[G.R. No. 413. February 2, 1903.

JOSE FERNANDEZ, Plaintiff-Appellant, v. FRANCISCO DE LA ROSA, Defendant-Appellee.

SYLLABUS

1. PARTNERSHIP; INTENTION TO DIVIDE PROFITS. — Where the fact is established that parties have mutually
contributed to the purchase of a common stock, under circumstances which afford no different explanation of
their object, it must be deduced that they intended a joint interest in the profits therefrom.

2. ID.; WRITTEN ARTICLES. — Since the general provisions of article 1280 of the Civil Code are controlled by the
special provisions of article 1667 idem, written articles of copartnership are only necessary in the cases
mentioned in the latter.

3. ID.; DISSOLUTION. — Where the parties fail to agree upon articles of copartnership and some of the
contributions of one partner, less than all, are returned to him and accepted with an express reservation of his
rights as partner, the partnership is not dissolved nor does he waive his right to an accounting of the profits.

DECISION

The object of this action is to obtain from the court a declaration that a partnership exists between the parties,
that the plaintiff has a consequent interest in certain cascoes which are alleged to be partnership property, and
that the defendant is bound to render an account of his administration of the cascoes and the business carried on
with them.

Judgment was rendered for the defendant in the court below and the plaintiff appealed. The respective claims of
the parties as to the facts, so far as it is necessary to state them in order to indicate the point in dispute, may be
briefly summarized. The plaintiff alleges that in January, 1900, he entered into a verbal agreement with the
defendant to form a partnership for the purchase of cascoes and the carrying on of the business of letting the
same for hire in Manila, the defendant to buy the cascoes and each partner to furnish for that purpose such
amount of money as he could, the profits to be divided proportionately; that in the same January the plaintiff
furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the defendant did
purchase for 500 pesos of Doña Isabel Vales, taking the title in his own name; that the plaintiff furnished further
sums aggregating about 300 pesos for repairs on this casco; that on the fifth of the following March he furnished
the defendant 825 pesos to purchase another casco designated as No. 2089, which the defendant did purchase
for 1,000 pesos of Luis R. Yangco, taking the title to this casco also in his own name; that in April the parties
undertook to draw up articles of partnership for the purpose of embodying the same in an authentic document,
but that the defendant having proposed a draft of such articles which differed materially from the terms of the
earlier verbal agreement, and being unwilling to include casco No. 2089 in the partnership, they were unable to
come to any understanding and no written agreement was executed; that the defendant having in the meantime
had the control and management of the two cascoes, the plaintiff made a demand for an accounting upon him,
which the defendant refused to render, denying the existence of the partnership altogether.

The defendant admits that the project of forming a partnership in the casco business in which he was already
engaged to some extent individually was discussed between himself and the plaintiff in January, 1900, and
earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery business, being also a party to the
negotiations, but he denies that any agreement was ever consummated. He denies that the plaintiff furnished
any money in January, 1900, for the purchase of casco No. 1515, or for repairs on the same, but claims that he
borrowed 300 pesos on his individual account in January from the bakery firm, consisting of the plaintiff, Marcos
Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff March 5, he claims
was for the purchase of casco No. 1515, which he alleged was bought March 12, and he alleges that he never
received anything from the defendant toward the purchase of casco No. 2089. He claims to have paid, exclusive
of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one.

The case comes to this court under the old procedure, and it is therefore necessary for us the review the
evidence and pass upon the facts. Our general conclusions may be stated as follows: library

(1) Doña Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale was made and the
casco delivered in January, although the public document of sale was not executed till some time afterwards. This
witness is apparently disinterested, and we think it is safe to rely upon the truth of her testimony, especially as
the defendant, while asserting that the sale was in March, admits that he had the casco taken to the ways of
repairs in January.

It is true that the public document of sale was executed March 10, and that the vendor declares therein that she
is the owner of the casco, but such declaration does not exclude proof as to the actual date of the sale, at least as
against the plaintiff, who was not a party to the instrument. (Civil Code, sec. 1218.) It often happens, of course, in
such cases, that the actual sale precedes by a considerable time the execution of the formal instrument of
transfer, and this is what we think occurred here.

(2) The plaintiff presented in evidence the following receipt: "I have this day received from D. Jose Fernandez
eight hundred and twenty-five pesos for the cost of a casco which we are to purchase in company. Manila, March
5, 1900. Francisco de la Rosa." The authenticity of this receipt is admitted by the defendant. If casco No. 1515 was
bought, as we think it was, in January, the casco referred to in the receipt which the parties "are to purchase in
company" must be casco No. 2089, which was bought March 22. We find this to be the fact, and that the plaintiff
furnished and the defendant received 825 pesos toward the purchase of this casco, with the understanding that it
was to be purchased on joint account.

(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo give the defendant,
in the name of the plaintiff, a sum of money, the amount of which he is unable to state, for the purchase of a
casco to be used in the plaintiff’s and defendant’s business. Antonio Angulo also testified, but the defendant
claims that the fact that Angulo was a partner of the plaintiff rendered him incompetent as a witness under the
provisions of article 643 of the then Code of Civil Procedure, and without deciding whether this point is well
taken, we have discarded his testimony altogether in considering the case. The defendant admits the receipt of
300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan from the firm. Yet he
sets up the claim that the 825 pesos which he received from the plaintiff in March were furnished toward the
purchase of casco No. 1515, thereby virtually admitting that casco was purchased in company with the plaintiff.
We discover nothing in the evidence to support the claim that the 300 pesos received in January was a loan,
unless it may be the fact that the defendant had on previous occasions borrowed money from the bakery firm.
We think all the probabilities of the case point to the truth of the evidence of Antonio Fernandez as to this
transaction, and we find the fact to be that the sum in question was furnished by the plaintiff toward the
purchase for joint ownership of casco No. 1515, and that the defendant received it with the understanding that it
was to be used for this purpose. We also find that the plaintiff furnished some further sums of money for the
repair of this casco.

(4) The balance of the purchase price of each of the two cascoes over and above the amount contributed by the
plaintiff was furnished by the defendant.

(5) We are unable to find upon the evidence before us that there was any specific verbal agreement of
partnership, except such as may be implied from the facts as to the purchase of the casco.
(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable than otherwise
that no attempt was made to agree upon articles of partnership till about the middle of the April following the
purchase of the cascoes.

(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and after the
defendant had been operating the cascoes for some time, the defendant returned to the plaintiff, 1,125 pesos, in
two different sums, one of 300 and one of 825 pesos. The only evidence in the record as to the circumstances
under which the plaintiff received these sums is contained in his answers to the interrogatories proposed to him
by the defendant, and the whole of his statement on this point may properly be considered in determining the
facts as being in the nature of an indivisible admission. He states that both sums were received with an express
reservation on his part of all his rights as a partner. We find this to be true

Two questions of law are raised by the foregoing facts:

(1) Did a partnership exist between the parties?
(2) If such partnership existed, was it terminated as a result of the act of the defendant in receiving back the
1,125 pesos?

(1) "Partnership is a contract by which 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." (Civil Code, art. 1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore,
(1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these
two elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties
fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendant with the
understanding that it was to be used for the purchase of the cascoes in question. This establishes the first
element of the contract, namely, mutual contribution to a common stock. The second element, namely, the
intention to share profits, appears to be an unavoidable deduction from the fact of the purchase of the cascoes in
common, in the absence of any other explanation of the object of the parties in making the purchase in that
form, and, it may be added, in view of the admitted fact that prior to the purchase of the first casco the
formation of a partnership had been a subject of negotiation between them.

Under other circumstances the relation of joint ownership, a relation distinct though perhaps not essentially
different in its practical consequence from that of partnership, might have been the result of the joint purchase.
If, for instance, it were shown that the object of the parties in purchasing in company had been to make a more
favorable bargain for the two cascoes than they could have done by purchasing them separately, and that they
had no ulterior object except to effect a division of the common property when once they had acquired it, the
affectio societatis would be lacking and the parties would have become joint tenants only; but, as nothing of this
sort appears in the case, we must assume that the object of the purchase was active use and profit and not mere
passive ownership in common.

It is thus apparent that a complete and perfect contract of partnership was entered into by the parties. This
contract, it is true, might have been subject to a suspensive condition, postponing its operation until an
agreement was reached as to the respective participation of the partners in the profits, the character of the
partnership as collective or en comandita, and other details, but although it is asserted by counsel for the
defendant that such was the case, there is little or nothing in the record to support this claim, and the fact that
the defendant did actually go on and purchase the boats, as it would seem, before any attempt had been made
to formulate partnership articles, strongly discountenances the theory.
The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of
partnership as a civil contract, the contributions of the partners not having been in the form of immovables or
rights in immovables. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public
writing in the single case mentioned and dispensing with all formal requirements in other cases, renders
inapplicable to this species of contract the general provisions of art. 1280 of the Civil Code.

(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money returned to
him by the defendant after the definitive failure of the attempt to agree upon partnership articles. The amount
returned fell short, in our view of the facts, of that which the plaintiff had contributed to the capital of the
partnership, since it did not include the sum which he had furnished for the repairs of casco No. 1515. Moreover,
it is quite possible, as claimed by the plaintiff, that a profit may have been realized from the business during the
period in which the defendant had been administering it prior to the return of the money, and if so he still
retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did not have the
effect of terminating the legal existence of the partnership by converting it into a societas leonina, as claimed by
counsel for the defendant.

Did the defendant waive his right to such interest as remained to him in the partnership property by receiving the
money? Did he by so doing waive his right to an accounting of the profits already realized, if any, and a
participation in them in proportion to the amount he had originally contributed to the common fund? Was the
partnership dissolved by the "will or withdrawal of one of the partners" under article 1705 of the Civil Code? We
think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinguish his rights as a partner, nor
is there any evidence that by anything that he said or by anything that he omitted to say he gave the defendant
any ground whatever to believe that he intended to relinquish them. On the contrary he notified the defendant
that he waived none of his rights in the partnership. Nor was the acceptance of the money an act which was in
itself inconsistent with the continuance of the partnership relation, as would have been the case had the plaintiff
withdrawn his entire interest in the partnership. There is, therefore, nothing upon which a waiver, either express
or implied, can be predicated. The defendant might have himself terminated the partnership relation at any time,
if he had chosen to do so, by recognizing the plaintiff’s right in the partnership property and in the profits. Having
failed to do this he can not be permitted to force a dissolution upon his copartner upon terms which the latter is
unwilling to accept. We see nothing in the case which can give the transaction in question any other aspect than
that of the withdrawal by one partner with the consent of the other of a portion of the common capital.

The result is that we hold and declare that a partnership was formed between the parties in January, 1900, the
existence of which the defendant is bound to recognize; that cascoes Nos. 1515 and 2089 constitute partnership
property, and that the plaintiff is entitled to an accounting of the defendant’s administration of such property,
and of the profits derived therefrom. This declaration does not involve an adjudication as to any disputed items
of the partnership account. The judgment of the court below will be reversed without costs, and the record
returned for the execution of the judgment now rendered. So ordered.
 [G.R. No. 127347. November 25, 1999]

ALFREDO N. AGUILA, JR, Petitioner, v. HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR, Respondents.

DECISION

This is a petition for review on certiorari of the decision1 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. 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:

Plaintiffs 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. . . . .

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. . . . .

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 of sale executed.

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 . . . .

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 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 the period therein stated, the
property shall be sold at public auction to satisfy the mortgage debt and costs and if there is an excess, the same
is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case
should have been brought; (2) the judgment in the ejectment case is a bar to the filing of the complaint for
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 petition is meritorious.

Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that every
action must be prosecuted and defended in the name of the real party in interest. A real party in interest is one
who would be benefited or injured by the judgment, or who is entitled to the avails of the suit. 7 This ruling is now
embodied in Rule 3, 2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is
not a real party in interest in the case cannot be executed.8 Hence, a complaint filed against such a person should
be dismissed for failure to state a cause of action.9

Under Art. 1768 of the Civil Code, a partnership has a juridical personality separate and distinct from that of each
of the partners. The partners cannot be held liable for the obligations of the partnership unless it is shown that
the legal 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, unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila
& Sons, Co. and the Memorandum of Agreement was executed between private respondent, with the consent of
her late husband, and A. C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its
officers or agents, which should be impleaded in any litigation involving property registered in its name. A
violation of this rule will result in the dismissal of the complaint.11 We cannot understand why both the Regional
Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.

Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted
makes it unnecessary to discuss the other issues raised by him in this appeal. WHEREFORE, the decision of the
Court of Appeals is hereby REVERSED and the complaint against petitioner is DISMISSED. SO ORDERED.
 G.R. No. 127405 October 4, 2000

MARJORIE TOCAO and WILLIAM T. BELO vs. COURT OF APPEALS and NENITA A. ANAY

DECISION

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No. 41616,1 affirming the
Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No. 88-509.2

Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent Nenita A. Anay
met petitioner William T. Belo, then the vice-president for operations of Ultra Clean Water Purifier, through her
former employer in Bangkok. Belo introduced Anay to petitioner Marjorie Tocao, who conveyed her desire to
enter into a joint venture with her for the importation and local distribution of kitchen cookwares. Belo
volunteered to finance the joint venture and assigned to Anay the job of marketing the product considering her
experience and established relationship with West Bend Company, a manufacturer of kitchen wares in Wisconsin,
U.S.A. Under the joint venture, Belo acted as capitalist, Tocao as president and general manager, and Anay as
head of the marketing department and later, vice-president for sales. Anay organized the administrative staff and
sales force while Tocao hired and fired employees, determined commissions and/or salaries of the employees,
and assigned them to different branches. The parties agreed that Belo’s name should not appear in any
documents relating to their transactions with West Bend Company. Instead, they agreed to use Anay’s name in
securing distributorship of cookware from that company. The parties agreed further that Anay would be entitled
to: (1) ten percent (10%) of the annual net profits of the business; (2) overriding commission of six percent (6%)
of the overall weekly production; (3) thirty percent (30%) of the sales she would make; and (4) two percent (2%)
for her demonstration services. The agreement was not reduced to writing on the strength of Belo’s assurances
that he was sincere, dependable and honest when it came to financial commitments.

Anay having secured the distributorship of cookware products from the West Bend Company and organized the
administrative staff and the sales force, the cookware business took off successfully. They operated under the
name of Geminesse Enterprise, a sole proprietorship registered in Marjorie Tocao’s name, with office at 712
Rufino Building, Ayala Avenue, Makati City. Belo made good his monetary commitments to Anay. Thereafter,
Roger Muencheberg of West Bend Company invited Anay to the distributor/dealer meeting in West Bend,
Wisconsin, U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach,
California, U.S.A., from July 25-26, 1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as
president and general manager of Geminesse Enterprise, even wrote a letter to the Visa Section of the U.S.
Embassy in Manila on July 13, 1987. A portion of the letter reads:

"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20) years now,
acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the Vice President Sales
Marketing and a business partner of our company, will attend in response to the invitation." (Italics supplied.)3

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving the business on
account of the unsatisfactory sales record in the Makati and Cubao offices. On August 31, 1987, she received a
plaque of appreciation from the administrative and sales people through Marjorie Tocao 4 for her excellent job
performance. On October 7, 1987, in the presence of Anay, Belo signed a memo5 entitling her to a thirty-seven
percent (37%) commission for her personal sales "up Dec 31/87." Belo explained to her that said commission was
apart from her ten percent (10%) share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had
signed a letter6 addressed to the Cubao sales office to the effect that she was no longer the vice-president of
Geminesse Enterprise. The following day, October 10, she received a note from Lina T. Cruz, marketing manager,
that Marjorie Tocao had barred her from holding office and conducting demonstrations in both Makati and
Cubao offices.7 Anay attempted to contact Belo. She wrote him twice to demand her overriding commission for
the period of January 8, 1988 to February 5, 1988 and the audit of the company to determine her share in the net
profits. When her letters were not answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still,
that letter was not answered.

Anay still received her five percent (5%) overriding commission up to December 1987. The following year, 1988,
she did not receive the same commission although the company netted a gross sales of P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with damages8 against
Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati, Branch 140.

In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the following: (1)
P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, 1988; (2) P100,000.00 as moral
damages, and (3) P100,000.00 as exemplary damages. The plaintiff also prayed for an audit of the finances of
Geminesse Enterprise from the inception of its business operation until she was "illegally dismissed" to determine
her ten percent (10%) share in the net profits. She further prayed that she be paid the five percent (5%)
"overriding commission" on the remaining 150 West Bend cookware sets before her "dismissal."

In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that was "neither
reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As far as Belo was concerned,
his only role was to introduce Anay to Marjorie Tocao. There could not have been a partnership because, as Anay
herself admitted, Geminesse Enterprise was the sole proprietorship of Marjorie Tocao. Because Anay merely
acted as marketing demonstrator of Geminesse Enterprise for an agreed remuneration, and her complaint
referred to either her compensation or dismissal, such complaint should have been lodged with the Department
of Labor and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "ill-will and
resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse Enterprise." Anay had
acted like she owned the enterprise because of her experience and expertise. Hence, petitioners were the ones
who suffered actual damages "including unreturned and unaccounted stocks of Geminesse Enterprise," and
"serious anxiety, besmirched reputation in the business world, and various damages not less than P500,000.00."
They also alleged that, to "vindicate their names," they had to hire counsel for a fee of P23,000.00.

At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an employee or
partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to damages.10

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the business. He,
however, admitted that the two had agreed that Anay would receive a three to four percent (3-4%) share in the
gross sales of the cookware. He denied contributing capital to the business or receiving a share in its profits as he
merely served as a guarantor of Marjorie Tocao, who was new in the business. He attended and/or presided over
business meetings of the venture in his capacity as a guarantor but he never participated in decision-making. He
claimed that he wrote the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal
from the business venture at the request of Tocao, because Anay had no other income.

For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay. However, she
admitted that Anay was an expert in the cookware business and hence, they agreed to grant her the following
commissions: thirty-seven percent (37%) on personal sales; five percent (5%) on gross sales; two percent (2%) on
product demonstrations, and two percent (2%) for recruitment of personnel. Marjorie denied that they agreed on
a ten percent (10%) commission on the net profits. Marjorie claimed that she got the capital for the business out
of the sale of the sewing machines used in her garments business and from Peter Lo, a Singaporean friend-
financier who loaned her the funds with interest. Because she treated Anay as her "co-equal," Marjorie received
the same amounts of commissions as her. However, Anay failed to account for stocks valued at P200,000.00.

On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the years 1987
and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent (10%) share of plaintiff in
the net profits of the cookware business;

2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and fifty (150)
cookware sets available for disposition when plaintiff was wrongfully excluded from the partnership by
defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total production which for the period
covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;

4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary damages, and

5. Ordering defendants to pay P50,000.00 as attorney’s fees and P20,000.00 as costs of suit.

SO ORDERED."

The trial court held that there was indeed an "oral partnership agreement between the plaintiff and the
defendants," based on the following: (a) there was an intention to create a partnership; (b) a common fund was
established through contributions consisting of money and industry, and (c) there was a joint interest in the
profits. The testimony of Elizabeth Bantilan, Anay’s cousin and the administrative officer of Geminesse Enterprise
from August 21, 1986 until it was absorbed by Royal International, Inc., buttressed the fact that a partnership
existed between the parties. The letter of Roger Muencheberg of West Bend Company stating that he awarded
the distributorship to Anay and Marjorie Tocao because he was convinced that with Marjorie’s financial
contribution and Anay’s experience, the combination of the two would be invaluable to the partnership, also
supported that conclusion. Belo’s claim that he was merely a "guarantor" has no basis since there was no written
evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of attending and/or presiding
over meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37% commission on personal
sales belied this. On the contrary, it demonstrated his involvement as a partner in the business.

The trial court further held that the payment of commissions did not preclude the existence of the partnership
inasmuch as such practice is often resorted to in business circles as an impetus to bigger sales volume. It did not
matter that the agreement was not in writing because Article 1771 of the Civil Code provides that a partnership
may be "constituted in any form." The fact that Geminesse Enterprise was registered in Marjorie Tocao’s name is
not determinative of whether or not the business was managed and operated by a sole proprietor or a
partnership. What was registered with the Bureau of Domestic Trade was merely the business name or style of
Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an innocent partner.
Hence, the guilty partner must give him his due upon the dissolution of the partnership as well as damages or
share in the profits "realized from the appropriation of the partnership business and goodwill." An innocent
partner thus possesses "pecuniary interest in every existing contract that was incomplete and in the trade name
of the co-partnership and assets at the time he was wrongfully expelled."
Petitioners’ appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded by the trial
court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary damages. Their Motion for
Reconsideration was denied by the Court of Appeals for lack of merit.12 Petitioners Belo and Marjorie Tocao are
now before this Court on a petition for review on certiorari, asserting that there was no business partnership
between them and herein private respondent Nenita A. Anay who is, therefore, not entitled to the damages
awarded to her by the Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership existed
between them and private respondent Anay because Geminesse Enterprise "came into being" exactly a year
before the "alleged partnership" was formed, and that it was very unlikely that petitioner Belo would invest the
sum of P2,500,000.00 with petitioner Tocao contributing nothing, without any "memorandum whatsoever
regarding the alleged partnership."13

The issue of whether or not a partnership exists is a factual matter which are within the exclusive domain of both
the trial and appellate courts. This Court cannot set aside factual findings of such courts absent any showing that
there is no evidence to support the conclusion drawn by the court a quo.14 In this case, both the trial court and
the Court of Appeals are one in ruling that petitioners and private respondent established a business partnership.
This Court finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind
themselves to contribute money, property or industry to a common fund; and (2) intention on the part of the
partners to divide the profits among themselves.15 It may be constituted in any form; a public instrument is
necessary only where immovable property or real rights are contributed thereto. 16 This implies that since a
contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no
immovable property or real rights are involved, what matters is that the parties have complied with the requisites
of a partnership. The fact that there appears to be no record in the Securities and Exchange Commission of a
public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code 17 did not
cause the nullification of the partnership. The pertinent provision of the Civil Code on the matter states:

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even
in case of failure to comply with the requirements of article 1772, first paragraph.

Petitioners admit that private respondent had the expertise to engage in the business of distributorship of
cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she was
the industrial or managing partner. It was through her reputation with the West Bend Company that the
partnership was able to open the business of distributorship of that company’s cookware products; it was
through the same efforts that the business was propelled to financial success. Petitioner Tocao herself admitted
private respondent’s indispensable role in putting up the business when, upon being asked if private respondent
held the positions of marketing manager and vice-president for sales, she testified thus:

"A: No, sir at the start she was the marketing manager because there were no one to sell yet, it’s only me there
then her and then two (2) people, so about four (4). Now, after that when she recruited already Oscar Abella and
Lina Torda-Cruz these two (2) people were given the designation of marketing managers of which definitely Nita
as superior to them would be the Vice President."18

By the set-up of the business, third persons were made to believe that a partnership had indeed been forged
between petitioners and private respondents. Thus, the communication dated June 4, 1986 of Missy Jagler of
West Bend Company to Roger Muencheberg of the same company states:
"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge does not
have cookware experience. Nita Anay has started to gather former managers, Lina Torda and Dory Vista. She has
also gathered former demonstrators, Betty Bantilan, Eloisa Lamela, Menchu Javier. They will continue to gather
other key people and build up the organization. All they need is the finance and the products to sell."19

On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face of the
established fact that he presided over meetings regarding matters affecting the operation of the business.
Moreover, his having authorized in writing on October 7, 1987, on a stationery of his own business firm, Wilcon
Builders Supply, that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales,
could not be interpreted otherwise than that he had a proprietary interest in the business. His claim that he was
merely a guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was indeed a
guarantor of future debts of petitioner Tocao under Article 2053 of the Civil Code, 20 he should have presented
documentary evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty must be
"express," Article 1403, the Statute of Frauds, requires that "a special promise to answer for the debt, default or
miscarriage of another" be in writing.21

Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed that she herself
financed the business. Her and petitioner Belo’s roles as both capitalists to the partnership with private
respondent are buttressed by petitioner Tocao’s admissions that petitioner Belo was her boyfriend and that the
partnership was not their only business venture together. They also established a firm that they called "Wiji," the
combination of petitioner Belo’s first name, William, and her nickname, Jiji.23 The special relationship between
them dovetails with petitioner Belo’s claim that he was acting in behalf of petitioner Tocao. Significantly, in the
early stage of the business operation, petitioners requested West Bend Company to allow them to "utilize their
banking and trading facilities in Singapore" in the matter of importation and payment of the cookware
products.24 The inevitable conclusion, therefore, was that petitioners merged their respective capital and infused
the amount into the partnership of distributing cookware with private respondent as the managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship
between petitioners and private respondent. While it is true that the receipt of a percentage of net profits
constitutes only prima facie evidence that the recipient is a partner in the business,25 the evidence in the case at
bar controverts an employer-employee relationship between the parties. In the first place, private respondent
had a voice in the management of the affairs of the cookware distributorship,26 including selection of people who
would constitute the administrative staff and the sales force. Secondly, petitioner Tocao’s admissions militate
against an employer-employee relationship. She admitted that, like her who owned Geminesse
Enterprise,27 private respondent received only commissions and transportation and representation
allowances28 and not a fixed salary.29 Petitioner Tocao testified:

"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. ‘X’ and ‘Y.’ Please go over
this. Exh. ‘Y’ is denominated `Cubao overrides’ 8-21-87 with ending August 21, 1987, will you please go over this
and tell the Honorable Court whether you ever came across this document and know of your own knowledge the
amount ---

A: Yes, sir this is what I am talking about earlier. That’s the one I am telling you earlier a certain percentage for
promotions, advertising, incentive.

Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote: ‘Overrides
Marjorie Ann Tocao P21,410.50’ this means that you have received this amount?

A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing commission, representation,
advertising and promotion?

A: Yes, sir.

Q: I see. Below your name is the words and figure and I quote ‘Nita D. Anay P21,410.50’, what is this?

A: That’s her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the same
P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a sense because of
her expertise in the business she is vital to my business. So, as part of the incentive I offer her the same thing.

Q: So, in short you are saying that this you have shared together, I mean having gotten from the company
P21,140.50 is your way of indicating that you were treating her as an equal?

A: As an equal.

Q: As an equal, I see. You were treating her as an equal?

A: Yes, sir.

Q: I am calling again your attention to Exh. ‘Y’ ‘Overrides Makati the other one is ---

A: That is the same thing, sir.

Q: With ending August 21, words and figure ‘Overrides Marjorie Ann Tocao P15,314.25’ the amount there you
will acknowledge you have received that?

A: Yes, sir.

Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.

Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she received the
same amount?

A: Yes, sir.

Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?

A: No, sir.

Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir." (Italics supplied.)30

If indeed petitioner Tocao was private respondent’s employer, it is difficult to believe that they shall receive the
same income in the business. In a partnership, each partner must share in the profits and losses of the venture,
except that the industrial partner shall not be liable for the losses.31 As an industrial partner, private respondent
had the right to demand for a formal accounting of the business and to receive her share in the net profit. 32

The fact that the cookware distributorship was operated under the name of Geminesse Enterprise, a sole
proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on August 19, 1987 was
merely the name of that enterprise.33 While it is true that in her undated application for renewal of registration of
that firm name, petitioner Tocao indicated that it would be engaged in retail of "kitchenwares, cookwares,
utensils, skillet,"34 she also admitted that the enterprise was only "60% to 70% for the cookware business," while
20% to 30% of its business activity was devoted to the sale of water sterilizer or purifier.35 Indubitably then, the
business name Geminesse Enterprise was used only for practical reasons - it was utilized as the common name
for petitioner Tocao’s various business activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and unremitted stocks
of Geminesse Enterprise amounting to P208,250.00."36 Obviously a ploy to offset the damages awarded to private
respondent, that claim, more than anything else, proves the existence of a partnership between them. In Idos v.
Court of Appeals, this Court said:

"The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up
stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the
partnership has not been terminated, the petitioner and private complainant remained as co-partners. x x x."37

It is not surprising then that, even after private respondent had been unceremoniously booted out of the
partnership in October 1987, she still received her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to reap for herself
and/or for petitioner Belo financial gains resulting from private respondent’s efforts to make the business
venture a success. Thus, as petitioner Tocao became adept in the business operation, she started to assert herself
to the extent that she would even shout at private respondent in front of other people.38 Her instruction to Lina
Torda Cruz, marketing manager, not to allow private respondent to hold office in both the Makati and Cubao
sales offices concretely spoke of her perception that private respondent was no longer necessary in the business
operation,39 and resulted in a falling out between the two. However, a mere falling out or misunderstanding
between partners does not convert the partnership into a sham organization. 40 The partnership exists until
dissolved under the law. Since the partnership created by petitioners and private respondent has no fixed term
and is therefore a partnership at will predicated on their mutual desire and consent, it may be dissolved by the
will of a partner. Thus:

"x x x. The right to choose with whom a person wishes to associate himself is the very foundation and essence of
that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along
with each partner’s capability to give it, and the absence of cause for dissolution provided by the law itself. Verily,
any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must,
however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but
that it can result in a liability for damages."41

An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that
arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not
necessarily the right to dissolve the partnership.42
In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership is shown by her
memo to the Cubao office plainly stating that private respondent was, as of October 9, 1987, no longer the vice-
president for sales of Geminesse Enterprise.43 By that memo, petitioner Tocao effected her own withdrawal from
the partnership and considered herself as having ceased to be associated with the partnership in the carrying on
of the business. Nevertheless, the partnership was not terminated thereby; it continues until the winding up of
the business.44

The winding up of partnership affairs has not yet been undertaken by the partnership.1âwphi1 This is manifest in
petitioners’ claim for stocks that had been entrusted to private respondent in the pursuit of the partnership
business.

The determination of the amount of damages commensurate with the factual findings upon which it is based is
primarily the task of the trial court.45 The Court of Appeals may modify that amount only when its factual findings
are diametrically opposed to that of the lower court,46 or the award is palpably or scandalously and unreasonably
excessive.47 However, exemplary damages that are awarded "by way of example or correction for the public
good,"48 should be reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly,
the award of moral damages of P100,000.00 was excessive and should be likewise reduced to P50,000.00.
Similarly, attorney’s fees that should be granted on account of the award of exemplary damages and petitioners’
evident bad faith in refusing to satisfy private respondent’s plainly valid, just and demandable claims, 49 appear to
have been excessively granted by the trial court and should therefore be reduced to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among petitioners and
private respondent is ordered dissolved, and the parties are ordered to effect the winding up and liquidation of
the partnership pursuant to the pertinent provisions of the Civil Code. This case is remanded to the Regional Trial
Court for proper proceedings relative to said dissolution. The appealed decisions of the Regional Trial Court and
the Court of Appeals are AFFIRMED with MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the partnership affairs
for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in order to determine private
respondent’s ten percent (10%) share in the net profits of the partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%) overriding
commission for the one hundred and fifty (150) cookware sets available for disposition since the time
private respondent was wrongfully excluded from the partnership by petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding commission on the
total production which, for the period covering January 8, 1988 to February 5, 1988, amounted to
P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the amount
of P50,000.00, exemplary damages in the amount of P50,000.00 and attorney’s fees in the amount of
P25,000.00.

SO ORDERED.
 G.R. No. 159333 July 31, 2006

ARSENIO T. MENDIOLA, vs CA, NLRC, PACIFIC FOREST RESOURCES, PHILS., INC. and/or CELLMARK AB

DECISION

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.

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.

In a partnership, the members become co-owners of what is contributed to the firm capital and of all property
that 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 regards a partner as a co-owner of specific partnership property.38 Each partner possesses a joint
interest in the whole of partnership property. If the relation does not have this feature, it is not one of
partnership.39 This essential element, the community of interest, or co-ownership of, or joint interest in
partnership property is absent in the relations between petitioner and private respondent Pacfor. Petitioner is
not a part-owner of Pacfor Phils. William Gleason, private respondent Pacfor's President established this fact
when he said that Pacfor Phils. is simply a "theoretical company" for the purpose of dividing the income 50-50.
He stressed that petitioner knew of this arrangement from the very 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. Thus, the parties in this case, merely shared profits. This alone does not make a partnership. 40

Besides, a corporation cannot become a member of a partnership in the absence of express authorization by
statute or charter.41 This doctrine is based on the following considerations: (1) that the mutual agency between
the partners, 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 subject to risks not contemplated by the stockholders when they originally
invested in the corporation.42No such authorization has been proved in the case at bar.
Be that as it may, we hold that on the basis of the evidence, an employer-employee relationship is present in the
case at bar. The elements to determine the existence of an employment relationship are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's
power to 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

In the instant case, all the foregoing elements are present. First, it was private respondent Pacfor which selected
and 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 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.

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.

Next, we shall determine if petitioner was constructively dismissed from employment.

The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and would not quit however,
private respondent Pacfor began to systematically deprive petitioner of his duties and benefits to make him feel
that his presence in the company was no longer wanted. First, private respondent Pacfor directed petitioner to
turn over to it all records of Pacfor Phils. This would certainly make the work of petitioner very difficult, if not
impossible. Second, private respondent Pacfor ordered petitioner to remit the Christmas giveaway fund intended
for clients of Pacfor Phils. Then it ordered petitioner to transfer title and turn over to it the possession of the
service car. It also advised its clients in the Philippines, particularly Intercontinental Paper Industries, Inc. and
DAVCOR, not to deal with petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor appointed a new
resident agent for Pacfor Phils.45

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,
insensibility or disdain by the employer that continued employment may become so unbearable on the part of
the employee so as to foreclose any choice on his part except to resign from such employment. 47

The harassing acts of the private respondent are unjustified. They were undertaken when petitioner sought
clarification from the private respondent about his supposed 50% equity on Pacfor Phils. Private respondent
Pacfor 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 exercised in good faith and with due regard to the rights of labor – verily, with the principles
of fair play at heart and justice in mind." The exercise of management prerogative cannot be utilized as an
implement to circumvent our laws and oppress employees.48

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 trust and confidence is no longer possible. He should be awarded separation pay, in lieu of
reinstatement.

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.

SO ORDERED.