to it the possession of the service car. It also
"theoretical company" for the purpose of dividing the income 50-50. He stressed that petitioner knew of this
advised its clients in the Philippines, particularly Intercontinental Paper Industries, Inc. and DAVCOR, not to deal with
arrangement from the very start, having been the one to propose to private respondent Pacfor the setting up of a
petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor appointed a new resident agent for Pacfor Phils. 45
representative office, and "not a branch office" in the Philippines to save on taxes. Thus, the parties in this case,
merely shared profits. This alone does not make a partnership.40
Although there is no reduction of the salary of petitioner, constructive dismissal is still present because continued
employment of petitioner is rendered, at the very least, unreasonable. 46 There is an act of clear discrimination,
Besides, a corporation cannot become a member of a partnership in the absence of express authorization by statute
insensibility or disdain by the employer that continued employment may become so unbearable on the part of the
or charter.41 This doctrine is based on the following considerations: (1) that the mutual agency between the partners,
employee so as to foreclose any choice on his part except to resign from such employment.47
whereby the corporation would be bound by the acts of persons who are not its duly appointed and authorized
agents and officers, would be inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively; and, (2) that such an arrangement would improperly allow corporate property to become The harassing acts of the private respondent are unjustified. They were undertaken when petitioner sought
subject to risks not contemplated by the stockholders when they originally invested in the corporation.42 No such clarification from the private respondent about his supposed 50% equity on Pacfor Phils. Private respondent Pacfor
authorization has been proved in the case at bar. invokes its rights as an owner. Allegedly, its issuance of the foregoing directives against petitioner was a valid
exercise of management prerogative. We remind private respondent Pacfor that the exercise of management
prerogative is not absolute. "By its very nature, encompassing as it could be, management prerogative must be
Be that as it may, we hold that on the basis of the evidence, an employer-employee relationship is present in the
exercised in good faith and with due regard to the rights of labor – verily, with the principles of fair play at heart and
case at bar. The elements to determine the existence of an employment relationship are: (a) the selection and
justice in mind." The exercise of management prerogative cannot be utilized as an implement to circumvent our laws
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's power to
and oppress employees.48
control the employee's conduct. The most important element is the employer's control of the employee's conduct, not
only as to the result of the work to be done, but also as to the means and methods to accomplish it. 43
As resident agent of private respondent corporation, petitioner occupied a position involving trust and confidence. In
the light of the strained relations between the parties, the full restoration of an employment relationship based on
In the instant case, all the foregoing elements are present. First, it was private respondent Pacfor which selected and
trust and confidence is no longer possible. He should be awarded separation pay, in lieu of reinstatement.
engaged the services of petitioner as its resident agent in the Philippines. Second, as stipulated in their Side
Agreement, private respondent Pacfor pays petitioner his salary amounting to $65,000 per annum which was later
increased to $78,000. Third, private respondent Pacfor holds the power of dismissal, as may be gleaned through the
IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003 Decision in CA-G.R. SP
No. 71028 and July 30, 2003 Resolution, affirming the December 20, 2001 Decision of the National Labor Relations
Commission, are ANNULED and SET ASIDE. The July 30, 2001 Decision of the Labor Arbiter is REINSTATED with
the MODIFICATION that the amount of P250,000.00 representing an alleged increase in petitioner's salary shall be
deducted from the grant of separation pay for lack of evidence.
G.R. No. 174149 : September 8, 2010
J. TIOSEJO INVESTMENT CORP., Petitioner, v. SPOUSES BENJAMIN AND ELEANOR ANG, Respondents.
DECISION
PEREZ, J.:
Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for review at bench seeks the reversal of
the Resolutions dated 23 May 2006 and 9 August 2006 issued by the Third Division of the Court of Appeals (CA) in
CA-G.R. SP No. 93841 which, respectively, dismissed the petition for review of petitioner J. Tiosejo Investment Corp.
(JTIC) for having been filed out of time 1 and denied the motion for reconsideration of said dismissal. 2
The Facts
On 28 December 1995 petitioner entered into a Joint Venture Agreement (JVA) with Primetown Property Group, Inc.
(PPGI) for the development of a residential condominium project to be known as The Meditel on the former’s 9,502
square meter property along Samat St., Highway Hills, Mandaluyong City. 3 With petitioner contributing the same
property to the joint venture and PPGI undertaking to develop the condominium, the JVA provided, among other
terms and conditions, that the developed units shall be shared by the former and the latter at a ratio of 17%-83%,
respectively. 4 While both parties were allowed, at their own individual responsibility, to pre-sell the units pertaining to
them, 5 PPGI further undertook to use all proceeds from the pre-selling of its saleable units for the completion of the
Condominium Project.” 6cräläwvirtualibräry
On 17 June 1996, the Housing and Land Use Regulatory Board (HLURB) issued License to Sell No. 96-06-2854 in
favor of petitioner and PPGI as project owners. 7 By virtue of said license, PPGI executed Contract to Sell No.
0212 with Spouses Benjamin and Eleanor Ang on 5 February 1997, over the 35.45-square meter condominium unit
denominated as Unit A-1006, for the agreed contract price of P52,597.88 per square meter or a
total P2,077,334.25. 8 On the same date PPGI and respondents also executed Contract to Sell No. 0214 over the
12.50 square meter parking space identified as Parking Slot No. 0405, for the stipulated consideration of P26,400.00
square meters or a total of P313,500.00. 9cräläwvirtualibräry
On 21 July 1999, respondents filed against petitioner and PPGI the complaint for the rescission of the aforesaid
Contracts to Sell docketed before the HLURB as HLURB Case No. REM 072199-10567. Contending that they were
assured by petitioner and PPGI that the subject condominium unit and parking space would be available for turn-
over and occupancy in December 1998, respondents averred, among other matters, that in view of the non-
completion of the project according to said representation, respondents instructed petitioner and PPGI to stop
depositing the post-dated checks they issued and to cancel said Contracts to Sell; and, that despite several
demands, petitioner and PPGI have failed and refused to refund the P611,519.52 they already paid under the
circumstances. Together with the refund of said amount and interests thereon at the rate of 12% per annum,
respondents prayed for the grant of their claims for moral and exemplary damages as well as attorney’s fees and the
costs. 10cräläwvirtualibräry
Specifically denying the material allegations of the foregoing complaint, PPGI filed its 7 September 1999 answer
alleging that the delay in the completion of the project was attributable to the economic crisis which affected the
country at the time; that the unexpected and unforeseen inflation as well as increase in interest rates and cost of
building materials constitute force majeure and were beyond its control; that aware of its responsibilities, it offered
several alternatives to its buyers like respondents for a transfer of their investment to its other feasible projects and
for the amounts they already paid to be considered as partial payment for the replacement unit/s; and, that the
complaint was prematurely filed in view of the on-going negotiations it is undertaking with its buyers and prospective
joint venture partners. Aside from the dismissal of the complaint, PPGI sought the readjustment of the contract price
and the grant of its counterclaims for attorney’s fees and litigation expenses. 11cräläwvirtualibräry
Petitioner also specifically denied the material allegations of the complaint in separate answer dated 5 February
2002 12 which it amended on 20 May 2002. Calling attention to the fact that its prestation under the JVA consisted in
contributing the property on which The Meditel was to be constructed, petitioner asseverated that, by the terms of the
JVA, each party was individually responsible for the marketing and sale of the units pertaining to its share; that not
being privy to the Contracts to Sell executed by PPGI and respondents, it did not receive any portion of the
payments made by the latter; and, that without any contributory fault and negligence on its part, PPGI breached its
undertakings under the JVA by failing to complete the condominium project. In addition to the dismissal of the
complaint and the grant of its counterclaims for exemplary damages, attorney’s fees, litigation expenses and the
costs, petitioner interposed a cross-claim against PPGI for full reimbursement of any sum it may be adjudged liable
to pay respondents. 13cräläwvirtualibräry
Acting on the position papers and draft decisions subsequently submitted by the parties, 14 Housing and Land Use
(HLU) Arbiter Dunstan T. San Vicente went on to render the 30 July 2003 decision declaring the subject Contracts to
Sell cancelled and rescinded on account of the non-completion of the condominium project. On the ground that the
JVA created a partnership liability on their part, petitioner and PPGI, as co-owners of the condominium project, were
ordered to pay: (a) respondents’ claim for refund of the P611,519.52 they paid, with interest at the rate of 12% per
annum from 5 February 1997; (b) damages in the sum of P75,000.00; (c) attorney’s fees in the sum of P30,000.00;
(d) the costs; and, (e) an administrative fine in the sum of P10,000.00 for violation of Sec. 20 in relation to Sec. 38 of
Presidential Decree No. 957. 15 Elevated to the HLURB Board of Commissioners via the petition for review filed by
petitioner, 16 the foregoing decision was modified to grant the latter’s cross-claim in the 14 September 2004 decision
rendered by said administrative body’s Second Division in HLURB Case No. REM-A-031007-0240, 17 to wit:
Wherefore, the petition for review of the respondent Corporation is dismissed. However, the decision of the Office
below dated July 30, 2003 is modified, hence, its dispositive portion shall read:
1. Declaring the contracts to sell, both dated February 5, 1997, as cancelled and rescinded, and ordering the
respondents to immediately pay the complainants the following:
a. The amount of P611,519.52, with interest at the legal rate reckoned from February 5, 1997 until fully paid;
b. Damages of P75,000.00;
c. Attorney’s fees equivalent to P30,000.00; and
d. The Cost of suit;
2. Ordering respondents to pay this Office administrative fine of P10,000.00 for violation of Section 20 in relation to
Section 38 of P.D. 957; and
3. Ordering respondent Primetown to reimburse the entire amount which the respondent Corporation will be
constrained to pay the complainants.
So ordered. 18
With the denial of its motion for reconsideration of the foregoing decision, 19 petitioner filed a Notice of Appeal dated
28 February 2005 which was docketed before the Office of the President (OP) as O.P. Case No. 05-B-072. 20 On 3
March 2005, the OP issued an order directing petitioner to submit its appeal memorandum within 15 days from
receipt thereof. 21 Acting on the motion therefor filed, the OP also issued another order on the same date, granting
petitioner a period of 15 days from 28 February 2005 or until 15 March 2005 within which to file its appeal
memorandum. 22 In view of petitioner’s filing of a second motion for extension dated 15 March 2005, 23 the OP issued
the 18 March 2005 order granting the former an additional 10 days from 15 March 2005 or until 25 March 2005 within
which to file its appeal memorandum, “provided no further extension shall be allowed.” 24 Claiming to have received
the aforesaid 3 March 2005 order only on 16 March 2005, however, petitioner filed its 31 March 2005 motion seeking
yet another extension of 10 days or until 10 April 2005 within which to file its appeal
memorandum. 25cräläwvirtualibräry
On 7 April 2005, respondents filed their opposition to the 31 March 2005 motion for extension of petitioner 26 which
eventually filed its appeal memorandum by registered mail on 11 April 2005 in view of the fact that 10 April 2005 fell
on a Sunday. 27 On 25 October 2005, the OP rendered a decision dismissing petitioner’s appeal on the ground that
the latter’s appeal memorandum was filed out of time and that the HLURB Board committed no grave abuse of
discretion in rendering the appealed decision. 28 Aggrieved by the denial of its motion for reconsideration of the
foregoing decision in the 3 March 2006 order issued by the OP, 29 petitioner filed before the CA its 29 March 2006
motion for an extension of 15 days from 31 March 2006 or until 15 April 2006 within which to file its petition for
review. 30 Accordingly, a non-extendible period of 15 days to file its petition for review was granted petitioner in the
31 March 2006 resolution issued by the CA Third Division in CA-G.R, SP No. 93841. 31cräläwvirtualibräry
Maintaining that 15 April 2006 fell on a Saturday and that pressures of work prevented its counsel from finalizing its
petition for review, petitioner filed a motion on 17 April 2006, seeking for an additional time of 10 days or until 27 April
2006 within which to file said pleading. 32 Although petitioner filed by registered mail a motion to admit its attached
petition for review on 19 April 2006, 33 the CA issued the herein assailed 23 May 2006 resolution, 34 disposing of the
former’s pending motion for extension as well as the petition itself in the following wise:
We resolve to DENY the second extension motion and rule to DISMISS the petition for being filed late.
Settled is that heavy workload is by no means excusable (Land Bank of the Philippines vs. Natividad, 458 SCRA 441
[2005]). If the failure of the petitioners’ counsel to cope up with heavy workload should be considered a valid
justification to sidestep the reglementary period, there would be no end to litigations so long as counsel had not been
sufficiently diligent or experienced (LTS Philippine Corporation vs. Maliwat, 448 SCRA 254, 259-260 [2005], citing
Sublay vs. National Labor Relations Commission, 324 SCRA 188 [2000]).
Moreover, lawyers should not assume that their motion for extension or postponement will be granted the length of
time they pray for (Ramos vs. Dajoyag, 378 SCRA 229 [2002]).
SO ORDERED. 35
Petitioner’s motion for reconsideration of the foregoing resolution 36 was denied for lack of merit in the CA’s second
assailed 9 August 2006 resolution, 37 hence, this petition.
The Issues
Petitioner seeks the reversal of the assailed resolutions on the following grounds, to wit:
I. THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION ON MERE TECHNICALITY;
II. THE COURT OF APPEALS ERRED IN REFUSING TO RESOLVE THE PETITION ON THE MERITS THEREBY
AFFIRMING THE OFFICE OF THE PRESIDENT’S DECISION (A) DISMISSING JTIC’S APPEAL ON A MERE
TECHNICALITY; (B) AFFIRMING THE HLURB BOARD’S DECISION INSOFAR AS IT FOUND JTIC SOLIDARILY
LIABLE WITH PRIMETOWN TO PAY SPOUSES ANG DAMAGES, ATTORNEY’S FEES AND THE COST OF THE
SUIT; AND (C) AFFIRMING THE HLURB BOARD’S DECISION INSOFAR AS IT FAILED TO AWARD JITC ITS
COUNTERCLAIMS AGAINST SPOUSES ANG. 38
The Court’s Ruling
We find the petition bereft of merit.
While the dismissal of an appeal on purely technical grounds is concededly frowned upon, 39 it bears emphasizing
that the procedural requirements of the rules on appeal are not harmless and trivial technicalities that litigants can
just discard and disregard at will. 40 Neither being a natural right nor a part of due process, the rule is settled that the
right to appeal is merely a statutory privilege which may be exercised only in the manner and in accordance with the
provisions of the law. 41 The perfection of an appeal in the manner and within the period prescribed by law is, in fact,
not only mandatory but jurisdictional. 42 Considering that they are requirements which cannot be trifled with as mere
technicality to suit the interest of a party, 43 failure to perfect an appeal in the prescribed manner has the effect of
rendering the judgment final and executory. 44cräläwvirtualibräry
Fealty to the foregoing principles impels us to discount the error petitioner imputes against the CA for denying its
second motion for extension of time for lack of merit and dismissing its petition for review for having been filed out of
time. Acting on the 29 March 2006 motion filed for the purpose, after all, the CA had already granted petitioner an
inextendible period of 15 days from 31 March 2006 or until 15 April 2006 within which to file its petition for review.
Sec. 4, Rule 43 of the 1997 Rules of Civil Procedure provides as follows:
Sec. 4. Period of appeal. – The appeal shall be taken within fifteen (15) days from notice of the award, judgment,
final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of
the denial of petitioner’s motion for new trial or reconsideration duly filed in accordance with the governing law of the
court or agency a quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and payment
of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant
an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be
granted except for the most compelling reason and in no case to exceed fifteen (15) days.” (Underscoring supplied)
The record shows that, having been granted the 15-day extension sought in its first motion, petitioner filed a second
motion for extension praying for an additional 10 days from 17 April 2006 within which to file its petition for review, on
the ground that pressures of work and the demands posed by equally important cases prevented its counsel from
finalizing the same. As correctly ruled by the CA, however, heavy workload cannot be considered as a valid
justification to sidestep the reglementary period 45 since to do so would only serve to encourage needless delays and
interminable litigations. Indeed, rules prescribing the time for doing specific acts or for taking certain proceedings are
considered absolutely indispensable to prevent needless delays and to orderly and promptly discharge judicial
business. 46 Corollary to the principle that the allowance or denial of a motion for extension of time is addressed to
the sound discretion of the court, 47 moreover, lawyers cannot expect that their motions for extension or
postponement will be granted 48 as a matter of course.
Although technical rules of procedure are not ends in themselves, they are necessary for an effective and
expeditious administration of justice and cannot, for said reason, be discarded with the mere expediency of claiming
substantial merit. 49 This holds particularly true in the case at bench where, prior to the filing of its petition for review
before the CA, petitioner’s appeal before the OP was likewise dismissed in view of its failure to file its appeal
memorandum within the extensions of time it had been granted by said office. After being granted an initial
extension of 15 days to do the same, the records disclose that petitioner was granted by the OP a second extension
of 10 days from 15 March 2005 or until 25 March 2005 within which to file its appeal memorandum, on the condition
that no further extensions shall be allowed. Aside from not heeding said proviso, petitioner had, consequently, no
more time to extend when it filed its 31 March 2005 motion seeking yet another extension of 10 days or until 10 April
2005 within which to file its appeal memorandum.
With the foregoing procedural antecedents, the initial 15-day extension granted by the CA and the injunction under
Sec. 4, Rule 43 of the 1997 Rules of Civil Procedure against further extensions “except for the most compelling
reason”, it was clearly inexcusable for petitioner to expediently plead its counsel’s heavy workload as ground for
seeking an additional extension of 10 days within which to file its petition for review. To our mind, petitioner would do
well to remember that, rather than the low gate to which parties are unreasonably required to stoop, procedural rules
are designed for the orderly conduct of proceedings and expeditious settlement of cases in the courts of law. Like all
rules, they are required to be followed 50 and utter disregard of the same cannot be expediently rationalized by
harping on the policy of liberal construction 51 which was never intended as an unfettered license to disregard the
letter of the law or, for that matter, a convenient excuse to substitute substantial compliance for regular adherence
thereto. When it comes to compliance with time rules, the Court cannot afford inexcusable
delay. 52cräläwvirtualibräry
Even prescinding from the foregoing procedural considerations, we also find that the HLURB Arbiter and Board
correctly held petitioner liable alongside PPGI for respondents’ claims and the P10,000.00 administrative fine
imposed pursuant to Section 20 in relation to Section 38 of P.D. 957. By the express terms of the JVA, it appears
that petitioner not only retained ownership of the property pending completion of the condominium project 53 but had
also bound itself to answer liabilities proceeding from contracts entered into by PPGI with third parties. Article VIII,
Section 1 of the JVA distinctly provides as follows:
“Sec. 1. Rescission and damages. Non-performance by either party of its obligations under this Agreement shall be
excused when the same is due to Force Majeure. In such cases, the defaulting party must exercise due diligence to
minimize the breach and to remedy the same at the soonest possible time. In the event that either party defaults or
breaches any of the provisions of this Agreement other than by reason of Force Majeure, the other party shall have
the right to terminate this Agreement by giving notice to the defaulting party, without prejudice to the filing of a civil
case for damages arising from the breach of the defaulting party.
In the event that the Developer shall be rendered unable to complete the Condominium Project, and such failure is
directly and solely attributable to the Developer, the Owner shall send written notice to the Developer to cause the
completion of the Condominium Project. If the developer fails to comply within One Hundred Eighty (180) days from
such notice or, within such time, indicates its incapacity to complete the Project, the Owner shall have the right to
take over the construction and cause the completion thereof. If the Owner exercises its right to complete the
Condominium Project under these circumstances, this Agreement shall be automatically rescinded upon written
notice to the Developer and the latter shall hold the former free and harmless from any and all liabilities to third
persons arising from such rescission. In any case, the Owner shall respect and strictly comply with any covenant
entered into by the Developer and third parties with respect to any of its units in the Condominium Project. To
enable the owner to comply with this contingent liability, the Developer shall furnish the Owner with a copy of its
contracts with the said buyers on a month-to-month basis. Finally, in case the Owner would be constrained to
assume the obligations of the Developer to its own buyers, the Developer shall lose its right to ask for indemnity for
whatever it may have spent in the Development of the Project.
Nevertheless, with respect to the buyers of the Developer for the First Phase, the area intended for the Second
Phase shall not be bound and/or subjected to the said covenants and/or any other liability incurred by the Developer
in connection with the development of the first phase.” (Underscoring supplied)
Viewed in the light of the foregoing provision of the JVA, petitioner cannot avoid liability by claiming that it was not in
any way privy to the Contracts to Sell executed by PPGI and respondents. As correctly argued by the latter,
moreover, a joint venture is considered in this jurisdiction as a form of partnership and is, accordingly, governed by
the law of partnerships. 54 Under Article 1824 of the Civil Code of the Philippines, all partners are solidarily liable with
the partnership for everything chargeable to the partnership, including loss or injury caused to a third person or
penalties incurred due to any wrongful act or omission of any partner acting in the ordinary course of the business of
the partnership or with the authority of his co-partners. 55 Whether innocent or guilty, all the partners are solidarily
liable with the partnership itself. 56cräläwvirtualibräry
WHEREFORE, premises considered, the petition for review is DENIED for lack of merit.
G.R. No. L-39780 November 11, 1985
ELMO MUÑASQUE, petitioner,
vs.
COURT OF APPEALS,CELESTINO GALAN TROPICAL COMMERCIAL COMPANY and RAMON
PONS, respondents.
John T. Borromeo for petitioner.
Juan D. Astete for respondent C. Galan.
Paul Gornes for respondent R. Pons.
Viu Montecillo for respondent Tropical.
Paterno P. Natinga for Intervenor Blue Diamond Glass Palace.
GUTTIERREZ, JR., J.:
In this petition for certiorari, the petitioner seeks to annul and set added the decision of the Court of Appeals affirming
the existence of a partnership between petitioner and one of the respondents, Celestino Galan and holding both of
them liable to the two intervenors which extended credit to their partnership. The petitioner wants to be excluded
from the liabilities of the partnership.
Petitioner Elmo Muñasque filed a complaint for payment of sum of money and damages against respondents
Celestino Galan, Tropical Commercial, Co., Inc. (Tropical) and Ramon Pons, alleging that the petitioner entered into
a contract with respondent Tropical through its Cebu Branch Manager Pons for remodelling a portion of its building
without exchanging or expecting any consideration from Galan although the latter was casually named as partner in
the contract; that by virtue of his having introduced the petitioner to the employing company (Tropical). Galan would
receive some kind of compensation in the form of some percentages or commission; that Tropical, under the terms of
the contract, agreed to give petitioner the amount of P7,000.00 soon after the construction began and thereafter, the
amount of P6,000.00 every fifteen (15) days during the construction to make a total sum of P25,000.00; that on
January 9, 1967, Tropical and/or Pons delivered a check for P7,000.00 not to the plaintiff but to a stranger to the
contract, Galan, who succeeded in getting petitioner's indorsement on the same check persuading the latter that the
same be deposited in a joint account; that on January 26, 1967 when the second check for P6,000.00 was due,
petitioner refused to indorse said cheek presented to him by Galan but through later manipulations, respondent Pons
succeeded in changing the payee's name from Elmo Muñasque to Galan and Associates, thus enabling Galan to
cash the same at the Cebu Branch of the Philippine Commercial and Industrial Bank (PCIB) placing the petitioner in
great financial difficulty in his construction business and subjecting him to demands of creditors to pay' for
construction materials, the payment of which should have been made from the P13,000.00 received by Galan; that
petitioner undertook the construction at his own expense completing it prior to the March 16, 1967 deadline;that
because of the unauthorized disbursement by respondents Tropical and Pons of the sum of P13,000.00 to Galan
petitioner demanded that said amount be paid to him by respondents under the terms of the written contract between
the petitioner and respondent company.
The respondents answered the complaint by denying some and admitting some of the material averments and
setting up counterclaims.
During the pre-trial conference, the petitioners and respondents agreed that the issues to be resolved are:
(1) Whether or not there existed a partners between Celestino Galan and Elmo Muñasque; and
 (2) Whether or not there existed a justifiable cause on the part of respondent Tropical to
disburse money to respondent Galan.
The business firms Cebu Southern Hardware Company and Blue Diamond Glass Palace were allowed to intervene,
both having legal interest in the matter in litigation.
After trial, the court rendered judgment, the dispositive portion of which states:
IN VIEW WHEREOF, Judgment is hereby rendered:
(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the intervenors
Cebu and Southern Hardware Company and Blue Diamond Glass Palace the amount of
P6,229.34 and P2,213.51, respectively;
(2) absolving the defendants Tropical Commercial Company and Ramon Pons from any liability,
No damages awarded whatsoever.
The petitioner and intervenor Cebu Southern Company and its proprietor, Tan Siu filed motions for reconsideration.
On January 15, 197 1, the trial court issued 'another order amending its judgment to make it read as follows:
IN VIEW WHEREOF, Judgment is hereby rendered:
(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the intervenors
Cebu Southern Hardware Company and Blue Diamond Glass Palace the amount of P6,229.34
and P2,213.51, respectively,
(2) ordering plaintiff and defendant Galan to pay Intervenor Cebu Southern Hardware Company
and Tan Siu jointly and severally interest at 12% per annum of the sum of P6,229.34 until the
amount is fully paid;
(3) ordering plaintiff and defendant Galan to pay P500.00 representing attorney's fees jointly and
severally to Intervenor Cebu Southern Hardware Company:
(4) absolving the defendants Tropical Commercial Company and Ramon Pons from any liability,
No damages awarded whatsoever.
On appeal, the Court of Appeals affirmed the judgment of the trial court with the sole modification that the liability
imposed in the dispositive part of the decision on the credit of Cebu Southern Hardware and Blue Diamond Glass
Palace was changed from "jointly and severally" to "jointly."
Not satisfied, Mr. Muñasque filed this petition.
The present controversy began when petitioner Muñasque in behalf of the partnership of "Galan and Muñasque" as
Contractor entered into a written contract with respondent Tropical for remodelling the respondent's Cebu branch
building. A total amount of P25,000.00 was to be paid under the contract for the entire services of the Contractor.
The terms of payment were as follows: thirty percent (30%) of the whole amount upon the signing of the contract and
the balance thereof divided into three equal installments at the lute of Six Thousand Pesos (P6,000.00) every fifteen
(15) working days.
The first payment made by respondent Tropical was in the form of a check for P7,000.00 in the name of the
petitioner.Petitioner, however, indorsed the check in favor of respondent Galan to enable the latter to deposit it in the
bank and pay for the materials and labor used in the project.
Petitioner alleged that Galan spent P6,183.37 out of the P7,000.00 for his personal use so that when the second
check in the amount of P6,000.00 came and Galan asked the petitioner to indorse it again, the petitioner refused.
The check was withheld from the petitioner. Since Galan informed the Cebu branch of Tropical that there was
a"misunderstanding" between him and petitioner, respondent Tropical changed the name of the payee in the second
check from Muñasque to "Galan and Associates" which was the duly registered name of the partnership between
Galan and petitioner and under which name a permit to do construction business was issued by the mayor of Cebu
City. This enabled Galan to encash the second check.
Meanwhile, as alleged by the petitioner, the construction continued through his sole efforts. He stated that he
borrowed some P12,000.00 from his friend, Mr. Espina and although the expenses had reached the amount of
P29,000.00 because of the failure of Galan to pay what was partly due the laborers and partly due for the materials,
the construction work was finished ahead of schedule with the total expenditure reaching P34,000.00.
The two remaining checks, each in the amount of P6,000.00,were subsequently given to the petitioner alone with the
last check being given pursuant to a court order.
As stated earlier, the petitioner filed a complaint for payment of sum of money and damages against the
respondents,seeking to recover the following: the amounts covered by the first and second checks which fell into the
hands of respondent Galan, the additional expenses that the petitioner incurred in the construction, moral and
exemplary damages, and attorney's fees.
Both the trial and appellate courts not only absolved respondents Tropical and its Cebu Manager, Pons, from any
liability but they also held the petitioner together with respondent Galan, hable to the intervenors Cebu Southern
Hardware Company and Blue Diamond Glass Palace for the credit which the intervenors extended to the partnership
of petitioner and Galan
In this petition the legal questions raised by the petitioner are as follows: (1) Whether or not the appellate court erred
in holding that a partnership existed between petitioner and respondent Galan. (2) Assuming that there was such a
partnership, whether or not the court erred in not finding Galan guilty of malversing the P13,000.00 covered by the
first and second checks and therefore, accountable to the petitioner for the said amount; and (3) Whether or not the
court committed grave abuse of discretion in holding that the payment made by Tropical through its manager Pons to
Galan was "good payment, "
Petitioner contends that the appellate court erred in holding that he and respondent Galan were partners, the truth
being that Galan was a sham and a perfidious partner who misappropriated the amount of P13,000.00 due to the
petitioner.Petitioner also contends that the appellate court committed grave abuse of discretion in holding that the
payment made by Tropical to Galan was "good" payment when the same gave occasion for the latter to
misappropriate the proceeds of such payment.
The contentions are without merit.
The records will show that the petitioner entered into a con-tract with Tropical for the renovation of the latter's
building on behalf of the partnership of "Galan and Muñasque." This is readily seen in the first paragraph of the
contract where it states:
 This agreement made this 20th day of December in the year 1966 by Galan and Muñasque
hereinafter called the Contractor, and Tropical Commercial Co., Inc., hereinafter called the
owner do hereby for and in consideration agree on the following: ... .
There is nothing in the records to indicate that the partner-ship organized by the two men was not a genuine one. If
there was a falling out or misunderstanding between the partners, such does not convert the partnership into a sham
organization.
Likewise, when Muñasque received the first payment of Tropical in the amount of P7,000.00 with a check made out
in his name, he indorsed the check in favor of Galan. Respondent Tropical therefore, had every right to presume that
the petitioner and Galan were true partners. If they were not partners as petitioner claims, then he has only himself to
blame for making the relationship appear otherwise, not only to Tropical but to their other creditors as well. The
payments made to the partnership were, therefore, valid payments.
In the case of Singsong v. Isabela Sawmill (88 SCRA 643),we ruled:
Although it may be presumed that Margarita G. Saldajeno had acted in good faith, the appellees
also acted in good faith in extending credit to the partnership. Where one of two innocent
persons must suffer, that person who gave occasion for the damages to be caused must bear
the consequences.
No error was committed by the appellate court in holding that the payment made by Tropical to Galan was a good
payment which binds both Galan and the petitioner. Since the two were partners when the debts were incurred, they,
are also both liable to third persons who extended credit to their partnership. In the case of George Litton v. Hill and
Ceron, et al, (67 Phil. 513, 514), we ruled:
There is a general presumption that each individual partner is an authorized agent for the firm
and that he has authority to bind the firm in carrying on the partnership transactions. (Mills vs.
Riggle,112 Pan, 617).
The presumption is sufficient to permit third persons to hold the firm liable on transactions
entered into by one of members of the firm acting apparently in its behalf and within the scope of
his authority. (Le Roy vs. Johnson, 7 U.S. (Law. ed.), 391.)
Petitioner also maintains that the appellate court committed grave abuse of discretion in not holding Galan liable for
the amounts which he "malversed" to the prejudice of the petitioner. He adds that although this was not one of the
issues agreed upon by the parties during the pretrial, he, nevertheless, alleged the same in his amended complaint
which was, duly admitted by the court.
When the petitioner amended his complaint, it was only for the purpose of impleading Ramon Pons in his personal
capacity. Although the petitioner made allegations as to the alleged malversations of Galan, these were the same
allegations in his original complaint. The malversation by one partner was not an issue actually raised in the
amended complaint but the alleged connivance of Pons with Galan as a means to serve the latter's personal
purposes.
The petitioner, therefore, should be bound by the delimitation of the issues during the pre-trial because he himself
agreed to the same. In Permanent Concrete Products, Inc. v. Teodoro, (26 SCRA 336), we ruled:
xxx xxx xxx
... The appellant is bound by the delimitation of the issues contained in the trial court's order
issued on the very day the pre-trial conference was held. Such an order controls the subsequent
course of the action, unless modified before trial to prevent manifest injustice.In the case at bar,
modification of the pre-trial order was never sought at the instance of any party.
Petitioner could have asked at least for a modification of the issues if he really wanted to include the determination of
Galan's personal liability to their partnership but he chose not to do so, as he vehemently denied the existence of the
partnership. At any rate, the issue raised in this petition is the contention of Muñasque that the amounts payable to
the intervenors should be shouldered exclusively by Galan. We note that the petitioner is not solely burdened by the
obligations of their illstarred partnership. The records show that there is an existing judgment against respondent
Galan, holding him liable for the total amount of P7,000.00 in favor of Eden Hardware which extended credit to the
partnership aside from the P2, 000. 00 he already paid to Universal Lumber.
We, however, take exception to the ruling of the appellate court that the trial court's ordering petitioner and Galan to
pay the credits of Blue Diamond and Cebu Southern Hardware"jointly and severally" is plain error since the liability of
partners under the law to third persons for contracts executed inconnection with partnership business is only pro rata
under Art. 1816, of the Civil Code.
While it is true that under Article 1816 of the Civil Code,"All partners, including industrial ones, shall be liable prorate
with all their property and after all the partnership assets have been exhausted, for the contracts which may be
entered into the name and fm the account cd the partnership, under its signature and by a person authorized to act
for the partner-ship. ...". this provision should be construed together with Article 1824 which provides that: "All
partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 and
1823." In short, while the liability of the partners are merely joint in transactions entered into by the partnership, a
third person who transacted with said partnership can hold the partners solidarily liable for the whole obligation if the
case of the third person falls under Articles 1822 or 1823.
Articles 1822 and 1823 of the Civil Code provide:
Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partner-ship or with the authority of his co-partners, loss or injury is caused
to any person, not being a partner in the partnership or any penalty is incurred, the partnership is
liable therefor to the same extent as the partner so acting or omitting to act.
Art. 1823. The partnership is bound to make good:
(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a third
person and t he money or property so received is misapplied by any partner while it is in the
custody of the partnership.
The obligation is solidary, because the law protects him, who in good faith relied upon the authority of a partner,
whether such authority is real or apparent. That is why under Article 1824 of the Civil Code all partners, whether
innocent or guilty, as well as the legal entity which is the partnership, are solidarily liable.
In the case at bar the respondent Tropical had every reason to believe that a partnership existed between the
petitioner and Galan and no fault or error can be imputed against it for making payments to "Galan and Associates"
and delivering the same to Galan because as far as it was concerned, Galan was a true partner with real authority to
transact on behalf of the partnership with which it was dealing. This is even more true in the cases of Cebu Southern
Hardware and Blue Diamond Glass Palace who supplied materials on credit to the partnership. Thus, it is but fair that
the consequences of any wrongful act committed by any of the partners therein should be answered solidarily by all
the partners and the partnership as a whole
However. as between the partners Muñasque and Galan,justice also dictates that Muñasque be reimbursed by
Galan for the payments made by the former representing the liability of their partnership to herein intervenors, as it
was satisfactorily established that Galan acted in bad faith in his dealings with Muñasque as a partner.
WHEREFORE, the decision appealed from is hereby AFFIRMED with the MODIFICATION that the liability of
petitioner and respondent Galan to intervenors Blue Diamond Glass and Cebu Southern Hardware is declared to be
joint and solidary. Petitioner may recover from respondent Galan any amount that he pays, in his capacity as a
partner, to the above intervenors,
[G.R. No. 30616 : December 10, 1990.]
192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B. MAGLANA, Defendant-Appellee.
DECISION
PARAS, J.:
This is a direct appeal to this Court from a decision ** of the then Court of First Instance of Davao, Seventh Judicial
District, Branch III, in Civil Case No. 3518, dismissing appellant's complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit "A") called Eastcoast
Development Enterprises (EDE) with only the two of them as partners. The partnership EDE with an indefinite term
of existence was duly registered on January 21, 1955 with the Securities and Exchange Commission.
One of the purposes of the duly-registered partnership was to "apply or secure timber and/or minor forests products
licenses and concessions over public and/or private forest lands and to operate, develop and promote such forests
rights and concessions." (Rollo, p. 114).
A duly registered Articles of Co-Partnership was filed together with an application for a timber concession covering
the area located at Cateel and Baganga, Davao with the Bureau of Forestry which was approved and Timber
License No. 35-56 was duly issued and became the basis of subsequent renewals made for and in behalf of the duly
registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage the business affairs of the partnership,
including marketing and handling of cash and is authorized to sign all papers and instruments relating to the
partnership, while appellant Rojas shall be the logging superintendent and shall manage the logging operations of
the partnership. It is also provided in the said articles of co-partnership that all profits and losses of the partnership
shall be divided share and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no operation of said partnership (Record on
Appeal [R.A.] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of Pahamotang as
industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-Partnership (Exhibit "B"
and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT ENTERPRISES (EDE). Aside from the slight
difference in the purpose of the second partnership which is to hold and secure renewal of timber license instead of
to secure the license as in the first partnership and the term of the second partnership is fixed to thirty (30) years,
everything else is the same.
The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956, and was able to ship
logs and realize profits. An income was derived from the proceeds of the logs in the sum of P643,633.07 (Decision,
R.A. 919).
On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled "CONDITIONAL SALE OF
INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT ENTERPRISE" (Exhibits "C" and "D") agreeing
among themselves that Maglana and Rojas shall purchase the interest, share and participation in the Partnership of
Pahamotang assessed in the amount of P31,501.12. It was also agreed in the said instrument that after payment of
the sum of P31,501.12 to Pahamotang including the amount of loan secured by Pahamotang in favor of the
partnership, the two (Maglana and Rojas) shall become the owners of all equipment contributed by Pahamotang and
the EASTCOAST DEVELOPMENT ENTERPRISES, the name also given to the second partnership, be dissolved.
Pahamotang was paid in fun on August 31, 1957. No other rights and obligations accrued in the name of the second
partnership (R.A. 921).
After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas without the benefit of any
written agreement or reconstitution of their written Articles of Partnership (Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract with another logging enterprise, the CMS Estate,
Inc. He left and abandoned the partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly acquired area
(Decision, R.A. 948).
The equipment withdrawn were his supposed contributions to the first partnership and was transferred to CMS
Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).
On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute, either in cash or in
equipment, to the capital investments of the partnership as well as his obligation to perform his duties as logging
superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with the promised
contributions and he will not work as logging superintendent. Maglana then told Rojas that the latter's share will just
be 20% of the net profits. Such was the sharing from 1957 to 1959 without complaint or dispute (Decision, R.A.
949).: nad
Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter dated February 21,
1961 (Exhibit "10") Maglana notified Rojas that he dissolved the partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against Maglana for the recovery
of properties, accounting, receivership and damages, docketed as Civil Case No. 3518 (Record on Appeal, pp. 1-
26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine the long and
voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894-895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114) was denied by Judge
Romero for want of merit (Ibid., p. 125). Judge Romero also required the inclusion of the entire year 1961 in the
report to be submitted by the commissioners (Ibid., pp. 138-143). Accordingly, the commissioners started examining
the records and supporting papers of the partnership as well as the information furnished them by the parties, which
were compiled in three (3) volumes.
On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with counterclaim, attaching
thereto the amended answer (Ibid., pp. 26-336), which was granted on May 22, 1964 (Ibid., p. 336).
On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid., p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964 approving the report of
the commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues were agreed upon to be
submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after the dissolution of the
second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the partnership (Decision,
R.A. pp. 895-896).- nad
After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of which reads as follows:
"WHEREFORE, the above facts and issues duly considered, judgment is hereby rendered by the Court
declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after Pahamotang retired
from the second partnership, that is, after August 31, 1957, when Pahamotang was finally paid his share
— the partnership of the defendant and the plaintiff is one of a de facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation, that is the ratio and
proportion of their respective contributions, or on the basis of share and share alike — this covered by
actual contributions of the plaintiff and the defendant and by their verbal agreement; that the sharing of
profits and losses is on the basis of actual contributions; that from 1957 to 1959, the sharing is on the basis
of 80% for the defendant and 20% for the plaintiff of the profits, but from 1960 to the date of dissolution,
February 23, 1961, the plaintiff's share will be on the basis of his actual contribution and, considering his
indebtedness to the partnership, the plaintiff is not entitled to any share in the profits of the said
partnership;
"3. As to whether the properties which were bought by the defendant and placed in his or in his wife's
name were acquired with partnership funds or with funds of the defendant and — the Court declares that
there is no evidence that these properties were acquired by the partnership funds, and therefore the same
should not belong to the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused them and who should be
liable for them — the Court declares that neither parties is entitled to damages, for as already stated above
it is not a wise policy to place a price on the right of a person to litigate and/or to come to Court for the
assertion of the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February 23, 1961; did it
dissolve the partnership or not — the Court declares that the letter of the defendant to the plaintiff dated
February 23, 1961, in effect dissolved the partnership;
"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and other merchandise to
the laborers and employees of the Eastcoast Development Enterprises, — the COURT DECLARES THE
SAME AS NOT BELONGING TO THE PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles David — is VALID
AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED AS PART OF MAGLANA'S
CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the partnership the amount of
P69,000.00 the profits he received from the CMS Estate, Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of P85,000.00 which according
to him he is still entitled to receive from the CMS Estate, Inc. is hereby denied considering that it has not
yet been actually received, and further the receipt is merely based upon an expectancy and/or still
speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his personal account to
the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he should have received
as logging superintendent, and which was not paid to him, and this should be considered as part of
Maglana's contribution likewise to the partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.: rd
"SO ORDERED." Decision, Record on Appeal, pp. 985-989).
Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal relationship of the Maglana-Rojas after
Pahamotang retired from the second partnership.
The lower court is of the view that the second partnership superseded the first, so that when the second partnership
was dissolved there was no written contract of co-partnership; there was no reconstitution as provided for in the
Maglana, Rojas and Pahamotang partnership contract. Hence, the partnership which was carried on by Rojas and
Maglana after the dissolution of the second partnership was a de facto partnership and at will. It was considered as a
partnership at will because there was no term, express or implied; no period was fixed, expressly or impliedly
(Decision, R.A. pp. 962-963).
On the other hand, Rojas insists that the registered partnership under the firm name of Eastcoast Development
Enterprises (EDE) evidenced by the Articles of Co-Partnership dated January 14, 1955 (Exhibit "A") has not been
novated, superseded and/or dissolved by the unregistered articles of 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 Co-Partnership (Exhibit
"A"). Rather, appellant is entitled to the rights enumerated in Article 1837 of the Civil Code and to the sharing profits
between them of "share and share alike" as stipulated in the registered Articles of Co-Partnership (Exhibit "A").
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears evident that it
was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which
they unmistakably called an "Additional Agreement" (Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except
for the fact that they took in one industrial partner; gave him an equal share in the profits and fixed the term of the
second partnership to thirty (30) years, everything else was the same. Thus, they adopted the same name,
EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes and the capital contributions of
Rojas and Maglana as stipulated in both partnerships call for the same amounts. Just as important is the fact that all
subsequent renewals of Timber License No. 35-36 were secured in favor of the First Partnership, the original
licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership (Exhibit "C") which was never registered (Brief for Plaintiff-Appellant, p. 5).
Otherwise stated, even during the existence of the second partnership, all business transactions were carried out
under the duly registered articles. As found by the trial court, it is an admitted fact that even up to now, there are still
subsisting obligations and contracts of the latter (Decision, R.A. pp. 950-957). No rights and obligations accrued in
the name of the second partnership except in favor of Pahamotang which was fully paid by the duly registered
partnership (Decision, R.A., pp. 919-921).
On the other hand, there is no dispute that the second partnership was dissolved by common consent. Said
dissolution did not affect the first partnership which continued to exist. Significantly, Maglana and Rojas agreed to
purchase the interest, share and participation in the second partnership of Pahamotang and that thereafter, the two
(Maglana and Rojas) became the owners of equipment contributed by Pahamotang. Even more convincing, is the
fact that Maglana on March 17, 1957, wrote Rojas, reminding the latter of his obligation to contribute either in cash or
in equipment, to the capital investment of the partnership as well as his obligation to perform his duties as logging
superintendent. This reminder cannot refer to any other but to the provisions of the duly registered Articles of Co-
Partnership. As earlier stated, Rojas replied that he will not be able to comply with the promised contributions and he
will not work as logging superintendent. By such statements, it is obvious that Roxas understood what Maglana was
referring to and left no room for doubt that both considered themselves governed by the articles of the duly
registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of Pahamotang can neither be
considered as a De Facto Partnership, nor a Partnership at Will, for as stressed, there is an existing partnership, duly
registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the case at bar, the answer
is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the partnership, it is in effect a
notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can cause its dissolution by
expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the
cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be
compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution.
And in whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana shall be guided
in the liquidation of the partnership by the provisions of its duly registered Articles of Co-Partnership; that is, all profits
and losses of the partnership shall be divided "share and share alike" between the partners.
But an accounting must first be made and which in fact was ordered by the trial court and accomplished by the
commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners from 1956-1961 are as
follows: Eufracio Rojas who should have contributed P158,158.00, contributed only P18,750.00 while Maglana who
should have contributed P160,984.00, contributed P267,541.44 (Decision, R.A. p. 976). It is a settled rule that when
a partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership
for whatever he may have promised to contribute (Article 1786, Civil Code) and for interests and damages from the
time he should have complied with his obligation (Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133
SCRA 94 [1984]). Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their voluminous reports which
was approved by the trial court, they showed that on 50-50% basis, Rojas will be liable in the amount of
P131,166.00; on 80-20%, he will be liable for P40,092.96 and finally on the basis of actual capital contribution, he will
be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamotang which is
unquestionably a continuation of the duly registered partnership and the sharing of profits and losses which should
be on the basis of share and share alike as 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
G.R. No. 97212 June 30, 1993
BENJAMIN YU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED,
WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-FU, respondents.
Jose C. Guico for petitioner.
Wilfredo Cortez for private respondents.
FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and export business
operated by a registered partnership with the firm name of "Jade Mountain Products Company Limited" ("Jade
Mountain"). The partnership was originally organized on 28 June 1984 with Lea Bendal and Rhodora Bendal as
general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as
limited partners. The partnership business consisted of exploiting a marble deposit found on land owned by the Sps.
Ricardo and Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984
with the Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant General Manager
with a monthly salary of P4,000.00. According to petitioner Yu, however, he actually received only half of his
stipulated monthly salary, since he had accepted the promise of the partners that the balance would be paid when
the firm shall have secured additional operating funds from abroad. Benjamin Yu actually managed the operations
and finances of the business; he had overall supervision of the workers at the marble quarry in Bulacan and took
charge of the preparation of papers relating to the exportation of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and Rhodora Bendal
sold and transferred their interests in the partnership to private respondent Willy Co and to one Emmanuel Zapanta.
Mr. Yu Chang, a limited partner, also sold and transferred his interest in the partnership to Willy Co. Between Mr.
Emmanuel Zapanta and himself, private respondent Willy Co acquired the great bulk of the partnership interest. The
partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan Manila. A Supplement
to the Memorandum Agreement relating to the operation of the marble quarry was entered into with the Cruz
spouses in February of 1988.2 The actual operations of the business enterprise continued as before. All the
employees of the partnership continued working in the business, all, save petitioner Benjamin Yu as it turned out.
On 16 November 1987, having learned of the transfer of the firm's main office from Makati to Mandaluyong,
petitioner Benjamin Yu reported to the Mandaluyong office for work and there met private respondent Willy Co for the
first time. Petitioner was informed by Willy Co that the latter had bought the business from the original partners and
that it was for him to decide whether or not he was responsible for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade Mountain business
enterprise. His unpaid salaries remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing
from November 1984 to October 1988, moral and exemplary damages and attorney's fees, against Jade Mountain,
Mr. Willy Co and the other private respondents. The partnership and Willy Co denied petitioner's charges, contending
in the main that Benjamin Yu was never hired as an employee by the present or new partnership.4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had been illegally
dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for unpaid salaries, backwages
and attorney's fees.5
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor Arbiter and
dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC held that a new partnership
consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the Jade Mountain business, that the new
partnership had not retained petitioner Yu in his original position as Assistant General Manager, and that there was
no law requiring the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore, had not
been illegally dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages should be asserted
against the original members of the preceding partnership, but these though impleaded had, apparently, not been
served with summons in the proceedings before the Labor Arbiter. 6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and annul the
Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership has a juridical
personality separate and distinct from that of each of its members. Such independent legal personality subsists,
petitioner claims, notwithstanding changes in the identities of the partners. Consequently, the employment contract
between Benjamin Yu and the partnership Jade Mountain could not have been affected by changes in the latter's
membership.7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had
hired petitioner Yu as Assistant General Manager had been extinguished and replaced by a new partnerships
composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new partnership had come into existence,
whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new
partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the
changes in the membership of the partnership was the dissolution of the old partnership which had hired petitioner in
1984 and the emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987.
The applicable law in this connection — of which the NLRC seemed quite unaware — is found in the Civil Code
provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on as distinguished from the winding up of
the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in
good faith, when no definite term or particular
undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the
partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;
xxx xxx xxx
(Emphasis supplied)
In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of the total
partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not show what happened to the
remaining 18% of the original partnership interest. The acquisition of 82% of the partnership interest by new
partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82% interest, was
enough to constitute a new partnership.
The occurrence of events which precipitate the legal consequence of dissolution of a partnership do not, however,
automatically result in the termination of the legal personality of the old partnership. Article 1829 of the Civil Code
states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of
winding up and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that
the business of the old partnership was simply continued by the new partners, without the old partnership undergoing
the procedures relating to dissolution and winding up of its business affairs. In other words, the new partnership
simply took over the business enterprise owned by the preceeding partnership, and continued using the old name of
Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off
its debts, liquidating and distributing its net assets, and then re-assembling the said assets or most of them and
opening a new business enterprise. There were, no doubt, powerful tax considerations which underlay such an
informal approach to business on the part of the retiring and the incoming partners. It is not, however, necessary to
inquire into such matters.
What is important for present purposes is that, under the above described situation, not only the retiring partners
(Rhodora Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one,
are liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al,8 the Court held that
under facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party creditor of the
old partnership.9 The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the
case at bar, is established in Article 1840 of the Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the
person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires
and assigns (or the representative of the deceased partner assigns) his rights in partnership
property to two or more of the partners, or to one or more of the partners and one or more third
persons, if the business is continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased partner
assigns) their rights in partnership property to the remaining partner, who continues the business
without liquidation of partnership affairs, either alone or with others;
 (3) When any Partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired partners or
the representative of the deceased partner, but without any assignment of his right in partnership
property;
(4) When all the partners or their representatives assign their rights in partnership property to
one or more third persons who promise to pay the debts and who continue the business of the
dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners continue the
business under the provisions of article 1837, second paragraph, No. 2, either alone or with
others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business either alone or
with others without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the business,
under this article, to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth
in this article the creditors of the retiring or deceased partner or the representative of the
deceased partner, have a prior right to any claim of the retired partner or the representative of
the deceased partner against the person or partnership continuing the business on account of
the retired or deceased partner's interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment on the
ground of fraud.
xxx xxx xxx
(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which
continued the business of the old one without liquidation of the partnership affairs. Indeed, a creditor of the old Jade
Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid wages, is entitled to priority vis-a-vis any
claim of any retired or previous partner insofar as such retired partner's interest in the dissolved partnership is
concerned. It is not necessary for the Court to determine under which one or mare of the above six (6) paragraphs,
the case at bar would fall, if only because the facts on record are not detailed with sufficient precision to permit such
determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is entitled to enforce his
claim for unpaid salaries, as well as other claims relating to his employment with the previous partnership, against
the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new
general or assistant general manager to run the affairs of the business enterprise take over. An assistant general
manager belongs to the most senior ranks of management and a new partnership is entitled to appoint a top
manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager did not
therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise
authorized cause for termination in the case at bar was redundancy. 10 The new partnership had its own new General
Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of Jade
Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or redundant. 11 It
follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of
service that he had rendered to the old partnership, a fraction of at least six (6) months being considered as a whole
year.
While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, we consider that
Benjamin Yu was very shabbily treated by the new partnership. The old partnership certainly benefitted from the
services of Benjamin Yu who, as noted, previously ran the whole marble quarrying, processing and exporting
enterprise. His work constituted value-added to the business itself and therefore, the new partnership similarly
benefitted from the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that
there was any cause consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the new
partnership to terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office of Jade Mountain from Makati to Mandaluyong and the
assumption by Mr. Willy Co of control of operations. The treatment (including the refusal to honor his claim for unpaid
wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to amount to
arbitrary, bad faith treatment, for which the new Jade Mountain may legitimately be required to respond by paying
moral damages. This Court, exercising its discretion and in view of all the circumstances of this case, believes that
an indemnity for moral damages in the amount of P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six percent (6%) per
annum on the amount of unpaid wages, and of his separation pay, computed from the date of promulgation of the
award of the Labor Arbiter. Finally, because the new Jade Mountain compelled Benjamin Yu to resort to litigation to
protect his rights in the premises, he is entitled to attorney's fees in the amount of ten percent (10%) of the total
amount due from private respondent Jade Mountain.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the Comment filed by
private respondents is treated as their Answer to the Petition for Certiorari, and the Decision of the NLRC dated 29
November 1990 is hereby NULLIFIED and SET ASIDE. A new Decision is hereby ENTERED requiring private
respondent Jade Mountain Products Company Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six (36)
months (November 1984 to December 1987) in the total amount of
P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied
by three (3) years of service or a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a) and (b)
above, commencing on 26 December 1989 and until fully paid; and
(e) ten percent (10%) attorney's fees on the total amount due from private
respondent Jade Mountain.
Costs against private respondents.