Bus. Org.

I Cases – Page 1 Syllabus

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154486 December 1, 2010
FEDERICO JARANTILLA, JR., Petitioner,
vs.
ANTONIETA JARANTILLA, BUENAVENTURA REMOTIGUE, substituted by CYNTHIA REMOTIGUE, DOROTEO
JARANTILLA and TOMAS JARANTILLA, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:

This petition for review on certiorari1 seeks to modify the Decision2 of the Court of Appeals dated July
30, 2002 in CA-G.R. CV No. 40887, which set aside the Decision3 dated December 18, 1992 of the
Regional Trial Court (RTC) of Quezon City, Branch 98 in Civil Case No. Q-50464.
The pertinent facts are as follows:
The spouses Andres Jarantilla and Felisa Jaleco were survived by eight children: Federico, Delfin,
Benjamin, Conchita, Rosita, Pacita, Rafael and Antonieta.4 Petitioner Federico Jarantilla, Jr. is the
grandchild of the late Jarantilla spouses by their son Federico Jarantilla, Sr. and his wife Leda
Jamili.5 Petitioner also has two other brothers: Doroteo and Tomas Jarantilla.
Petitioner was one of the defendants in the complaint before the RTC while Antonieta Jarantilla, his
aunt, was the plaintiff therein. His co-respondents before he joined his aunt Antonieta in her complaint,
were his late aunt Conchita Jarantilla’s husband Buenaventura Remotigue, who died during the
pendency of the case, his cousin Cynthia Remotigue, the adopted daughter of Conchita Jarantilla
and Buenaventura Remotigue, and his brothers Doroteo and Tomas Jarantilla.6
In 1948, the Jarantilla heirs extrajudicially partitioned amongst themselves the real properties of their
deceased parents.7 With the exception of the real property adjudicated to Pacita Jarantilla, the heirs
also agreed to allot the produce of the said real properties for the years 1947-1949 for the studies of
Rafael and Antonieta Jarantilla.8
In the same year, the spouses Rosita Jarantilla and Vivencio Deocampo entered into an agreement
with the spouses Buenaventura Remotigue and Conchita Jarantilla to provide mutual assistance to
each other by way of financial support to any commercial and agricultural activity on a joint business
arrangement. This business relationship proved to be successful as they were able to establish a
manufacturing and trading business, acquire real properties, and construct buildings, among other
things.9 This partnership ended in 1973 when the parties, in an "Agreement,"10 voluntarily agreed to
completely dissolve their "joint business relationship/arrangement."11
On April 29, 1957, the spouses Buenaventura and Conchita Remotigue executed a document wherein
they acknowledged that while registered only in Buenaventura Remotigue’s name, they were not the
only owners of the capital of the businesses Manila Athletic Supply (712 Raon Street, Manila),
Remotigue Trading (Calle Real, Iloilo City) and Remotigue Trading (Cotabato City). In this same
"Acknowledgement of Participating Capital," they stated the participating capital of their co-owners
as of the year 1952, with Antonieta Jarantilla’s stated as eight thousand pesos (₱8,000.00) and Federico
Jarantilla, Jr.’s as five thousand pesos (₱5,000.00).12
The present case stems from the amended complaint13 dated April 22, 1987 filed by Antonieta
Jarantilla against Buenaventura Remotigue, Cynthia Remotigue, Federico Jarantilla, Jr., Doroteo
Jarantilla and Tomas Jarantilla, for the accounting of the assets and income of the co-ownership, for
its partition and the delivery of her share corresponding to eight percent (8%), and for damages.
Antonieta claimed that in 1946, she had entered into an agreement with Conchita and Buenaventura
Remotigue, Rafael Jarantilla, and Rosita and Vivencio Deocampo to engage in business. Antonieta
alleged that the initial contribution of property and money came from the heirs’ inheritance, and her
subsequent annual investment of seven thousand five hundred pesos (₱7,500.00) as additional capital
came from the proceeds of her farm. Antonieta also alleged that from 1946-1969, she had helped in
the management of the business they co-owned without receiving any salary. Her salary was
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supposedly rolled back into the business as additional investments in her behalf. Antonieta further
claimed co-ownership of certain properties14 (the subject real properties) in the name of the
defendants since the only way the defendants could have purchased these properties were through
the partnership as they had no other source of income.
The respondents, including petitioner herein, in their Answer,15 denied having formed a partnership with
Antonieta in 1946. They claimed that she was in no position to do so as she was still in school at that
time. In fact, the proceeds of the lands they partitioned were devoted to her studies. They also averred
that while she may have helped in the businesses that her older sister Conchita had formed with
Buenaventura Remotigue, she was paid her due salary. They did not deny the existence and validity
of the "Acknowledgement of Participating Capital" and in fact used this as evidence to support their
claim that Antonieta’s 8% share was limited to the businesses enumerated therein. With regard to
Antonieta’s claim in their other corporations and businesses, the respondents said these should also be
limited to the number of her shares as specified in the respective articles of incorporation. The
respondents denied using the partnership’s income to purchase the subject real properties and said
that the certificates of title should be binding on her.16
During the course of the trial at the RTC, petitioner Federico Jarantilla, Jr., who was one of the original
defendants, entered into a compromise agreement17 with Antonieta Jarantilla wherein he supported
Antonieta’s claims and asserted that he too was entitled to six percent (6%) of the supposed
partnership in the same manner as Antonieta was. He prayed for a favorable judgment in this wise:
Defendant Federico Jarantilla, Jr., hereby joins in plaintiff’s prayer for an accounting from the other
defendants, and the partition of the properties of the co-ownership and the delivery to the plaintiff
and to defendant Federico Jarantilla, Jr. of their rightful share of the assets and properties in the co-
ownership.181avvphi1
The RTC, in an Order19 dated March 25, 1992, approved the Joint Motion to Approve Compromise
Agreement20and on December 18, 1992, decided in favor of Antonieta, to wit:
WHEREFORE, premises above-considered, the Court renders judgment in favor of the plaintiff Antonieta
Jarantilla and against defendants Cynthia Remotigue, Doroteo Jarantilla and Tomas Jarantilla
ordering the latter:
1. to deliver to the plaintiff her 8% share or its equivalent amount on the real properties covered
by TCT Nos. 35655, 338398, 338399 & 335395, all of the Registry of Deeds of Quezon City; TCT Nos.
(18303)23341, 142882 & 490007(4615), all of the Registry of Deeds of Rizal; and TCT No. T-6309 of
the Registry of Deeds of Cotabato based on their present market value;
2. to deliver to the plaintiff her 8% share or its equivalent amount on the Remotigue Agro-
Industrial Corporation, Manila Athletic Supply, Inc., MAS Rubber Products, Inc. and Buendia
Recapping Corporation based on the shares of stocks present book value;
3. to account for the assets and income of the co-ownership and deliver to plaintiff her rightful
share thereof equivalent to 8%;
4. to pay plaintiff, jointly and severally, the sum of ₱50,000.00 as moral damages;
5. to pay, jointly and severally, the sum of ₱50,000.00 as attorney’s fees; and
6. to pay, jointly and severally, the costs of the suit.21
Both the petitioner and the respondents appealed this decision to the Court of Appeals. The petitioner
claimed that the RTC "erred in not rendering a complete judgment and ordering the partition of the
co-ownership and giving to [him] six per centum (6%) of the properties."22
While the Court of Appeals agreed to some of the RTC’s factual findings, it also established that
Antonieta Jarantilla was not part of the partnership formed in 1946, and that her 8% share was limited
to the businesses enumerated in the Acknowledgement of Participating Capital. On July 30, 2002, the
Court of Appeals rendered the herein challenged decision setting aside the RTC’s decision, as follows:
WHEREFORE, the decision of the trial court, dated 18 December 1992 is SET ASIDE and a new one is
hereby entered ordering that:
(1) after accounting, plaintiff Antonieta Jarantilla be given her share of 8% in the assets and
profits of Manila Athletic Supply, Remotigue Trading in Iloilo City and Remotigue Trading in
Cotabato City;

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(2) after accounting, defendant Federico Jarantilla, Jr. be given his share of 6% of the assets
and profits of the above-mentioned enterprises; and, holding that
(3) plaintiff Antonieta Jarantilla is a stockholder in the following corporations to the extent stated
in their Articles of Incorporation:
(a) Rural Bank of Barotac Nuevo, Inc.;
(b) MAS Rubber Products, Inc.;
(c) Manila Athletic Supply, Inc.; and
(d) B. Remotigue Agro-Industrial Development Corp.
(4) No costs.23
The respondents, on August 20, 2002, filed a Motion for Partial Reconsideration but the Court of Appeals
denied this in a Resolution24 dated March 21, 2003.
Antonieta Jarantilla filed before this Court her own petition for review on certiorari25 dated September
16, 2002, assailing the Court of Appeals’ decision on "similar grounds and similar assignments of errors
as this present case"26 but it was dismissed on November 20, 2002 for failure to file the appeal within the
reglementary period of fifteen (15) days in accordance with Section 2, Rule 45 of the Rules of Court.27
Petitioner filed before us this petition for review on the sole ground that:
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT PETITIONER FEDERICO
JARANTILLA, JR. IS ENTITLED TO A SIX PER CENTUM (6%) SHARE OF THE OWNERSHIP OF THE REAL
PROPERTIES ACQUIRED BY THE OTHER DEFENDANTS USING COMMON FUNDS FROM THE BUSINESSES
WHERE HE HAD OWNED SUCH SHARE.28
Petitioner asserts that he was in a partnership with the Remotigue spouses, the Deocampo spouses,
Rosita Jarantilla, Rafael Jarantilla, Antonieta Jarantilla and Quintin Vismanos, as evidenced by the
Acknowledgement of Participating Capital the Remotigue spouses executed in 1957. He contends
that from this partnership, several other corporations and businesses were established and several real
properties were acquired. In this petition, he is essentially asking for his 6% share in the subject real
properties. He is relying on the Acknowledgement of Participating Capital, on his own testimony, and
Antonieta Jarantilla’s testimony to support this contention.
The core issue is whether or not the partnership subject of the Acknowledgement of Participating
Capital funded the subject real properties. In other words, what is the petitioner’s right over these real
properties?
It is a settled rule that in a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure,
only questions of law may be raised by the parties and passed upon by this Court.29
A question of law arises when there is doubt as to what the law is on a certain state of facts, while there
is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question
to be one of law, the same must not involve an examination of the probative value of the evidence
presented by the litigants or any of them. The resolution of the issue must rest solely on what the law
provides on the given set of circumstances. Once it is clear that the issue invites a review of the
evidence presented, the question posed is one of fact. Thus, the test of whether a question is one of
law or of fact is not the appellation given to such question by the party raising the same; rather, it is
whether the appellate court can determine the issue raised without reviewing or evaluating the
evidence, in which case, it is a question of law; otherwise it is a question of fact.30
Since the Court of Appeals did not fully adopt the factual findings of the RTC, this Court, in resolving
the questions of law that are now in issue, shall look into the facts only in so far as the two courts a quo
differed in their appreciation thereof.
The RTC found that an unregistered partnership existed since 1946 which was affirmed in the 1957
document, the "Acknowledgement of Participating Capital." The RTC used this as its basis for giving
Antonieta Jarantilla an 8% share in the three businesses listed therein and in the other businesses and
real properties of the respondents as they had supposedly acquired these through funds from the
partnership.31
The Court of Appeals, on the other hand, agreed with the RTC as to Antonieta’s 8% share in the business
enumerated in the Acknowledgement of Participating Capital, but not as to her share in the other
corporations and real properties. The Court of Appeals ruled that Antonieta’s claim of 8% is based on
the "Acknowledgement of Participating Capital," a duly notarized document which was specific as to
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the subject of its coverage. Hence, there was no reason to pattern her share in the other corporations
from her share in the partnership’s businesses. The Court of Appeals also said that her claim in the
respondents’ real properties was more "precarious" as these were all covered by certificates of title
which served as the best evidence as to all the matters contained therein.32 Since petitioner’s claim
was essentially the same as Antonieta’s, the Court of Appeals also ruled that petitioner be given his 6%
share in the same businesses listed in the Acknowledgement of Participating Capital.
Factual findings of the trial court, when confirmed by the Court of Appeals, are final and conclusive
except in the following cases: (1) when the inference made is manifestly mistaken, absurd or
impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on
speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on
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 of the Court of Appeals 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 Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion; and (10)
when the findings of fact of the Court of Appeals are premised on the absence of evidence and are
contradicted by the evidence on record.33
In this case, we find no error in the ruling of the Court of Appeals.
Both the petitioner and Antonieta Jarantilla characterize their relationship with the respondents as a
co-ownership, but in the same breath, assert that a verbal partnership was formed in 1946 and was
affirmed in the 1957 Acknowledgement of Participating Capital.
There is a co-ownership when an undivided thing or right belongs to different persons.34 It is a
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.35 The Court, in Pascual v.
The Commissioner of Internal Revenue,36 quoted the concurring opinion of Mr. Justice Angelo Bautista
in Evangelista v. The Collector of Internal Revenue37 to further elucidate on the distinctions between a
co-ownership and a partnership, to wit:
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.
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.

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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.
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 plaintiff’s commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties.
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. x x x.
The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the
proceeds therefrom.38 (Citations omitted.)
Under Article 1767 of the Civil Code, there are two essential elements in a contract of partnership: (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, all the parties in this case 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.39 It is not denied
that all the parties in this case have agreed to contribute capital to a common fund to be able to later
on share its profits. They have admitted this fact, agreed to its veracity, and even submitted one
common documentary evidence to prove such partnership - the Acknowledgement of Participating
Capital.
As this case revolves around the legal effects of the Acknowledgement of Participating Capital, it
would be instructive to examine the pertinent portions of this document:
ACKNOWLEDGEMENT OF
PARTICIPATING CAPITAL
KNOW ALL MEN BY THESE PRESENTS:
That we, the spouses Buenaventura Remotigue and Conchita Jarantilla de Remotigue, both of legal
age, Filipinos and residents of Loyola Heights, Quezon City, P.I. hereby state:
That the Manila Athletic Supply at 712 Raon, Manila, the Remotigue Trading of Calle Real, Iloilo City
and the Remotigue Trading, Cotabato Branch, Cotabato, P.I., all dealing in athletic goods and
equipments, and general merchandise are recorded in their respective books with Buenaventura
Remotigue as the registered owner and are being operated by them as such:
That they are not the only owners of the capital of the three establishments and their participation in
the capital of the three establishments together with the other co-owners as of the year 1952 are stated
as follows:
1. Buenaventura Remotigue (TWENTY-FIVE THOUSAND)₱25,000.00
2. Conchita Jarantilla de Remotigue (TWENTY-FIVE THOUSAND)… 25,000.00
3. Vicencio Deocampo (FIFTEEN THOUSAND)…… 15,000.00
4. Rosita J. Deocampo (FIFTEEN THOUSAND)….... 15,000.00
5. Antonieta Jarantilla (EIGHT THOUSAND)……….. 8,000.00
6. Rafael Jarantilla (SIX THOUSAND)…………….. ... 6,000.00
7. Federico Jarantilla, Jr. (FIVE THOUSAND)……….. 5,000.00
8. Quintin Vismanos (TWO THOUSAND)…………... 2,000.00
That aside from the persons mentioned in the next preceding paragraph, no other person has any
interest in the above-mentioned three establishments.
IN WITNESS WHEREOF, they sign this instrument in the City of Manila, P.I., this 29th day of April, 1957.
[Sgd.]
BUENAVENTURA REMOTIGUE
[Sgd.]
CONCHITA JARANTILLA DE REMOTIGUE40
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The Acknowledgement of Participating Capital is a duly notarized document voluntarily executed by

Conchita Jarantilla-Remotigue and Buenaventura Remotigue in 1957. Petitioner does not dispute its
contents and is actually relying on it to prove his participation in the partnership. Article 1797 of the
Civil Code provides:
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If only the share
of each partner in the profits has been agreed upon, the share of each in the losses shall be in the
same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion
to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital. (Emphases supplied.)
It is clear from the foregoing that a partner is entitled only to his share as agreed upon, or in the absence
of any such stipulations, then to his share in proportion to his contribution to the partnership. The
petitioner himself claims his share to be 6%, as stated in the Acknowledgement of Participating Capital.
However, petitioner fails to realize that this document specifically enumerated the businesses covered
by the partnership: Manila Athletic Supply, Remotigue Trading in Iloilo City and Remotigue Trading in
Cotabato City. Since there was a clear agreement that the capital the partners contributed went to
the three businesses, then there is no reason to deviate from such agreement and go beyond the
stipulations in the document. Therefore, the Court of Appeals did not err in limiting petitioner’s share to
the assets of the businesses enumerated in the Acknowledgement of Participating Capital.
In Villareal v. Ramirez,41 the Court held that since a partnership is a separate juridical entity, the shares
to be paid out to the partners is necessarily limited only to its total resources, to wit:
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners,
the amount to be refunded is necessarily limited to its total resources. In other words, it can only pay
out what it has in its coffers, which consists of all its assets. However, before the partners can be paid
their shares, the creditors of the partnership must first be compensated. After all the creditors have
been paid, whatever is left of the partnership assets becomes available for the payment of the
partners’ shares.42
There is no evidence that the subject real properties were assets of the partnership referred to in the
Acknowledgement of Participating Capital.
The petitioner further asserts that he is entitled to respondents’ properties based on the concept of
trust. He claims that since the subject real properties were purchased using funds of the partnership,
wherein he has a 6% share, then "law and equity mandates that he should be considered as a co-
owner of those properties in such proportion."43 In Pigao v. Rabanillo,44 this Court explained the concept
of trusts, to wit:
Express trusts are created by the intention of the trustor or of the parties, while implied trusts come into
being by operation of law, either through implication of an intention to create a trust as a matter of
law or through the imposition of the trust irrespective of, and even contrary to, any such intention. In
turn, implied trusts are either resulting or constructive trusts. Resulting trusts are based on the equitable
doctrine that valuable consideration and not legal title determines the equitable title or interest and
are presumed always to have been contemplated by the parties. They arise from the nature or
circumstances of the consideration involved in a transaction whereby one person thereby becomes
invested with legal title but is obligated in equity to hold his legal title for the benefit of another.45
On proving the existence of a trust, this Court held that:
Respondent has presented only bare assertions that a trust was created. Noting the need to prove the
existence of a trust, this Court has held thus:
"As a rule, the burden of proving the existence of a trust is on the party asserting its existence, and such
proof must be clear and satisfactorily show the existence of the trust and its elements. While implied
trusts may be proved by oral evidence, the evidence must be trustworthy and received by the courts
with extreme caution, and should not be made to rest on loose, equivocal or indefinite declarations.
Trustworthy evidence is required because oral evidence can easily be fabricated." 46

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The petitioner has failed to prove that there exists a trust over the subject real properties. Aside from his
bare allegations, he has failed to show that the respondents used the partnership’s money to purchase
the said properties. Even assuming arguendo that some partnership income was used to acquire these
properties, the petitioner should have successfully shown that these funds came from his share in the
partnership profits. After all, by his own admission, and as stated in the Acknowledgement of
Participating Capital, he owned a mere 6% equity in the partnership.
In essence, the petitioner is claiming his 6% share in the subject real properties, by relying on his own
self-serving testimony and the equally biased testimony of Antonieta Jarantilla. Petitioner has not
presented evidence, other than these unsubstantiated testimonies, to prove that the respondents did
not have the means to fund their other businesses and real properties without the partnership’s income.
On the other hand, the respondents have not only, by testimonial evidence, proven their case against
the petitioner, but have also presented sufficient documentary evidence to substantiate their claims,
allegations and defenses. They presented preponderant proof on how they acquired and funded such
properties in addition to tax receipts and tax declarations.47 It has been held that "while tax
declarations and realty tax receipts do not conclusively prove ownership, they may constitute strong
evidence of ownership when accompanied by possession for a period sufficient for
prescription."48 Moreover, it is a rule in this jurisdiction that testimonial evidence cannot prevail over
documentary evidence.49 This Court had on several occasions, expressed our disapproval on using
mere self-serving testimonies to support one’s claim. In Ocampo v. Ocampo,50 a case on partition of a
co-ownership, we held that:
Petitioners assert that their claim of co-ownership of the property was sufficiently proved by their
witnesses -- Luisa Ocampo-Llorin and Melita Ocampo. We disagree. Their testimonies cannot prevail
over the array of documents presented by Belen. A claim of ownership cannot be based simply on the
testimonies of witnesses; much less on those of interested parties, self-serving as they are.51
It is true that a certificate of title is merely an evidence of ownership or title over the particular property
described therein. Registration in the Torrens system does not create or vest title as registration is not a
mode of acquiring ownership; hence, this cannot deprive an aggrieved party of a remedy in
law.52 However, petitioner asserts ownership over portions of the subject real properties on the strength
of his own admissions and on the testimony of Antonieta Jarantilla.1avvphi1 As held by this Court in
Republic of the Philippines v. Orfinada, Sr.53:
Indeed, a Torrens title is generally conclusive evidence of ownership of the land referred to therein,
and a strong presumption exists that a Torrens title was regularly issued and valid. A Torrens title is
incontrovertible against any informacion possessoria, of other title existing prior to the issuance thereof
not annotated on the Torrens title. Moreover, persons dealing with property covered by a Torrens
certificate of title are not required to go beyond what appears on its face.54
As we have settled that this action never really was for partition of a co-ownership, to permit petitioner’s
claim on these properties is to allow a collateral, indirect attack on respondents’ admitted titles. In the
words of the Court of Appeals, "such evidence cannot overpower the conclusiveness of these
certificates of title, more so since plaintiff’s [petitioner’s] claims amount to a collateral attack, which is
prohibited under Section 48 of Presidential Decree No. 1529, the Property Registration Decree."55
SEC. 48. Certificate not subject to collateral attack. – A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in
accordance with law.
This Court has deemed an action or proceeding to be "an attack on a title when its objective is to
nullify the title, thereby challenging the judgment pursuant to which the title was decreed."56 In Aguilar
v. Alfaro,57 this Court further distinguished between a direct and an indirect or collateral attack, as
follows:
A collateral attack transpires when, in another action to obtain a different relief and as an incident to
the present action, an attack is made against the judgment granting the title. This manner of attack is
to be distinguished from a direct attack against a judgment granting the title, through an action whose
main objective is to annul, set aside, or enjoin the enforcement of such judgment if not yet
implemented, or to seek recovery if the property titled under the judgment had been disposed of. x x
x.
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Petitioner’s only piece of documentary evidence is the Acknowledgement of Participating Capital,

which as discussed above, failed to prove that the real properties he is claiming co-ownership of were
acquired out of the proceeds of the businesses covered by such document. Therefore, petitioner’s
theory has no factual or legal leg to stand on.
WHEREFORE, the Petition is hereby DENIED and the Decision of the Court of Appeals in CA-G.R. CV No.
40887, dated July 30, 2002 is AFFIRMED.
SO ORDERED.

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SECOND DIVISION
G.R. No. 142293 February 27, 2003
VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION, and SBT1 TRUCKING
CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and JAIME SAHOT, respondents.
DECISION
QUISUMBING, J.:

This petition for review seeks the reversal of the decision 2 of the Court of Appeals dated February 29,
2000, in CA-G.R. SP No. 52671, affirming with modification the decision3 of the National Labor Relations
Commission promulgated on June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the
reinstatement of the decision4 of the Labor Arbiter in NLRC NCR Case No. 00-09-06717-94.
Culled from the records are the following facts of this case:
Sometime in 1958, private respondent Jaime Sahot5 started working as a truck helper for petitioners’
family-owned trucking business named Vicente Sy Trucking. In 1965, he became a truck driver of the
same family business, renamed T. Paulino Trucking Service, later 6B’s Trucking Corporation in 1985, and
thereafter known as SBT Trucking Corporation since 1994. Throughout all these changes in names and
for 36 years, private respondent continuously served the trucking business of petitioners.
In April 1994, Sahot was already 59 years old. He had been incurring absences as he was suffering from
various ailments. Particularly causing him pain was his left thigh, which greatly affected the
performance of his task as a driver. He inquired about his medical and retirement benefits with the
Social Security System (SSS) on April 25, 1994, but discovered that his premium payments had not been
remitted by his employer.
Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically examined
and treated for EOR, presleyopia, hypertensive retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104,
respectively),6 HPM, UTI, Osteoarthritis (Annex "G-4", p. 105),7 and heart enlargement (Annex G, p.
107).8 On said grounds, Belen Paulino of the SBT Trucking Service management told him to file a formal
request for extension of his leave. At the end of his week-long absence, Sahot applied for extension of
his leave for the whole month of June, 1994. It was at this time when petitioners allegedly threatened
to terminate his employment should he refuse to go back to work.
At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to work, But he
could not retire on pension because petitioners never paid his correct SSS premiums. The fact remained
he could no longer work as his left thigh hurt abominably. Petitioners ended his dilemma. They carried
out their threat and dismissed him from work, effective June 30, 1994. He ended up sick, jobless and
penniless.
On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal
dismissal, docketed as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of separation
pay and attorneys fees against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking,
T. Paulino Trucking Service, 6B’s Trucking and SBT Trucking, herein petitioners.
For their part, petitioners admitted they had a trucking business in the 1950s but denied employing
helpers and drivers. They contend that private respondent was not illegally dismissed as a driver
because he was in fact petitioner’s industrial partner. They add that it was not until the year 1994, when
SBT Trucking Corporation was established, and only then did respondent Sahot become an employee
of the company, with a monthly salary that reached P4,160.00 at the time of his separation.
Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and was not able
to report for work for almost seven days. On June 1, 1994, Sahot asked permission to extend his leave
of absence until June 30, 1994. It appeared that from the expiration of his leave, private respondent
never reported back to work nor did he file an extension of his leave. Instead, he filed the complaint
for illegal dismissal against the trucking company and its owners.
Petitioners add that due to Sahot’s refusal to work after the expiration of his authorized leave of
absence, he should be deemed to have voluntarily resigned from his work. They contended that Sahot
had all the time to extend his leave or at least inform petitioners of his health condition. Lastly, they
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cited NLRC Case No. RE-4997-76, entitled "Manuelito Jimenez et al. vs. T. Paulino Trucking Service," as a
defense in view of the alleged similarity in the factual milieu and issues of said case to that of Sahot’s,
hence they are in pari material and Sahot’s complaint ought also to be dismissed.
The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that there was no
illegal dismissal in Sahot’s case. Private respondent had failed to report to work. Moreover, said the
Labor Arbiter, petitioners and private respondent were industrial partners before January 1994. The
Labor Arbiter concluded by ordering petitioners to pay "financial assistance" of P15,000 to Sahot for
having served the company as a regular employee since January 1994 only.
On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It
declared that private respondent was an employee, not an industrial partner, since the start. Private
respondent Sahot did not abandon his job but his employment was terminated on account of his illness,
pursuant to Article 2849 of the Labor Code. Accordingly, the NLRC ordered petitioners to pay private
respondent separation pay in the amount of P60,320.00, at the rate of P2,080.00 per year for 29 years
of service.
Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision dated February
29, 2000, the appellate court affirmed with modification the judgment of the NLRC. It held that private
respondent was indeed an employee of petitioners since 1958. It also increased the amount of
separation pay awarded to private respondent to P74,880, computed at the rate of P2,080 per year
for 36 years of service from 1958 to 1994. It decreed:
WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking Corporation is
hereby directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND EIGHT
HUNDRED EIGHTY (P74,880.00) PESOS as and for his separation pay.10
Hence, the instant petition anchored on the following contentions:
I
RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING WITH
MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT IN ACCORD
WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE.11
II
RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL LABOR
RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE LATTER
WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE WITNESSES IN THE
CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS NATIONAL CAPITAL REGION
(305 SCRA 233).12
III
PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION.13
Three issues are to be resolved: (1) Whether or not an employer-employee relationship existed between
petitioners and respondent Sahot; (2) Whether or not there was valid dismissal; and (3) Whether or not
respondent Sahot is entitled to separation pay.
Crucial to the resolution of this case is the determination of the first issue. Before a case for illegal
dismissal can prosper, an employer-employee relationship must first be established.14
Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that respondent
Sahot was not an employee but was in fact, petitioners’ industrial partner.15 It is contended that it was
the Labor Arbiter who heard the case and had the opportunity to observe the demeanor and
deportment of the parties. The same conclusion, aver petitioners, is supported by substantial
evidence.16 Moreover, it is argued that the findings of fact of the Labor Arbiter was wrongly overturned
by the NLRC when the latter made the following pronouncement:
We agree with complainant that there was error committed by the Labor Arbiter when he concluded
that complainant was an industrial partner prior to 1994. A computation of the age of complainant
shows that he was only twenty-three (23) years when he started working with respondent as truck
helper. How can we entertain in our mind that a twenty-three (23) year old man, working as a truck
helper, be considered an industrial partner. Hence we rule that complainant was only an employee,
not a partner of respondents from the time complainant started working for respondent.17

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Because the Court of Appeals also found that an employer-employee relationship existed, petitioners
aver that the appellate court’s decision gives an "imprimatur" to the "illegal" finding and conclusion of
the NLRC.
Private respondent, for his part, denies that he was ever an industrial partner of petitioners. There was
no written agreement, no proof that he received a share in petitioners’ profits, nor was there anything
to show he had any participation with respect to the running of the business.18
The elements to determine the existence of an employment relationship are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the
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.19
As found by the appellate court, petitioners owned and operated a trucking business since the 1950s
and by their own allegations, they determined private respondent’s wages and rest day.20 Records of
the case show that private respondent actually engaged in work as an employee. During the entire
course of his employment he did not have the freedom to determine where he would go, what he
would do, and how he would do it. He merely followed instructions of petitioners and was content to
do so, as long as he was paid his wages. Indeed, said the CA, private respondent had worked as a
truck helper and driver of petitioners not for his own pleasure but under the latter’s control.
Article 176721 of the Civil Code states that in a contract of partnership two or more persons bind
themselves to contribute money, property or industry to a common fund, with the intention of dividing
the profits among themselves.22 Not one of these circumstances is present in this case. No written
agreement exists to prove the partnership between the parties. Private respondent did not contribute
money, property or industry for the purpose of engaging in the supposed business. There is no proof
that he was receiving a share in the profits as a matter of course, during the period when the trucking
business was under operation. Neither is there any proof that he had actively participated in the
management, administration and adoption of policies of the business. Thus, the NLRC and the CA did
not err in reversing the finding of the Labor Arbiter that private respondent was an industrial partner
from 1958 to 1994.
On this point, we affirm the findings of the appellate court and the NLRC. Private respondent Jaime
Sahot was not an industrial partner but an employee of petitioners from 1958 to 1994. The existence of
an employer-employee relationship is ultimately a question of fact23 and the findings thereon by the
NLRC, as affirmed by the Court of Appeals, deserve not only respect but finality when supported by
substantial evidence. Substantial evidence is such amount of relevant evidence which a reasonable
mind might accept as adequate to justify a conclusion.24
Time and again this Court has said that "if doubt exists between the evidence presented by the
employer and the employee, the scales of justice must be tilted in favor of the latter."25 Here, we
entertain no doubt. Private respondent since the beginning was an employee of, not an industrial
partner in, the trucking business.
Coming now to the second issue, was private respondent validly dismissed by petitioners?
Petitioners contend that it was private respondent who refused to go back to work. The decision of the
Labor Arbiter pointed out that during the conciliation proceedings, petitioners requested respondent
Sahot to report back for work. However, in the same proceedings, Sahot stated that he was no longer
fit to continue working, and instead he demanded separation pay. Petitioners then retorted that if
Sahot did not like to work as a driver anymore, then he could be given a job that was less strenuous,
such as working as a checker. However, Sahot declined that suggestion. Based on the foregoing
recitals, petitioners assert that it is clear that Sahot was not dismissed but it was of his own volition that
he did not report for work anymore.
In his decision, the Labor Arbiter concluded that:
While it may be true that respondents insisted that complainant continue working with respondents
despite his alleged illness, there is no direct evidence that will prove that complainant’s illness prevents
or incapacitates him from performing the function of a driver. The fact remains that complainant
suddenly stopped working due to boredom or otherwise when he refused to work as a checker which
certainly is a much less strenuous job than a driver.26
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But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court of Appeals,
held that:
While it was very obvious that complainant did not have any intention to report back to work due to
his illness which incapacitated him to perform his job, such intention cannot be construed to be an
abandonment. Instead, the same should have been considered as one of those falling under the just
causes of terminating an employment. The insistence of respondent in making complainant work did
not change the scenario.
It is worthy to note that respondent is engaged in the trucking business where physical strength is of
utmost requirement (sic). Complainant started working with respondent as truck helper at age twenty-
three (23), then as truck driver since 1965. Complainant was already fifty-nine (59) when the complaint
was filed and suffering from various illness triggered by his work and age.
x x x27
In termination cases, the burden is upon the employer to show by substantial evidence that the
termination was for lawful cause and validly made.28 Article 277(b) of the Labor Code puts the burden
of proving that the dismissal of an employee was for a valid or authorized cause on the employer,
without distinction whether the employer admits or does not admit the dismissal. 29 For an employee’s
dismissal to be valid, (a) the dismissal must be for a valid cause and (b) the employee must be afforded
due process.30
Article 284 of the Labor Code authorizes an employer to terminate an employee on the ground of
disease, viz:
Art. 284. Disease as a ground for termination- An employer may terminate the services of an employee
who has been found to be suffering from any disease and whose continued employment is prohibited
by law or prejudicial to his health as well as the health of his co-employees: xxx
However, in order to validly terminate employment on this ground, Book VI, Rule I, Section 8 of the
Omnibus Implementing Rules of the Labor Code requires:
Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continued
employment is prohibited by law or prejudicial to his health or to the health of his co-employees, the
employer shall not terminate his employment unless there is a certification by competent public health
authority that the disease is of such nature or at such a stage that it cannot be cured within a period
of six (6) months even with proper medical treatment. If the disease or ailment can be cured within the
period, the employer shall not terminate the employee but shall ask the employee to take a leave. The
employer shall reinstate such employee to his former position immediately upon the restoration of his
normal health. (Italics supplied).
As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC,31 the requirement for a medical
certificate under Article 284 of the Labor Code cannot be dispensed with; otherwise, it would sanction
the unilateral and arbitrary determination by the employer of the gravity or extent of the employee’s
illness and thus defeat the public policy in the protection of labor.
In the case at bar, the employer clearly did not comply with the medical certificate requirement before
Sahot’s dismissal was effected. In the same case of Sevillana vs. I.T. (International) Corp., we ruled:
Since the burden of proving the validity of the dismissal of the employee rests on the employer, the
latter should likewise bear the burden of showing that the requisites for a valid dismissal due to a disease
have been complied with. In the absence of the required certification by a competent public health
authority, this Court has ruled against the validity of the employee’s dismissal. It is therefore incumbent
upon the private respondents to prove by the quantum of evidence required by law that petitioner
was not dismissed, or if dismissed, that the dismissal was not illegal; otherwise, the dismissal would be
unjustified. This Court will not sanction a dismissal premised on mere conjectures and suspicions, the
evidence must be substantial and not arbitrary and must be founded on clearly established facts
sufficient to warrant his separation from work.32
In addition, we must likewise determine if the procedural aspect of due process had been complied
with by the employer.
From the records, it clearly appears that procedural due process was not observed in the separation
of private respondent by the management of the trucking company. The employer is required to
furnish an employee with two written notices before the latter is dismissed: (1) the notice to apprise the
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employee of the particular acts or omissions for which his dismissal is sought, which is the equivalent of
a charge; and (2) the notice informing the employee of his dismissal, to be issued after the employee
has been given reasonable opportunity to answer and to be heard on his defense. 33 These, the
petitioners failed to do, even only for record purposes. What management did was to threaten the
employee with dismissal, then actually implement the threat when the occasion presented itself
because of private respondent’s painful left thigh.
All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore,
Sahot’s dismissal is tainted with invalidity.
On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to separation
pay. The law is clear on the matter. An employee who is terminated because of disease is entitled to
"separation pay equivalent to at least one month salary or to one-half month salary for every year of
service, whichever is greater xxx."34 Following the formula set in Art. 284 of the Labor Code, his
separation pay was computed by the appellate court at P2,080 times 36 years (1958 to 1994) or
P74,880. We agree with the computation, after noting that his last monthly salary was P4,160.00 so that
one-half thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the part of
appellate court, we are constrained to sustain its decision. To avoid further delay in the payment due
the separated worker, whose claim was filed way back in 1994, this decision is immediately executory.
Otherwise, six percent (6%) interest per annum should be charged thereon, for any delay, pursuant to
provisions of the Civil Code.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals dated February 29, 2000 is
AFFIRMED. Petitioners must pay private respondent Jaime Sahot his separation pay for 36 years of
service at the rate of one-half monthly pay for every year of service, amounting to P74,880.00, with
interest of six per centum (6%) per annum from finality of this decision until fully paid.
Costs against petitioners.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 134559 December 9, 1999

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

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms of a
contract turn out to be financially disadvantageous to them will not relieve them of their obligations
therein. The lack of an inventory of real property will not ipso facto release the contracting partners
from their respective obligations to each other arising from acts executed in accordance with their
agreement.
The Case
The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court of
Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The
assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-
21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant
and against the plaintiffs, orders the dismissal of the plaintiffs complaint. The
counterclaims of the defendant are likewise ordered dismissed. No pronouncement as
to costs. 3
The Facts
Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement"
with Respondent Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to
the contract, they executed a Deed of Sale covering the said parcel of land in favor of respondent,
who then had it registered in his name. By mortgaging the property, respondent obtained from
Equitable Bank a loan of P40,000 which, under the Joint Venture Agreement, was to be used for the
development of the subdivision. 4 All three of them also agreed to share the proceeds from the sale of
the subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of "respondent's lack of funds or means and skills."
They add that respondent used the loan not for the development of the subdivision, but in furtherance
of his own company, Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With the
said amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu
Lapu City Council's approval of the subdivision project which he advertised in a local newspaper. He
also caused the construction of roads, curbs and gutters. Likewise, he entered into a contract with an
engineering firm for the building of sixty low-cost housing units and actually even set up a model house
on one of the subdivision lots. He did all of these for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their
relatives had separately caused the annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his requests, petitioners refused to cause the
clearing of the claims, thereby forcing him to give up on the project. 5
Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were
however acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was
later dismissed by the trial court in an Order dated September 6, 1982. On appeal, however, the
appellate court remanded the case for further proceedings. Thereafter, the RTC issued its assailed
Decision, which, as earlier stated, was affirmed by the CA.
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Hence, this Petition. 6

Ruling of the Court of Appeals
In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a
partnership for the development of the subdivision. Thus, they must bear the loss suffered by the
partnership in the same proportion as their share in the profits stipulated in the contract. Disagreeing
with the trial court's pronouncement that losses as well as profits in a joint venture should be distributed
equally, 7 the CA invoked Article 1797 of the Civil Code which provides:
Art. 1797 — The losses and profits shall be distributed in conformity with the agreement. If
only the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses shall be
in proportion to what he may have contributed, but the industrial partner shall not be
liable for the losses. As for the profits, the industrial partner shall receive such share as may
be just and equitable under the circumstances. If besides his services he has contributed
capital, he shall also receive a share in the profits in proportion to his capital.
The Issue
Petitioners impute to the Court of Appeals the following error:
. . . [The] Court of Appeals erred in concluding that the transaction
. . . between the petitioners and respondent was that of a joint venture/partnership,
ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines. 8
The Court's Ruling
The Petition is bereft of merit.
Main Issue:
Existence of a Partnership
Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture
Agreement and the earlier Deed of Sale, both of which were the bases of the appellate court's finding
of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is liable for
his failure to implement the project. Because the agreement entitled them to receive 60 percent of
the proceeds from the sale of the subdivision lots, they pray that respondent pay them damages
equivalent to 60 percent of the value of the property. 9
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of
March, 1969, by and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS.
ANTONIA B. TORRES, and MISS EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property
located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184
with a total area of 17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency upon the execution of this contract for the
property entrusted by the SECOND PARTY, for sub-division projects and development
purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein
contained the respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969,
in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS.
(P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS.
(P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not
actually receive the payment.
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SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary
amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal
obligations and this particular amount will serve as an advance payment from the FIRST
PARTY for the property mentioned to be sub-divided and to be deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the
principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos,
Philippine Currency, until the sub-division project is terminated and ready for sale to any
interested parties, and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine
currency, will be deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project
should be paid by the FIRST PARTY, exclusively and all the expenses will not be deducted
from the sales after the development of the sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for
the SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits
or whatever income deriving from the sales will be divided equally according to the . . .
percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work
and all improvements upon the adjacent lots will be negotiated in both parties['] favor
and all sales shall [be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property
mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST PARTY, including
all necessary improvements spent by the FIRST PARTY, and-the FIRST PARTY will be given
a grace period to turnover the property mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same
freely and voluntarily for the uses and purposes therein stated. 10
A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership
pursuant to Article 1767 of the Civil Code, which provides:
Art. 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in the
form of land which was to be developed into a subdivision; while respondent would give, in addition
to his industry, the amount needed for general expenses and other costs. Furthermore, the income
from the said project would be divided according to the stipulated percentage. Clearly, the contract
manifested the intention of the parties to form a partnership. 11
It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to
the land to facilitate its use in the name of the respondent. On the other hand, respondent caused the
subject land to be mortgaged, the proceeds of which were used for the survey and the subdivision of
the land. As noted earlier, he developed the roads, the curbs and the gutters of the subdivision and
entered into a contract to construct low-cost housing units on the property.
Respondent's actions clearly belie petitioners' contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property,
but also industry.
Petitioners Bound by
Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties
are bound not only to the fulfillment of what has been expressly stipulated but also to all
the consequences which, according to their nature, may be in keeping with good faith,
usage and law.

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It is undisputed that petitioners are educated and are thus presumed to have understood the terms of
the contract they voluntarily signed. If it was not in consonance with their expectations, they should
have objected to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and the
fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations. They cannot now disavow the relationship formed from such
agreement due to their supposed misunderstanding of its terms.
Alleged Nullity of the
Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which
provides:
Art. 1773. A contract of partnership is void, whenever immovable property is contributed
thereto, if an inventory of said property is not made, signed by the parties, and attached
to the public instrument.
They contend that since the parties did not make, sign or attach to the public instrument an inventory
of the real property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M.
Tolentino states that under the aforecited provision which is a complement of Article 1771, 12 "The
execution of a public instrument would be useless if there is no inventory of the property contributed,
because without its designation and description, they cannot be subject to inscription in the Registry
of Property, and their contribution cannot prejudice third persons. This will result in fraud to those who
contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables
may consist. Thus, the contract is declared void by the law when no such inventory is made." The case
at bar does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath
deny the contract and in another recognize it, depending on what momentarily suits their purpose.
Parties cannot adopt inconsistent positions in regard to a contract and courts will not tolerate, much
less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture
Agreement an ordinary contract from which the parties' rights and obligations to each other may be
inferred and enforced.
Partnership Agreement Not the Result
of an Earlier Illegal Contract
Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the Civil
Code, because it is the direct result of an earlier illegal contract, which was for the sale of the land
without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale
was the expectation of profits from the subdivision project. Its first stipulation states that petitioners did
not actually receive payment for the parcel of land sold to respondent. Consideration, more properly
denominated as cause, can take different forms, such as the prestation or promise of a thing or service
by another. 15
In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in
the expectation of profits from the subdivision project, for which the land was intended to be used. As
explained by the trial court, "the land was in effect given to the partnership as [petitioner's]
participation therein. . . . There was therefore a consideration for the sale, the [petitioners] acting in the
expectation that, should the venture come into fruition, they [would] get sixty percent of the net profits."
Liability of the Parties
Claiming that rerpondent was solely responsible for the failure of the subdivision project, petitioners
maintain that he should be made to pay damages equivalent to 60 percent of the value of the
property, which was their share in the profits under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the cause of the
failure of the project. 16 But it also ruled that neither was respondent responsible therefor. 17 In imputing
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the blame solely to him, petitioners failed to give any reason why we should disregard the factual
findings of the appellate court relieving him of fault. Verily, factual issues cannot be resolved in a
petition for review under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that
their Petition constitutes one of the exceptions to this doctrine. 18Accordingly, we find no reversible error
in the CA's ruling that petitioners are not entitled to damages.
WHEREFORE, the Perition is hereby DENIED and the challenged Decision AFFIRMED. Costs against
petitioners.
SO ORDERED

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business
and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their contribution may be in the form of
credit or industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts incurred
by or on behalf of the partnership. The liability for a contract entered into on behalf of an
unincorporated association or ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision
of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price
of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for
P385,377.80 dated February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for
P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00
per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on
the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these items
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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
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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
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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.

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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.
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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
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payment of the debt he and his partners owed. The nets and the floats were specifically manufactured
and tailor-made according to their own design, and were bought and used in the fishing venture they
agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

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
These are the main questions raised in the Petition for Review on Certiorari before us, assailing the
October 11, 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:
WHEREFORE, the petition is DISMISSED, with costs against petitioner 5
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6denying
reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
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 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 composed of the petitioners was formed on the same day.
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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. These assessments were protested by the petitioners through its
auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the 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
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
——————
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE
Dividend paid to Munich
Reinsurance Company P3,728,412.00
——————
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
——————
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
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:

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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. 12Its 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

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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

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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

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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
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the Court of Appeals in CA-
G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No. 5200.
Also assailed is the April 3, 2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement4 with
Baguio Gold Mining Company ("Baguio Gold") for the former to manage and operate the latter’s
mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties’
agreement was denominated as "Power of Attorney" and provided for the following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to
the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts
as from time to time may be required by the MANAGERS within the said 3-year period, for use in
the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall
be deemed, for internal audit purposes, as the owner’s account in the Sto. Nino PROJECT. Any
part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino
PROJECT, shall be added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto.
Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by the
Sto. Nino PROJECT as a special fund to be known as the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00, except with
prior approval of the PRINCIPAL; provided, however, that if the compensation of the
MANAGERS as herein provided cannot be paid in cash from the Sto. Nino PROJECT, the
amount not so paid in cash shall be added to the MANAGERS’ account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT
until termination of this Agency.
(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the MANAGERS’
account has to the owner’s account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the claims, shall be
transferred to the MANAGERS, except that such transferred assets shall not include mine
development, roads, buildings, and similar property which will be valueless, or of slight
value, to the MANAGERS. The MANAGERS can, on the other hand, require at their option
that property originally transferred by them to the Sto. Nino PROJECT be re-transferred to
them. Until such assets are transferred to the MANAGERS, this Agency shall remain
subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto.
Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on
their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino
PROJECT after deduction therefrom of the MANAGERS’ compensation.
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xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future,
may incur other obligations in favor of the MANAGERS. This Power of Attorney has been
executed as security for the payment and satisfaction of all such obligations of the PRINCIPAL
in favor of the MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be
irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding,
inclusive of the MANAGERS’ account. After all obligations of the PRINCIPAL in favor of the
MANAGERS have been paid and satisfied in full, this Agency shall be revocable by the
PRINCIPAL upon 36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-month
notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL
by reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the
MANAGERS’ withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing
losses over the years which resulted to petitioner’s withdrawal as manager of the mine on January 28,
1982 and in the eventual cessation of mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Gold’s
tangible assets to petitioner, transferring to the latter Baguio Gold’s equitable title in its Philodrill assets
and finally settling the remaining liability through properties that Baguio Gold may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in
Payment"8 where the parties determined that Baguio Gold’s indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This
time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The
parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in
the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness
of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and
P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for
bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for
a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined
to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it entered into with
Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to
the management contract, formed part of Baguio Gold’s "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold’s long-term loans which legally
entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it would
not be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt
to be considered worthless, petitioner claimed that it was neither required to institute a judicial action
for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It
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is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable
means to collect.
On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis. It held that
the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had
not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt
considering that, under the management contract, petitioner was to be paid fifty percent (50%) of the
project’s net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of
merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the
amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent
Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency interest
due computed from February 10, 1995, which is the date after the 20-day grace period given
by the respondent within which petitioner has to pay the deficiency amount x x x up to actual
date of payment.
SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership with
Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the "Power
of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement. Since the
advanced amount partook of the nature of an investment, it could not be deducted as a bad debt
from petitioner’s gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio
Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio
Gold was not in default since its loans were not yet due and demandable. What petitioner did was to
pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank imposed and collected
a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the management
of the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment
rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino
Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form
a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement when it
construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts
write-off.14
Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should
not only rely on the "Power of Attorney", but also on the subsequent "Compromise with Dation in
Payment" and "Amended Compromise with Dation in Payment" that the parties executed in 1982.
These documents, allegedly evinced the parties’ intent to treat the advances and payments as a loan
and establish a creditor-debtor relationship between them.
The petition lacks merit.
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The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’ contractual intent must first be
discovered from the expressed language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise agreements were mere collateral
documents executed by the parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which established the juridical relation
of the parties and defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties’ true intent. The compromise agreements were
executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by which
petitioner could recover the advances and payments it made under the "Power of Attorney". The
parties entered into the compromise agreements as a consequence of the dissolution of their business
relationship. It did not define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed
intended by the parties. Under a contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.15 While a corporation, like petitioner, cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture
which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary
purpose. x x x It is in fact hardly distinguishable from the partnership, since their elements are
similar – community of interest in the business, sharing of profits and losses, and a mutual right of
control. x x x The main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary nature. x
x x This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its object
a specific undertaking. x x x It would seem therefore that under Philippine law, a joint venture is
a form of partnership and should be governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however engage in a
joint venture with others. x x x (Citations omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property
and industry to the common fund known as the Sto. Niño mine.17 In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties to the development and
operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold
would contribute P11M under its owner’s account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioner’s contribution would consist of its expertise in
the management and operation of mines, as well as the manager’s account which is comprised
of P11M in funds and property and petitioner’s "compensation" as manager that cannot be paid in
cash.
However, petitioner asserts that it could not have entered into a partnership agreement with Baguio
Gold because it did not "bind" itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO MINE."18

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The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph 5(c)
which prohibits petitioner from withdrawing the advances until termination of the parties’ business
relations. As can be seen, petitioner became bound by its contributions once the transfers were made.
The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise its option
under paragraph 5.
There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal of
advances should not be taken as an indication that it had entered into a partnership with Baguio Gold;
that the stipulation only showed that what the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both principal
and agent.19 In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to
the advances made by petitioner who is supposedly the agent and not the principal under the
contract. Thus, it cannot be inferred from the stipulation that the parties’ relation under the agreement
is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the
parties was one of agency and not a partnership. Although the said provision states that "this Agency
shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding,
inclusive of the MANAGERS’ account," it does not necessarily follow that the parties entered into an
agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favor
of petitioner to contract with third persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former was to manage and operate
the latter’s mine through the parties’ mutual contribution of material resources and industry. The
essence of an agency, even one that is coupled with interest, is the agent’s ability to represent his
principal and bring about business relations between the latter and third persons. 20 Where
representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of one’s paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate undertaking of the
parties.21
In this case, the totality of the circumstances and the stipulations in the parties’ agreement indubitably
lead to the conclusion that a partnership was formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made
by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the
parties’ business relations, "the ratio which the MANAGER’S account has to the owner’s account will
be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims" shall be transferred to petitioner.22 As pointed out by the Court of Tax Appeals, petitioner
was merely entitled to a proportionate return of the mine’s assets upon dissolution of the parties’
business relations. There was nothing in the agreement that would require Baguio Gold to make
payments of the advances to petitioner as would be recognized as an item of obligation or "accounts
payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the
Sto. Niño mine upon termination, a provision that is more consistent with a partnership than a creditor-
debtor relationship. It should be pointed out that in a contract of loan, a person who receives a loan
or money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal
amount of the same kind and quality.23 In this case, however, there was no stipulation for Baguio Gold
to actually repay petitioner the cash and property that it had advanced, but only the return of an
amount pegged at a ratio which the manager’s account had to the owner’s account.
In this connection, we find no contractual basis for the execution of the two compromise agreements
in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Nino mine. The "Power of Attorney" clearly provides
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that petitioner would only be entitled to the return of a proportionate share of the mine assets to be
computed at a ratio that the manager’s account had to the owner’s account. Except to provide a
basis for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to hold
itself liable to petitioner under the compromise agreements, for any amount over and above the
proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds
of millions of pesos to another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific maturity
date for the advances to become due and demandable, and the manner of payment was unclear.
All these point to the inevitable conclusion that the advances were not loans but capital contributions
to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety
of the parties’ contractual stipulations simply leads to no other conclusion than that petitioner’s
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the profits
of a business is prima facie evidence that he is a partner in the business." Petitioner asserts, however,
that no such inference can be drawn against it since its share in the profits of the Sto Niño project was
in the nature of compensation or "wages of an employee", under the exception provided in Article
1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who
will be paid "wages" pursuant to an employer-employee relationship. To begin with, petitioner was the
manager of the project and had put substantial sums into the venture in order to ensure its viability and
profitability. By pegging its compensation to profits, petitioner also stood not to be remunerated in case
the mine had no income. It is hard to believe that petitioner would take the risk of not being paid at all
for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement actually
constitutes its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an
equal share in the income of the mine if it were just an employee of Baguio Gold. 25 It is not surprising
that petitioner was to receive a 50% share in the net profits, considering that the "Power of Attorney"
also provided for an almost equal contribution of the parties to the St. Nino mine. The "compensation"
agreed upon only serves to reinforce the notion that the parties’ relations were indeed of partners and
not employer-employee.
All told, the lower courts did not err in treating petitioner’s advances as investments in a partnership
known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as
the latter was under no unconditional obligation to return the same to the former under the "Power of
Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find no
reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed.27 In this case, petitioner failed to substantiate its assertion that the advances were subsisting
debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim
the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated
June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200
is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982
income in the amount of P62,811,161.31, with 20% delinquency interest computed from February 10,
1995, which is the due date given for the payment of the deficiency income tax, up to the actual date
of payment.
SO ORDERED.
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FIRST DIVISION
G.R. No. 193138, August 20, 2018
ANICETO G. SALUDO, JR., Petitioner, v. PHILIPPINE NATIONAL BANK, Respondent.
DECISION
JARDELEZA, J.:

In this petition, we emphasize that a partnership for the practice of law, constituted in accordance
with the Civil Code provisions on partnership, acquires juridical personality by operation of law.
Having a juridical personality distinct and separate from its partners, such partnership is the real party-
in-interest in a suit brought in connection with a contract entered into in its name and by a person
authorized to act on its behalf.

Petitioner Aniceto G. Saludo, Jr. (Saludo) filed this petition for review on certiorari1 assailing the
February 8, 2010 Decision2 and August 2, 2010 Resolution3 issued by the Court of Appeals (CA) in CA-
G.R. SP No. 98898. The CA affirmed with modification the January 11, 2007 Omnibus Order4 issued by
Branch 58 of the Regional Trial Court (RTC) of Makati City in Civil Case No. 06-678, and ruled that
respondent Philippine National Bank's (PNB) counterclaims against Saludo and the Saludo Agpalo
Fernandez and Aquino Law Office (SAFA Law Office) should be reinstated in its answer.

Records show that on June 11, 1998, SAFA Law Office entered into a Contract of Lease5 with PNB,
whereby the latter agreed to lease 632 square meters of the second floor of the PNB Financial Center
Building in Quezon City for a period of three years and for a monthly rental fee of P189,600.00. The
rental fee is subject to a yearly escalation rate of 10%.6 SAFA Law Office then occupied the leased
premises and paid advance rental fees and security deposit in the total amount of P1,137,600.00.7

On August 1, 2001, the Contract of Lease expired.8 According to PNB, SAFA Law Office continued to
occupy the leased premises until February 2005, but discontinued paying its monthly rental
obligations after December 2002.9 Consequently, PNB sent a demand letter10 dated July 17, 2003 for
SAFA Law Office to pay its outstanding unpaid rents in the amount of P4,648,086.34. PNB sent another
letter11demanding the payment of unpaid rents in the amount of P5,856,803.53 which was received
by SAFA Law Office on November 10, 2003.

In a letter12 to PNB dated June 9, 2004, SAFA Law Office expressed its intention to negotiate. It
claimed that it was enticed by the former management of PNB into renting the leased premises by
promising to: (1) give it a special rate due to the large area of the place; (2) endorse PNB's cases to
the firm with rents to be paid out of attorney's fees; and (3) retain the firm as one of PNB's external
counsels. When new management took over, it allegedly agreed to uphold this agreement to
facilitate rental payments. However, not a single case of significance was referred to the firm. SAFA
Law Office then asked PNB to review and discuss its billings, evaluate the improvements in the area
and agree on a compensatory sum to be applied to the unpaid rents, make good its commitment to
endorse or refer cases to SAFA Law Office under the intended terms and conditions, and book the
rental payments due as receivables payable every time attorney's fees are due from the bank on the
cases it referred. The firm also asked PNB to give a 50% discount on its unpaid rents, noting that while
it was waiting for case referrals, it had paid a total amount of P13,457,622.56 from January 1999 to
December 2002, which included the accelerated rates of 10% per annum beginning August 1999
until July 2003.

In February 2005, SAFA Law Office vacated the leased premises.13 PNB sent a demand letter14 dated
July 7, 2005 requiring the firm to pay its rental arrears in the total amount of P10,951,948.32. In
response, SAFA Law Office sent a letter dated June 8, 2006, proposing a settlement by providing a
range of suggested computations of its outstanding rental obligations, with deductions for the value
of improvements it introduced in the premises, professional fees due from Macroasia Corporation,
and the 50% discount allegedly promised by Dr. Lucio Tan.15 PNB, however, declined the settlement
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proposal in a letter16 dated July 17, 2006, stating that it was not amenable to the settlement's terms.
Besides, PNB also claimed that it cannot assume the liabilities of Macroasia Corporation to SAFA Law
Office as Macroasia Corporation has a personality distinct and separate from the bank. PNB then
made a final demand for SAFA Law Office to pay its outstanding rental obligations in the amount of
P25,587,838.09.

On September 1, 2006, Saludo, in his capacity as managing partner of SAFA Law Office, filed an
amended complaint17 for accounting and/or recomputation of unpaid rentals and damages against
PNB in relation to the Contract of Lease.

On October 4, 2006, PNB filed a motion to include an indispensable party as plaintiff,18 praying that
Saludo be ordered to amend anew his complaint to include SAFA Law Office as principal plaintiff.
PNB argued that the lessee in the Contract of Lease is not Saludo but SAFA Law Office, and that
Saludo merely signed the Contract of Lease as the managing partner of the law firm. Thus, SAFA Law
Office must be joined as a plaintiff in the complaint because it is considered an indispensable party
under Section 7, Rule 3 of the Rules of Court.19

On October 13, 2006, PNB filed its answer.20 By way of compulsory counterclaim, it sought payment
from SAFA Law Office in the sum of P25,587,838.09, representing overdue rentals.21 PNB argued that
as a matter of right and equity, it can claim that amount from SAFA Law Office in solidum with
Saludo.22

On October 23, 2006, Saludo filed his motion to dismiss counterclaims,23 mainly arguing that SAFA Law
Office is neither a legal entity nor party litigant. As it is only a relationship or association of lawyers in
the practice of law and a single proprietorship which may only be sued through its owner or
proprietor, no valid counterclaims may be asserted against it.24

On January 11, 2007, the RTC issued an Omnibus Order denying PNB's motion to include an
indispensable party as plaintiff and granting Saludo's motion to dismiss counterclaims in this wise:
The Court DENIES the motion of PNB to include the SAFA Law Offices. Plaintiff has shown by
documents attached to his pleadings that indeed SAFA Law Offices is a mere single proprietorship
and not a commercial and business partnership. More importantly, plaintiff has admitted and shown
sole responsibility in the affairs entered into by the SAFA Law Office. PNB has even admitted that the
SAFA Law Office, being a partnership in the practice of law, is a non-legal entity. Being a non-legal
entity, it cannot be a proper party, and therefore, it cannot sue or be sued.

Consequently, plaintiff's Motion to Dismiss Counterclaims (claimed by defendant PNB) should be

GRANTED. The counterclaims prayed for to the effect that the SAFA Law Offices be made to pay in
solidum with plaintiff the amounts stated in defendant's Answer is disallowed since no counterclaims
can be raised against a non-legal entity.25
PNB filed its motion for reconsideration26 dated February 5, 2007, alleging that SAFA Law Office should
be included as a co-plaintiff because it is the principal party to the contract of lease, the one that
occupied the leased premises, and paid the monthly rentals and security deposit. In other words, it
was the main actor and direct beneficiary of the contract. Hence, it is the real party-in-interest.27 The
RTC, however, denied the motion for reconsideration in an Order28 dated March 8, 2007.

Consequently, PNB filed a petition for certiorari29 with the CA. On February 8, 2010, the CA rendered
its assailed Decision,30 the dispositive portion of which reads:
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Omnibus Order dated 11 January 2007
and Order dated 8 March 2007, issued by respondent Court in Civil Case No. 06-678, respectively,
are AFFIRMED with MODIFICATION in that petitioner's counterclaims should be reinstated in its Answer.

SO ORDERED.31
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The CA ruled that an order granting Saludo's motion to dismiss counterclaim, being interlocutory in
nature, is not appealable until after judgment shall have been rendered on Saludo's complaint. Since
the Omnibus Order is interlocutory, and there was an allegation of grave abuse of discretion, a
petition for certiorari is the proper remedy.32

On the merits, the CA held that Saludo is estopped from claiming that SAFA Law Office is his single
proprietorship. Under the doctrine of estoppel, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person relying
thereon. Here, SAFA Law Office was the one that entered into the lease contract and not Saludo. In
fact, the latter signed the contract as the firm's managing partner. The alleged Memorandum of
Understanding33 (MOU) executed by the partners of SAFA Law Office, .which states, among others,
that Saludo alone would be liable for the firm's losses and liabilities, and the letter of Saludo to PNB
confirming that SAFA Law Office is his single proprietorship did not convert the firm to a single
proprietorship. Moreover, SAFA Law Office sent a letter to PNB regarding its unpaid rentals which
Saludo signed as a managing partner. The firm is also registered as a partnership with the Securities
and Exchange Commission (SEC).34

On the question of whether SAFA Law Office is an indispensable party, the CA held that it is not. As a
partnership, it may sue or be sued in its name or by its duly authorized representative. Saludo, as
managing partner, may execute all acts of administration, including the right to sue. Furthermore, the
CA found that SAFA Law Office is not a legal entity. A partnership for the practice of law is not a legal
entity but a mere relationship or association for a particular purpose. Thus, SAFA Law Office cannot
file an action in court. Based on these premises, the CA held that the RTC did not gravely abuse its
discretion in denying PNB's motion to include an indispensable party as plaintiff.35

Nonetheless, the CA ruled that PNB's counterclaims against SAFA Law Office should not be dismissed.
While SAFA Law Office is not a legal entity, it can still be sued under Section 15,36 Rule 3 of the Rules of
Court considering that it entered into the Contract of Lease with PNB.37

The CA further ruled that while it is true that SAFA Law Office's liability is not in solidum with Saludo as
PNB asserts, it does not necessarily follow that both of them cannot be made parties to PNB's
counterclaims. Neither should the counterclaims be dismissed on the ground that the nature of the
alleged liability is solidary. According to the CA, the presence ofSAFA Law Office is required for the
granting of complete relief in the determination of PNB's counterclaim. The court must, therefore,
order it to be brought in as defendant since jurisdiction over it can be obtained pursuant to Section
12,38 Rule 6 of the Rules of Court.39

Finally, the CA emphasized that PNB's counterclaims are compulsory, as they arose from the filing of
Saludo's complaint. It cannot be made subject of a separate action but should be asserted in the
same suit involving the same transaction. Thus, the Presiding Judge of the RTC gravely abused his
discretion in dismissing PNB's counterclaims as the latter may forever be barred from collecting
overdue rental fees if its counterclaims were not allowed.40

Saludo and PNB filed their respective motions for partial reconsideration dated February 25,
201041 and February 26, 2010.42 In a Resolution dated August 2, 2010, the CA denied both motions on
the ground that no new or substantial matters had been raised therein. Nonetheless, the CA
addressed the issue on the joining of SAFA Law Office as a defendant in PNB's compulsory
counterclaim. Pertinent portions of the CA Resolution read:
The Private Respondent claims that a compulsory counterclaim is one directed against an opposing
party. The SAFA Law Office is not a party to the case below and to require it to be brought in as a
defendant to the compulsory counterclaim would entail making it a co-plaintiff. Otherwise, the
compulsory counterclaim would be changed into a third-party complaint. The Private Respondent
also argues that Section 15, Rule 3 of the Rules of Court (on entities without juridical personality) is only
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applicable to initiatory pleadings and not to compulsory counterclaims. Lastly, it is claimed that since
the alleged obligations of the SAFA Law Office is solidary with the Private Respondent, there is no
need to make the former a defendant to the counterclaim.

We disagree with the reasoning of the Private Respondent. That a compulsory counterclaim can only
be brought against an opposing party is belied by considering one of the requisites of a compulsory
counterclaim it does not require for its adjudication the presence of third parties of whom the court
cannot acquire jurisdiction. This shows that non-parties to a suit may be brought in as defendants to
such a counterclaim. x x x
xxxx

In the case at bench, the trial court below can acquire jurisdiction over the SAFA Law Office
considering the amount and the nature of the counterclaim. Furthermore, the inclusion of the SAFA
Law Office as a defendant to the counterclaim will enable the granting of complete relief in view [of]
the liability of a partner to the partnership's creditors under the law.43
Hence, this petition, where Saludo raises the following issues for our resolution:
(1)
Whether the CA erred in including SAFA Law Office as defendant to PNB's counterclaim despite its
holding that SAFA Law Office is neither an indispensable party nor a legal entity;
(2)
Whether the CA went beyond the issues in the petition for certiorari and prematurely dealt with the
merits of PNB's counterclaim; and
(3)
Whether the CA erred when it gave due course to PNB's petition for certiorari to annul and set aside
the RTC's Omnibus Order dated January 11, 2007.44
The petition is bereft of merit.

We hold that SAFA Law Office is a juridical entity and the real party-in-interest in the suit filed with the
RTC by Saludo against PNB. Hence, it should be joined as plaintiff in that case.
I.

Contrary to Saludo's submission, SAFA Law Office is a partnership and not a single proprietorship.

Article 1767 of the Civil Code provides that 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. Two or more persons may also form a partnership for the
exercise of a profession. Under Article 1771, a partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in which case a public instrument
shall be necessary. Article 1784, on the other hand, provides that a partnership begins from the
moment of the execution of the contract, unless it is otherwise stipulated.

Here, absent evidence of an earlier agreement, SAFA Law Office was constituted as a partnership at
the time its partners signed the Articles of Partnership45 wherein they bound themselves to establish a
partnership for the practice of law, contribute capital and industry for the purpose, and receive
compensation and benefits in the course of its operation. The opening paragraph of the Articles of
Partnership reveals the unequivocal intention of its signatories to form a partnership, to wit:
WE, the undersigned ANICETO G. SALUDO, JR., RUBEN E. AGPALO, FILEMON L. FERNANDEZ, AND
AMADO D. AQUINO, all of legal age, Filipino citizens and members of the Philippine Bar, have this day
voluntarily associated ourselves for the purpose of forming a partnership engaged in the practice of
law, effective this date, under the terms and conditions hereafter set forth, and subject to the
provisions of existing laws[.]46

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The subsequent registration of the Articles of Partnership with the SEC, on the other hand, was made
in compliance with Article 1772 of the Civil Code, since the initial capital of the partnership was
P500,000.00.47 Said provision states:
Art. 1772. Every contract of partnership having a capital ofThree thousand pesos or more, in money
or property, shall appear in a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
xxxx
The other provisions of the Articles of Partnership also positively identify SAFA Law Office as a
partnership. It constantly used the words "partners" and "partnership." It designated petitioner Saludo
as managing partner,48 and Attys. Ruben E. Agpalo, Filemon L. Fernandez, and Amado D. Aquino as
industrial partners.49 It also provided for the term of the partnership,50 distribution of net profits and
losses, and management of the firm in which "the partners shall have equal interest in the conduct of
[its] affairs."51 Moreover, it provided for the cause and manner of dissolution of the
partnership.52 These provisions would not have been necessary if what had been established was a
sole proprietorship. Indeed, it may only be concluded from the circumstances that, for all intents and
purposes, SAFA Law Office is a partnership created and organized in accordance with the Civil
Code provisions on partnership.

Saludo asserts that SAFA Law Office is a sole proprietorship on the basis of the MOU executed by the
partners of the firm. The MOU states in full:53
MEMORANDUM OF UNDERSTANDING

WHEREAS, the undersigned executed and filed with the SEC the Articles of Incorporation of SALUDO,
AGPALO, FERNANDEZ and AQUINO on March 13, 1997;

WHEREAS, among the provisions of said Articles of Incorporation are the following:

1. That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall be industrial partners, and they
shall not contribute capital to the partnership and shall not in any way be liable for any loss or liability
that may be incurred by the law firm in the course of its operation.

2. That the partnership shall be dissolved by agreement of the partners or for any cause as and in
accordance with the manner provided by law, in which event the Articles of Dissolution of said
partnership shall be filed with the Securities and Exchange Commission. All remaining assets upon
dissolution shall accrue exclusively to A. G. Saludo, Jr. and all liabilities shall be solely for his account.

WHEREAS, the SEC has not approved the registration of the Articles of Incorporation and its Examiner
required that the phrase "shall not in any way be liable for any loss or liability that may be incurred by
the law firm in the course of its operation" in Article VII be deleted;

WHEREAS, the SEC Examiner likewise required that the sentence "All remaining assets upon dissolution
shall accrue exclusively to A. G. Saludo, Jr. and all liabilities shall be solely for his account" in Article X
be likewise deleted;

WHEREAS, in order to meet the objections of said Examiner, the objectionable provisions have been
deleted and new Articles of Incorporation deleting said objectionable provisions have been
executed by the parties and filed with the SEC.

NOW, THEREFORE, for and in consideration of the premises and the mutual covenant of the parties,
the parties hereby agree as follows:

1. Notwithstanding the deletion of the portions objected to by the said Examiner, by reason of which

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entirely new Articles of Incorporation have been executed by the parties removing the objected
portions, the actual and real intent of the parties is still as originally envisioned, namely:
a) That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall not in any way be liable for any
loss or liability that may be incurred by the law firm in the course of its operation;

b) That all remaining assets upon dissolution shall accrue exclusively to A. G. Saludo, Jr. and all
liabilities shall be solely for his account.

2. That the parties hereof hereby bind and obligate themselves to adhere and observe the real intent
of the parties as above-stated, any provisions in the Articles of Incorporation as filed to meet the
objections of the SEC Examiner to the contrary notwithstanding.

IN WITNESS WHEREOF, we have set our hands this _____ day of May, 1997 at Makati City, Philippines.
[Sgd.]
A.G. SALUDO, JR.
[Sgd.]
[Sgd.]
[Sgd.]
RUBEN E. AGPALO
FILEMON L. FERNANDEZ
AMADO D. AQUINO
The foregoing evinces the parties' intention to entirely shift any liability that may be incurred by SAFA
Law Office in the course of its operation to Saludo, who shall also receive all the remaining assets of
the firm upon its dissolution. This MOU, however, does not serve to convert SAFA Law Office into a sole
proprietorship. As discussed, SAFA Law Office was manifestly established as a partnership based on
the Articles of Partnership. The MOU, from its tenor, reinforces this fact. It did not change the nature of
the organization of SAFA Law Office but only excused the industrial partners from liability.

The law, in its wisdom, recognized the possibility that partners in a partnership may decide to place a
limit on their individual accountability. Consequently, to protect third persons dealing with the
partnership, the law provides a rule, embodied in Article 1816 of the Civil Code, which states:
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after
all the partnership assets have been exhausted, for the contract which may be entered into in the
name and for the account of the partnership, under its signature and by a person authorized to act
for the partnership. However, any partner may enter into a separate obligation to perform a
partnership contract.
The foregoing provision does not prevent partners from agreeing to limit their liability, but such
agreement may only be valid as among them. Thus, Article 1817 of the Civil Code provides:
Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except
as among the partners.
The MOU is an agreement forged under the foregoing provision. Consequently, the sole liability being
undertaken by Saludo serves to bind only the parties to the MOU, but never third persons like PNB.

Considering that the MOU is sanctioned by the law on partnership, it cannot change the nature of a
duly-constituted partnership. Hence, we cannot sustain Saludo's position that SAFA Law Office is a
sole proprietorship.
II.

Having settled that SAFA Law Office is a partnership, we hold that it acquired juridical personality by
operation of law. The perfection and validity of a contract of partnership brings about the creation of
a juridical person separate and distinct from the individuals comprising the partnership. Thus, Article
1768 of the Civil Code provides:

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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.
Article 44 of the Civil Code likewise provides that partnerships are juridical persons, to wit:
Art. 44. The following are juridical persons:
(1)
The State and its political subdivisions;
(2)
Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;
(3)
Corporations, partnerships and associations for private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of each shareholder, partner or member.54
It is this juridical personality that allows a partnership to enter into business transactions to fulfill its
purposes. Article 46 of the Civil Code provides that "[j]uridical persons may acquire and possess
property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with
the laws and regulations of their organization."

SAFA Law Office entered into a contract of lease with PNB as a juridical person to pursue the
objectives of the partnership. The terms of the contract and the manner in which the parties
implemented it are a glaring recognition of SAFA Law Office's juridical personality. Thus, the contract
stated that it is being executed by PNB as the lessor and "SALUDO AGPALO FERNANDEZ & AQUINO, a
partnership organized and existing under the laws of the Republic of the Philippines," as the lessee.55 It
also provided that the lessee, i.e., SAFA Law Office, shall be liable in case of default.56

Furthermore, subsequent communications between the parties have always been made for or on
behalf ofPNB and SAFA Law Office, respectively.57

In view of the above, we see nothing to support the position of the RTC and the CA, as well as
Saludo, that SAFA Law Office is not a partnership and a legal entity. Saludo's claims that SAFA Law
Office is his sole proprietorship and not a legal entity fail in light of the clear provisions of the law on
partnership. To reiterate, SAFA Law Office was created as a partnership, and as such, acquired
juridical personality by operation of law. Hence, its rights and obligations, as well as those of its
partners, are determined by law and not by what the partners purport them to be.
III.

In holding that SAFA Law Office, a partnership for the practice of law, is not a legal entity, the CA
cited58the case of Petition for Authority to Continue Use of the Firm Name "Sycip, Salazar, Feliciano,
Hernandez & Castillo"59 (Sycip case) wherein the Court held that "[a] partnership for the practice of
law is not a legal entity. It is a mere relationship or association for a particular purpose. x x x It is not a
partnership formed for the purpose of carrying on trade or business or of holding property."60 These
are direct quotes from the US case of In re Crawford's Estate.61 We hold, however, that our reference
to this US case is an obiter dictum which cannot serve as a binding precedent.62

An obiter dictum is an opinion of the court upon a question which was not necessary to the decision
of the case before it. It is an opinion uttered by the way, not upon the point or question pending, as if
turning aside from the main topic of the case to collateral subjects, or an opinion that does not
embody the court's determination and is made without argument or full consideration of the point. It
is not a professed deliberate determination of the judge himself.63

The main issue raised for the court's determination in the Sycip case is whether the two petitioner law
firms may continue using the names of their deceased partners in their respective firm names. The
court decided the issue in the negative on the basis of "legal and ethical impediments."64 To be sure,
the pronouncement that a partnership for the practice of law is not a legal entity does not bear on
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either the legal or ethical obstacle for the continued use of a deceased partner's name, inasmuch as
it merely describes the nature of a law firm. The pronouncement is not determinative of the main
issue. As a matter of fact, if deleted from the judgment, the rationale of the decision is neither
affected nor altered.

Moreover, reference of the Sycip case to the In re Crawford's Estate case was made without a full
consideration of the nature of a law firm as a partnership possessed with legal personality under our
Civil Code. First, we note that while the Court mentioned that a partnership for the practice of law is
not a legal entity, it also identified petitioner law firms as partnerships over whom Civil Code provisions
on partnership apply.65 The Court thus cannot hold that a partnership for the practice of law is not a
legal entity without running into conflict with Articles 44 and 1768 of the Civil Code which provide that
a partnership has a juridical personality separate and distinct from that of each of the partners.

Second, our law on partnership does not exclude partnerships for the practice of law from its
coverage. Article 1767 of the Civil Code provides that "[t]wo or more persons may also form a
partnership for the exercise of a profession." Article 1783, on the other hand, states that "[a] particular
partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the
exercise of a profession or vocation." Since the law uses the word "profession" in the general sense,
and does not distinguish which professional partnerships are covered by its provisions and which are
not, then no valid distinction may be made.

Finally, we stress that unlike Philippine law, American law does not treat of partnerships as forming a
separate juridical personality for all purposes. In the case of Bellis v. United States,66 the US Supreme
Court stated that law firms, as a form of partnership, are generally regarded as distinct entities for
specific purposes, such as employment, capacity to be sued, capacity to hold title to property, and
more.67 State and federal laws, however, do not treat partnerships as distinct entities for all
purposes.68

Our jurisprudence has long recognized that American common law does not treat of partnerships as
a separate juridical entity unlike Philippine law. Hence, in the case of Campos Rueda & Co. v. Pacific
Commercial Co.,69 which was decided under the old Civil Code, we held:
Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for
all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of
Commerce). This being so and the juridical personality of a limited partnership being different from
that of its members, it must, on general principle, answer for, and suffer, the consequence of its acts
as such an entity capable of being the subject of rights and obligations.70 x x x
On the other hand, in the case of Commissioner of Internal Revenue v. Suter.71 which was decided
under the new Civil Code, we held:
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.72 x x x
Indeed, under the old and new Civil Codes, Philippine law has consistently treated partnerships as
having a juridical personality separate from its partners. In view of the clear provisions of the law on
partnership, as enriched by jurisprudence, we hold that our reference to In re Crawford's Estate in
the Sycip case is an obiter dictum.
IV.

Having settled that SAFA Law Office is a juridical person, we hold that it is also the real party-in-
interest in the case filed by Saludo against PNB.

Section 2, Rule 3 of the Rules of Court defines a real party-in-interest as the one "who stands to be
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benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit." In Lee v.
Romillo, Jr.,73 we held that the "real [party-in-interest]-plaintiffis one who has a legal right[,] while a
real[party-in-interest]-defendant is one who has a correlative legal obligation whose act or omission
violates the legal rights of the former."74

SAFA Law Office is the party that would be benefited or injured by the judgment in the suit before the
RTC. Particularly, it is the party interested in the accounting and/or recomputation of unpaid rentals
and damages in relation to the contract of lease. It is also the party that would be liable for payment
to PNB of overdue rentals, if that claim would be proven. This is because it is the one that entered into
the contract of lease with PNB. As an entity possessed of a juridical personality, it has concomitant
rights and obligations with respect to the transactions it enters into. Equally important, the general
rule under Article 1816 of the Civil Code is that partnership assets are primarily liable for the contracts
entered into in the name of the partnership and by a person authorized to act on its behalf. All
partners, including industrial ones, are only liable pro rata with all their property after all the
partnership assets have been exhausted.

In Guy v. Gacott,75 we held that under Article 1816 of the Civil Code, the partners' obligation with
respect to the partnership liabilities is subsidiary in nature. It is merely secondary and only arises if the
one primarily liable fails to sufficiently satisfy the obligation. Resort to the properties of a partner may
be made only after efforts in exhausting partnership assets have failed or if such partnership assets
are insufficient to cover the entire obligation.76 Consequently, considering that SAFA Law Office is
primarily liable under the contract of lease, it is the real party-in-interest that should be joined as
plaintiff in the RTC case.

Section 2, Rule 3 of the Rules of Court requires that every action must be prosecuted or defended in
the name of the real party-in-interest. As the one primarily affected by the outcome of the suit, SAFA
Law Office should have filed the complaint with the RTC and should be made to respond to any
counterclaims that may be brought in the course of the proceeding.

In Aguila, Jr. v. Court of Appeals,77 a case for declaration of nullity of a deed of sale was filed against
a partner of A.C. Aguila & Sons, Co. We dismissed the complaint and held that it was the partnership,
not its partners, which should be impleaded for a cause of action against the partnership itself.
Moreover, the partners could not be held liable for the obligations of the partnership unless it was
shown that the legal fiction of a different juridical personality was being used for fraudulent, unfair, or
illegal purposes. We held:
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. 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. Hence, a complaint filed against such a person should be dismissed for failure to state a
cause of action.

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. 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.78
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In this case, there is likewise no showing that SAFA Law Office, as a separate juridical entity, is being
used for fraudulent, unfair, or illegal purposes. Hence, its partners cannot be held primarily liable for
the obligations of the partnership. As it was SAFA Law Office that entered into a contract of lease
with respondent PNB, it should also be impleaded in any litigation concerning that contract.

Accordingly, the complaint filed by Saludo should be amended to include SAFA Law Office as
plaintiff. Section 11,79 Rule 3 of the Rules of Court gives power to the court to add a party to the case
on its own initiative at any stage of the action and on such tenns as are just. We have also held in
several cases80that the court has full powers, apart from that power and authority which are inherent,
to amend processes, pleadings, proceedings, and decisions by substituting as party-plaintiff the real
party-in-interest.

In view of the above discussion, we find it unnecessary to discuss the other issues raised in the
petition. It is unfortunate that the case has dragged on for more than 10 years even if it involves an
issue that may be resolved by a simple application of Civil Code provisions on partnership. It is time
for trial to proceed so that the parties' substantial rights may be adjudicated without further
unnecessary delay.

WHEREFORE, the petition is DENIED. Petitioner is hereby ordered to amend his complaint to include
SAFA Law Office as plaintiff in Civil Case No. 06-678 pending before Branch 58 of the Regional Trial
Court of Makati City, it being the real party-in-interest.

SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

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

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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:
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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

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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.
xxx xxx xxx
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.

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THIRD DIVISION
G.R. No. 144214 July 14, 2003
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, petitioners,
vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C.
RAMIREZ,respondents.
PANGANIBAN, J.:

A share in a partnership can be returned only after the completion of the latter's dissolution, liquidation
and winding up of the business.
The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision1 and the July 26,
2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The assailed Decision disposed
as follows:
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu thereof
a new decision is rendered ordering the [petitioners] jointly and severally to pay and reimburse
to [respondents] the amount of P253,114.00. No pronouncement as to costs."4
Reconsideration was denied in the impugned Resolution.
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with a
capital of P750,000 for the operation of a restaurant and catering business under the name "Aquarius
Food House and Catering Services."5 Villareal was appointed general manager and Carmelito Jose,
operations manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984. His
capital contribution of P250,000 was paid by his parents, Respondents Cesar and Carmelita Ramirez.6
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of P250,000 was
refunded to him in cash by agreement of the partners.7
In the same month, without prior knowledge of respondents, petitioners closed down the restaurant,
allegedly because of increased rental. The restaurant furniture and equipment were deposited in the
respondents' house for storage.8
On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer interested in
continuing their partnership or in reopening the restaurant, and that they were accepting the latter's
offer to return their capital contribution.9
On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the deterioration
of the restaurant furniture and equipment stored in their house. She also reiterated the request for the
return of their one-third share in the equity of the partnership. The repeated oral and written requests
were, however, left unheeded.10
Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a
Complaint11 dated November 10, 1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had expressed a desire to withdraw from the
partnership and had called for its dissolution under Articles 1830 and 1831 of the Civil Code; that
respondents had been paid, upon the turnover to them of furniture and equipment worth over
P400,000; and that the latter had no right to demand a return of their equity because their share,
together with the rest of the capital of the partnership, had been spent as a result of irreversible business
losses.12
In their Reply, respondents alleged that they did not know of any loan encumbrance on the restaurant.
According to them, if such allegation were true, then the loans incurred by petitioners should be
regarded as purely personal and, as such, not chargeable to the partnership. The former further
averred that they had not received any regular report or accounting from the latter, who had solely
managed the business. Respondents also alleged that they expected the equipment and the furniture
stored in their house to be removed by petitioners as soon as the latter found a better location for the
restaurant.13
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Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant Furniture and
Equipment14 on July 8, 1988. The furniture and the equipment stored in their house were inventoried
and appraised at P29,000.15 The display freezer was sold for P5,000 and the proceeds were paid to
them.16
After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which could be
dissolved at any time. Petitioners clearly intended to dissolve it when they stopped operating the
restaurant. Hence, the trial court, in its July 21, 1992 Decision, held there liable as follows:18
"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the
[petitioners] ordering the [petitioners] to pay jointly and severally the following:
(a) Actual damages in the amount of P250,000.00
(b) Attorney's fee in the amount of P30,000.00
(c) Costs of suit."
The CA Ruling
The CA held that, although respondents had no right to demand the return of their capital contribution,
the partnership was nonetheless dissolved when petitioners lost interest in continuing the restaurant
business with them. Because petitioners never gave a proper accounting of the partnership accounts
for liquidation purposes, and because no sufficient evidence was presented to show financial losses,
the CA. computed their liability as follows:
"Consequently, since what has been proven is only the outstanding obligation of the partnership
in the amount of P240,658.00, although contracted by the partnership before [respondents']
have joined the partnership but in accordance with Article 1826 of the New Civil Code, they
are liable which must have to be deducted from the remaining capitalization of the said
partnership which is in the amount of P1,000,000.00 resulting in the amount of P759,342.00, and
in order to get the share of [respondents], this amount of P759,342.00 must be divided into three
(3) shares or in the amount of P253,114.00 for each share and which is the only amount which
[petitioner] will return to [respondents'] representing the contribution to the partnership minus
the outstanding debt thereof."19
Hence, this Petition.20
Issues
In their Memorandum,21 petitioners submit the following issues for our consideration:
"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the capital
contribution, instead of the net capital after the dissolution and liquidation of a partnership,
thereby treating the capital contribution like a loan, is in accordance with law and
jurisprudence;
"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly and
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on
record; and
"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to
costs."22
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for the
latter's share in the partnership; (2) whether the CA's computation of P253,114 as respondents' share is
correct; and (3) whether the CA was likewise correct in not assessing costs.
This Court's Ruling
The Petition has merit.
First Issue:
Share in Partnership
Both the trial and the appellate courts found that a partnership had indeed existed, and that it was
dissolved on March 1, 1987. They found that the dissolution took place when respondents informed
petitioners of the intention to discontinue it because of the former's dissatisfaction with, and loss of trust
in, the latter's management of the partnership affairs. These findings were amply supported by the
evidence on record. Respondents consequently demanded from petitioners the return of their one-
third equity in the partnership.

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We hold that respondents have no right to demand from petitioners the return of their equity share.
Except as managers of the partnership, petitioners did not personally hold its equity or assets. "The
partnership has a juridical personality separate and distinct from that of each of the partners."23 Since
the capital was contributed to the partnership, not to petitioners, it is the partnership that must refund
the equity of the retiring partners.24
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners,
the amount to be refunded is necessarily limited to its total resources. In other words, it can only pay
out what it has in its coffers, which consists of all its assets. However, before the partners can be paid
their shares, the creditors of the partnership must first be compensated.25 After all the creditors have
been paid, whatever is left of the partnership assets becomes available for the payment of the
partners' shares.
Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third share
in the partnership cannot be determined until all the partnership assets will have been liquidated — in
other words, sold and converted to cash — and all partnership creditors, if any, paid. The CA's
computation of the amount to be refunded to respondents as their share was thus erroneous.
First, it seems that the appellate court was under the misapprehension that the total capital
contribution was equivalent to the gross assets to be distributed to the partners at the time of the
dissolution of the partnership. We cannot sustain the underlying idea that the capital contribution at
the beginning of the partnership remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or
decreased by losses sustained. It does not remain static and unaffected by the changing fortunes of
the business. In the present case, the financial statements presented before the trial court showed that
the business had made meager profits.26However, notable therefrom is the omission of any provision
for the depreciation27 of the furniture and the equipment. The amortization of the goodwill28 (initially
valued at P500,000) is not reflected either. Properly taking these non-cash items into account will show
that the partnership was actually sustaining substantial losses, which consequently decreased the
capital of the partnership. Both the trial and the appellate courts in fact recognized the decrease of
the partnership assets to almost nil, but the latter failed to recognize the consequent corresponding
decrease of the capital.
Second, the CA's finding that the partnership had an outstanding obligation in the amount of P240,658
was not supported by evidence. We sustain the contrary finding of the RTC, which had rejected the
contention that the obligation belonged to the partnership for the following reason:
"x x x [E]vidence on record failed to show the exact loan owed by the partnership to its creditors.
The balance sheet (Exh. '4') does not reveal the total loan. The Agreement (Exh. 'A') par. 6 shows
an outstanding obligation of P240,055.00 which the partnership owes to different creditors, while
the Certification issued by Mercator Finance (Exh. '8') shows that it was Sps. Diogenes P. Villareal
and Luzviminda J. Villareal, the former being the nominal party defendant in the instant case,
who obtained a loan of P355,000.00 on Oct. 1983, when the original partnership was not yet
formed."
Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the
partnership to Jesus Jose when he withdrew from the partnership.
Because of the above-mentioned transactions, the partnership capital was actually reduced. When
petitioners and respondents ventured into business together, they should have prepared for the fact
that their investment would either grow or shrink. In the present case, the investment of respondents
substantially dwindled. The original amount of P250,000 which they had invested could no longer be
returned to them, because one third of the partnership properties at the time of dissolution did not
amount to that much.
It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish
or disastrous contracts they have entered into with all the required formalities and with full awareness

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of what they were doing. Courts have no power to relieve them from obligations they have voluntarily
assumed, simply because their contracts turn out to be disastrous deals or unwise investments.29
Petitioners further argue that respondents acted negligently by permitting the partnership assets in their
custody to deteriorate to the point of being almost worthless. Supposedly, the latter should have
liquidated these sole tangible assets of the partnership and considered the proceeds as payment of
their net capital. Hence, petitioners argue that the turnover of the remaining partnership assets to
respondents was precisely the manner of liquidating the partnership and fully settling the latter's share
in the partnership.
We disagree. The delivery of the store furniture and equipment to private respondents was for the
purpose of storage. They were unaware that the restaurant would no longer be reopened by
petitioners. Hence, the former cannot be faulted for not disposing of the stored items to recover their
capital investment.
Third Issue:
Costs
Section 1, Rule 142, provides:
"SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided in these rules, costs
shall be allowed to the prevailing party as a matter of course, but the court shall have power,
for special reasons, to adjudge that either party shall pay the costs of an action, or that the
same be divided, as may be equitable. No costs shall be allowed against the Republic of the
Philippines unless otherwise provided by law."
Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for special
reasons," to decree otherwise. When a lower court is reversed, the higher court normally does not
award costs, because the losing party relied on the lower court's judgment which is presumed to have
been issued in good faith, even if found later on to be erroneous. Unless shown to be patently
capricious, the award shall not be disturbed by a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE. This
disposition is without prejudice to proper proceedings for the accounting, the liquidation and the
distribution of the remaining partnership assets, if any. No pronouncement as to costs.
SO ORDERED.

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Republic of the Philippines

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

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which
they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of
1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights
to his four children, the petitioners, to enable them to build their residences. The company sold the two
lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles
issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They
derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit
as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total
of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which 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

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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,
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where the three Evangelista sisters bought four pieces of real property which they leased to various
tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated
the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are
not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled.
No costs.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-24020-21 July 29, 1968
FLORENCIO REYES and ANGEL REYES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX APPEALS, respondents.
Jose W. Diokno and Domingo Sandoval for petitioners.
Office of the Solicitor General for respondents.
FERNANDO, J.:

Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment
subsequently reduced to P37,528.00. This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another assessment was made
against petitioners, this time for back income taxes plus surcharge and compromise in the total sum of
P25,973.75, covering the years 1955 and 1956. There being a failure on their part to have such
assessments reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals. The
two cases1 involving as they did identical issues and ultimately traceable to facts similar in character
were heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954 was
reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the
partnership formed" by petitioners.2 The reduction was due to the elimination of surcharge, the failure
to file the income tax return being accepted as due to petitioners honest belief that no such liability
was incurred as well as the compromise penalties for such failure to file. 3 A reconsideration of the
aforesaid decision was sought and denied by respondent Court of Tax Appeals. Hence this petition for
review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial
evidence, must be respected4 follow: "On October 31, 1950, petitioners, father and son, purchased a
lot and building, known as the Gibbs Building, situated at 671 Dasmariñas Street, Manila, for
P835,000.00, of which they paid the sum of P375,000.00, leaving a balance of P460,000.00, representing
the mortgage obligation of the vendors with the China Banking Corporation, which mortgage
obligations were assumed by the vendees. The initial payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building was leased to various tenants, whose rights under
the lease contracts with the original owners, the purchasers, petitioners herein, agreed to respect. The
administration of the building was entrusted to an administrator who collected the rents; kept its books
and records and rendered statements of accounts to the owners; negotiated leases; made necessary
repairs and disbursed payments, whenever necessary, after approval by the owners; and performed
such other functions necessary for the conservation and preservation of the building. Petitioners
divided equally the income of operation and maintenance. The gross income from rentals of the
building amounted to about P90,000.00 annually."5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the
National Internal Revenue Code, the first of which imposes an income tax on corporations "organized
in, or existing under the laws of the Philippines, no matter how created or organized but not including
duly registered general co-partnerships (companias colectivas), ...,"6 a term, which according to the
second provision cited, includes partnerships "no matter how created or organized, ...,"7 and applying
the leading case of Evangelista v. Collector of Internal Revenue,8 sustained the action of respondent
Commissioner of Internal Revenue, but reduced the tax liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar.1äwphï1.ñëtConsequently they allege that the reliance by respondent Court of Tax Appeals
was unwarranted and the decision should be set aside. If their interpretation of the authoritative
doctrine therein set forth commands assent, then clearly what respondent Court of Tax Appeals did
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fails to find shelter in the law. That is the crux of the matter. A perusal of the Evangelista decision is
therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was 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, ..."9 After referring to another section of
the National Internal Revenue Code, which explicitly provides that the term corporation "includes
partnerships" and then to Article 1767 of the Civil Code of the Philippines, defining what a contract of
partnership is, the opinion goes on to state that "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,
..."10
In support of the above conclusion, reference was made to the following circumstances, namely, the
common fund being created purposely not something already found in existence, the investment of
the same not merely in one transaction but in a series of transactions; the lots thus acquired not being
devoted to residential purposes or to other personal uses of petitioners in that case; such properties
having been under the management of one person with full power to lease, to collect rents, to issue
receipts, to bring suits, to sign letters and contracts and to endorse notes and checks; the above
conditions having existed for more than 10 years since the acquisition of the above properties; and no
testimony having been introduced as to the purpose "in creating the set up already adverted to, or on
the causes for its continued existence."11 The conclusion that emerged had all the imprint of
inevitability. Thus: "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."12
It may be said that there could be a differentiation made between the circumstances above detailed
and those existing in the present case. It does not suffice though to preclude the applicability of the
Evangelista decision. Petitioners could harp on these being only one transaction. They could stress that
an affidavit of one of them found in the Bureau of Internal Revenue records would indicate that their
intention was to house in the building acquired by them the respective enterprises, coupled with a
plan of effecting a division in 10 years. It is a little surprising then that while the purchase was made on
October 31, 1950 and their brief as petitioners filed on October 20, 1965, almost 15 years later, there
was no allegation that such division as between them was in fact made. Moreover, the facts as found
and as submitted in the brief made clear that the building in question continued to be leased by other
parties with petitioners dividing "equally the income ... after deducting the expenses of operation and
maintenance ..."13 Differences of such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of
an authoritative decision; it recognized its binding character. There is clearly no merit to the second
error assigned by petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a partnership subject to income tax as a corporation under
the National Internal Revenue Code is likewise untenable. In their discussion in their brief of this alleged
error, stress is laid on their being co-owners and not partners. Such an allegation was likewise made in
the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly
rejected by the Court of Tax Appeals."14 Then came the explanation why: "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
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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 others, "joint accounts, (cuentas en
participacion)" and "associations", none of which has a legal personality of its own, independent of
that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general 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"."15 The opinion went on to summarize the matter aptly: "For purposes of the tax on
corporations, our National Internal Revenue Code, include these partnerships — with the exception
only of duly registered general co-partnerships 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."16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the
matter incorrectly. There is no warrant for the assertion that it failed to apply the settled law to
uncontroverted facts. Its decision cannot be successfully assailed. Moreover, an observation made
in Alhambra Cigar & Cigarette Manufacturing Co. v. Commissioner of Internal Revenue, 17 is well-worth
recalling. Thus: "Nor as a matter of principle is it advisable for this Court to set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very nature of its functions,
dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject, unless, as did not happen here, there has been an abuse or improvident
exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums
of P37,128.00 as income tax due from the partnership formed by herein petitioners for the years 1951
to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision
becomes final, plus the corresponding surcharge and interest in case of delinquency," is affirmed. With
costs against petitioners.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-35840 March 31, 1933
FRANCISCO BASTIDA, plaintiff-appellee,
vs.
MENZI & Co., INC., J.M. MENZI and P.C. SCHLOBOHM, defendants.
MENZI & CO., appellant.
Romualdez Brothers and Harvey and O'Brien for appellant.
Jose M. Casal, Alberto Barretto and Gibbs and McDonough for appellee.
VICKERS, J.:

This is an appeal by Menzi & Co., Inc., one of the defendants, from a decision of the Court of First
Instance of Manila. The case was tried on the amended complaint dated May 26, 1928 and
defendants' amended answer thereto of September 1, 1928. For the sake of clearness, we shall
incorporate herein the principal allegations of the parties.
FIRST CAUSE OF ACTION
Plaintiff alleged:
I
That the defendant J.M. Menzi, together with his wife and daughter, owns ninety-nine per cent (99%)
of the capital stock of the defendant Menzi & Co., Inc., that the plaintiff has been informed and
therefore believes that the defendant J.M. Menzi, his wife and daughter, together with the defendant
P.C. Schlobohm and one Juan Seiboth, constitute the board of directors of the defendant, Menzi &
Co., Inc.;
II
That on April 27, 1922, the defendant Menzi & Co., Inc. through its president and general manager,
J.M. Menzi, under the authority of the board of directors, entered into a contract with the plaintiff to
engage in the business of exploiting prepared fertilizers, as evidenced by the contract marked Exhibit
A, attached to the original complaint as a part thereof, and likewise made a part of the amended
complaint, as if it were here copied verbatim;
III
That in pursuance of said contract, plaintiff and defendant Menzi & Co., Inc., began to manufacture
prepared fertilizers, the former superintending the work of actual preparation, and the latter, through
defendants J.M. Menzi and P. C. Schlobohm, managing the business and opening an account entitled
"FERTILIZERS" on the books of the defendant Menzi & Co., Inc., where all the accounts of the partnership
business were supposed to be kept; the plaintiff had no participation in the making of these entries,
which were wholly in the defendants' charge, under whose orders every entry was made;
IV
That according to paragraph 7 of the contract Exhibit A, the defendant Menzi & Co., Inc., was obliged
to render annual balance sheets to be plaintiff upon the 30th day of June of each year; that the
plaintiff had no intervention in the preparation of these yearly balances, nor was he permitted to have
any access to the books of account; and when the balance sheets were shown him, he, believing in
good faith that they contained the true statement of the partnership business, and relying upon the
good faith of the defendants, Menzi & Co., Inc., J.M. Menzi, and P.C. Schlobohm, accepted and
signed them, the last balance sheet having been rendered in the year 1926;
V
That by reason of the foregoing facts and especially those set forth in the preceding paragraph, the
plaintiff was kept in ignorance of the defendants' acts relating to the management of the partnership
funds, and the keeping of accounts, until he was informed and so believes and alleges, that the
defendants had conspired to conceal from him the true status of the business, and to his damage and
prejudice made false entries in the books of account and in the yearly balance sheets, the exact
nature and amount of which it is impossible to ascertain, even after the examination of the books of
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the business, due to the defendants' refusal to furnish all the books and data required for the purpose,
and the constant obstacles they have placed in the way of the examination of the books of account
and vouchers;
VI
That when the plaintiff received the information mentioned in the preceding paragraph, he
demanded that the defendants permit him to examine the books and vouchers of the business, which
were in their possession, in order to ascertain the truth of the alleged false entries in the books and
balance sheets submitted for his approval, but the defendants refused, and did not consent to the
examination until after the original complaint was filed in this case; but up to this time they have refused
to furnish all the books, data, and vouchers necessary for a complete and accurate examination of all
the partnership's accounts; and
VII
That as a result of the partial examination of the books of account of the business, the plaintiff has,
through his accountants, discovered that the defendants, conspiring and confederating together,
presented to the plaintiff during the period covered by the partnership contract false and incorrect
accounts,
(a) For having included therein undue interest;
(b) For having entered, as a charge to fertilizers, salaries and wages which should have been
paid and were in fact paid by the defendant Menzi & Co., Inc.;
(c) For having collected from the partnership the income tax which should have been paid for
its own account by Menzi & Co., Inc.;
(d) For having collected, to the damage and prejudice of the plaintiff, commissions on the
purchase of materials for the manufacture of fertilizers;
(e) For having appropriated, to the damage and prejudice of the plaintiff, the profits obtained
from the sale of fertilizers belonging to the partnership and bought with its own funds; and
(f) For having appropriated to themselves all rebates for freight insurance, taxes, etc., upon
materials for fertilizer bought abroad, no entries of said rebates having been made on the books
to the credit of the partnership.
Upon the strength of the facts set out in this first cause of action, the plaintiff prays the court:
1. To prohibit the defendants, each and every one of them, from destroying and concealing
the books and papers of the partnership constituted between the defendant Menzi & Co., Inc.,
and the plaintiff;
2. To summon each and every defendant to appear and give a true account of all facts relating
to the partnership between the plaintiff and the defendant Menzi & Co., Inc., and of each and
every act and transaction connected with the business of said partnership from the beginning
to April 27, 1927, and a true statement of all merchandise of whatever description, purchased
for said partnership, and of all the expenditures and sale of every kind, together with the true
amount thereof, besides the sums received by the partnership from every source together with
their exact nature, and a true and complete account of the vouchers for all sums paid by the
partnership, and of the salaries paid to its employees;
3. To declare null and void the yearly balances submitted by the defendants to the plaintiff from
1922 to 1926, both inclusive;
4. To order the defendants to give a true statement of all receipts and disbursements of the
partnership during the period of its existence, besides granting the plaintiff any other remedy
that the court may deem just and equitable.
EXHIBIT A
CONTRATO
que se celebra entre los Sres. Menzi y Compañia, de Manila, como Primera Parte, y D.
Francisco Bastada, tambien de Manila, como Segunda Parte, bajo las siguientes
CONDICIONES
1.ª El objeto de este contrato es la explotacion del negocio de Abonos o Fertilizantes
Preparados, para diversas aplicaciones agricolas;
2.ª La duracion de este contrato sera de cinco años, a contrar desde la fecha de su firma;
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3.ª La Primera Parte se compromete a facilitar la ayuda financiera necesaria para el negocio;
4.ª La Segunda Parte se compromete a poner su entero tiempo y toda su experiencia a la
disposicion del negocio;
5.ª La Segunda Parte no podra, directa o indirectamente, dedicarse por si sola ni en sociedad
con otras personas, o de manera alguna que no sea con la Primera Parte, al negecio de
Abonos, simples o preparados, o de materia alguna que se aplique comunmente a la
fertilizacion de suelos y plantas, durante la vigencia de este contrato, a menos que obtenga
autorizacion expresa de la Primera Parte para ello;
6.ª La Primera Parte no podra dedicarse, por si sola ni en sociedad o combinacion con otras
personas o entidades, ni de otro modo que en sociedad con la Segunda Parte, al negocio de
Abonos o Fertilizantes preparados, ya sean ellos importados, ya preparados en las Islas
Fllipinas; tampoco podra dedicarse a la venta o negocio de materias o productos que
tengan aplicacion como fertilizantes, o que se usen en la composicion de fertilizantes o
abonos, si ellos son productos de suelo de la manufactura filipinos, pudiendo sin embargo
vender o negociar en materim fertilizantes simples importados de los Estados Unidos o del
Extranjero;
7.ª La Primera Parte se obliga a ceder y a hacer efectivo a la Segunda Parte el 35 por ciento
(treinta y cinco por ciento) de las utilidades netas del negocio de abonos, liquidables el 30 de
junio de cada año;
8.ª La Primera Parte facilitara la Segunda, mensualmente, la cantidad de P300 (trescientos
pesos), a cuenta de su parte de beneficios.
9.ª Durante el año 1923 la Parte concedera a la Segunda permiso para que este se ausente
de Filipinas por un periodo de tiempo que no exceda de un año, sin menoscabo para
derechos de la Segunda Parte con arreglo a este contrato.
En testimonio de lo cual firmamos el presente en la Ciudad de Manila, I. F., a veintisiete de
abril de 1922.
MENZI & CO., INC.
Por (Fdo.) J. MENZI
General Manager
Primera Parte
(Fdo.) F. BASTIDA
Segunda Parte
MENZI & CO., INC.
(Fdo.) MAX KAEGI
Acting Secretary
Defendants denied all the allegations of the amended complaint, except the formal allegations as to
the parties, and as a special defense to the first cause of action alleged:
1. That the defendant corporation, Menzi & Co., Inc., has been engaged in the general
merchandise business in the Philippine Islands since its organization in October, 1921, including
the importation and sale of all kinds of goods, wares, and merchandise, and especially simple
fertilizer and fertilizer ingredients, and as a part of that business, it has been engaged since its
organization in the manufacture and sale of prepared fertilizers for agricultural purposes, and
has used for that purpose trade-marks belonging to it;
2. That on or about November, 1921, the defendant, Menzi & CO., Inc., made and entered into
an employment agreement with the plaintiff, who represented that he had had much
experience in the mixing of fertilizers, to superintend the mixing of the ingredients in the
manufacture of prepared fertilizers in its fertilizer department and to obtain orders for such
prepared fertilizers subject to its approval, for a compensation of 50 per cent of the net profits
which it might derive from the sale of the fertilizers prepared by him, and that said Francisco
Bastida worked under said agreement until April 27, 1922, and received the compensation
agreed upon for his services; that on the said 27th of April, 1922, the said Menzi & Co., Inc., and
the said Francisco Bastida made and entered into the written agreement, which is marked
Exhibit A, and made a part of the amended complaint in this case, whereby they mutually
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agreed that the employment of the said Francisco Bastida by the said Menzi & Co., Inc., in the
capacity stated, should be for a definite period of five years from that date and under the other
terms and conditions stated therein, but with the understanding and agreement that the said
Francisco Bastida should receive as compensation for his said services only 35 per cent of the
net profits derived from the sale of the fertilizers prepared by him during the period of the
contract instead of 50 per cent of such profits, as provided in his former agreement; that the
said Francisco Bastida was found to be incompetent to do anything in relation to its said fertilizer
business with the exception of over-seeing the mixing of the ingredients in the manufacture of
the same, and on or about the month of December, 1922, the defendant, Menzi & Inc., in order
to make said business successful, was obliged to and actually did assume the full management
and direction of said business;
3. That the accounts of the business of the said fertilizer department of Menzi & Co., Inc., were
duly kept in the regular books of its general business, in the ordinary course thereof, up to June
30, 1923, and that after that time and during the remainder of the period of said agreement, for
the purpose of convenience in determining the amount of compensation due to the plaintiff
under his agreement, separate books of account for its said fertilizer business were duly, kept in
the name of 'Menzi & Co., Inc., Fertilizer', and used exclusively for that purpose and it was
mutually agreed between the said Francisco Bastida and the said Menzi & Co., Inc., that the
yearly balances for the determination of the net profits of said business due to the said plaintiff
as compensation for his services under said agreement would be made as of December 31st,
instead of June 30th, of each year, during the period of said agreement; that the accounts of
the business of its said fertilizer department, as recorded in its said books, and the vouchers and
records supporting the same, for each year of said business have been duly audited by Messrs.
White, Page & Co., certified public accountants, of Manila, who, shortly after the close of
business at the end of each year up to and including the year 1926, have prepared therefrom
a manufacturing and profit and loss account and balance sheet, showing the status of said
business and the share of the net profits pertaining to the plaintiff as his compensation under
said agreement; that after the said manufacturing and profit and the loss account and balance
sheet for each year of the business of its said fertilizer department up to and including the year
1926, had been prepared by the said auditors and certified by them, they were shown to and
examined by the plaintiff, and duly accepted, and approved by him, with full knowledge of
their contents, and as evidence of such approval, he signed his name on each of them, as
shown on the copies of said manufacturing and profit and loss account and balance sheet for
each year up to and including the year 1926, which are attached to the record of this case,
and which are hereby referred to and made a part of this amended answer, and in
accordance therewith, the said plaintiff has actually received the portion of the net profits of its
said business for those years pertaining to him for his services under said agreement; that at no
time during the course of said fertilizer business and the liquidation thereof has the plaintiff been
in any way denied access to the books and records pertaining thereto, but on the contrary,
said books and records have been subject to his inspection and examination at any time during
business hours, and even since the commencement of this action, the plaintiff and his
accountants, Messrs. Haskins & Sells, of Manila, have been going over and examining said books
and records for months and the defendant, Menzi & Co. Inc., through its officers, have turned
over to said plaintiff and his accountant the books and records of said business and even
furnished them suitable accommodations in its own office to examine the same;
4. That prior to the termination of the said agreement, Exhibit A, the defendant, Menzi & Co.,
Inc., duly notified the plaintiff that it would not under any conditions renew his said agreement
or continue his said employment with it after its expiration, and after the termination of said
agreement of April 27, 1927, the said Menzi & Co., Inc., had the certified public accountants,
White, Page & Co., audit the accounts of the business of its said fertilizer department for the four
months of 1927 covered by plaintiff's agreement and prepare a manufacturing and profit and
loss account and balance sheet of said business showing the status of said business at the
termination of said agreement, a copy of which was shown to and explained to the plaintiff;
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that at that time there were accounts receivable to be collected for business covered by said
agreement of over P100,000, and there was guano, ashes, fine tobacco and other fertilizer
ingredients on hand of over P75,000, which had to be disposed of by Menzi & Co., Inc., or valued
by the parties, before the net profits of said business for the period of the agreement could be
determined; that Menzi & Co., Inc., offered to take the face value of said accounts and the
cost value of the other properties for the purpose of determining the profits of said business for
that period, and to pay to the plaintiff at that time his proportion of such profits on that basis,
which the plaintiff refused to accept, and being disgruntled because the said Menzi & Co., Inc.,
would not continue him in its service, the said plaintiff commenced this action, including therein
not only Menzi & Co. Inc., but also it managers J.M. Menzi and P.C. Schlobohm, wherein he
knowingly make various false and malicious allegations against the defendants; that since that
time the said Menzi & Co., Inc., has been collecting the accounts receivable and disposing of
the stocks on hand, and there is still on hand old stock of approximately P25,000, which it has
been unable to dispose of up to this time; that as soon as possible a final liquidation and
amounting of the net profits of the business covered by said agreement for the last four months
thereof will be made and the share thereof appertaining to the plaintiff will be paid to him; that
the plaintiff has been informed from time to time as to the status of the disposition of such
properties, and he and his auditors have fully examined the books and records of said business
in relation thereto.
SECOND CAUSE OF ACTION
As a second cause of action plaintiff alleged:
I. That the plaintiff hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That the examination made by the plaintiff's auditors of some of the books of the partnership
that were furnished by the defendants disclosed the fact that said defendants had charged to
"purchases" of the business, undue interest, the amount of which the plaintiff is unable to
determine, as he has never had at his disposal the books and vouchers necessary for that
purpose, and especially, owning to the fact that the partnership constituted between the
plaintiff and the defendant Menzi & Co., Inc., never kept its own cash book, but that its funds
were maliciously included in the private funds of the defendant entity, neither was there a
separate BANK ACCOUNT of the partnership, such account being included in the defendant's
bank account.
III. That from the examination of the partnership books as aforesaid, the plaintiff estimates that
the partnership between himself and the defendant Menzi & Co., Inc., has been defrauded by
the defendants by way of interest in an amount of approximately P184,432.51, of which 35 per
cent, or P64,551.38, belongs to the plaintiff exclusively.
Wherefore, the plaintiff prays the court to render judgment ordering the defendants jointly and
severally to pay him the sum of P64,551.38, or any amount which may finally appear to be due and
owing from the defendants to the plaintiff upon this ground, with legal interest from the filing of the
original complaint until payment.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;
2. That under the contract of employment, Exhibit A, of the amended complaint, the defendant,
Menzi & Co., Inc., only undertook and agreed to facilitate financial aid in carrying on the said
fertilizer business, as it had been doing before the plaintiff was employed under the said
agreement; that the said defendant, Menzi & Co., Inc., in the course of the said business of its
fertilizer department, opened letters of credit through the banks of Manila, accepted and paid
drafts drawn upon it under said letters of credit, and obtained loans and advances of moneys
for the purchase of materials to be used in mixing and manufacturing its fertilizers and in paying
the expenses of said business; that such drafts and loans naturally provided for interest at the
banking rate from the dates thereof until paid, as is the case in all, such business enterprises, and
that such payments of interest as were actually made on such drafts, loans and advances

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during the period of the said employment agreement constituted legitimate expenses of said
business under said agreement.
THIRD CAUSE OF ACTION
As third cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That under the terms of the contract Exhibit A, neither the defendants J.M. Menzi and P.C.
Schlobohm, nor the defendant Menzi & Co., Inc., had a right to collect for itself or themselves
any amount whatsoever by way of salary for services rendered to the partnership between the
plaintiff and the defendant, inasmuch as such services were compensated with the 65% of the
net profits of the business constituting their share.
III. That the plaintiff has, on his on account and with his own money, paid all the employees he
has placed in the service of the partnership, having expended for their account, during the
period of the contract, over P88,000, without ever having made any claim upon the defendants
for this sum because it was included in the compensation of 35 per cent which he was to receive
in accordance with the contract Exhibit A.
IV. That the defendants J.M. Menzi and P.C. Schlobohm, not satisfied with collecting undue and
excessive salaries for themselves, have made the partnership, or the fertilizer business, pay the
salaries of a number of the employees of the defendant Menzi & Co., Inc.
V. That under this item of undue salaries the defendants have appropriated P43,920 of the
partnership funds, of which 35 per cent, or P15,372 belongs exclusively to the plaintiff.
Wherefore, the plaintiff prays the court to render judgment ordering the defendants to pay jointly and
severally to the plaintiff the amount of P15,372, with legal interest from the date of the filing of the
original complaint until the date of payment.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4 of the
special defense the first cause of action in this amended answer;
2. That the defendant, Menzi & Co., Inc., through its manager, exclusively managed and
conducted its said fertilizer business, in which the plaintiff was to receive 35 percent of the net
profits as compensation for this services, as hereinbefore alleged, from on or about January 1,
1923, when its other departments had special experienced Europeans in charge thereof, who
received not only salaries but also a percentage of the net profits of such departments; that its
said fertilizer business, after its manager took charge of it, became very successful, and owing
to the large volume of business transacted, said business required great deal of time and
attention, and actually consumed at least one-half of the time of the manager and certain
employees of Menzi & Co., Inc., in carrying it on; that the said Menzi & Co., furnished office
space, stationery and other incidentals, for said business, and had its employees perform the
duties of cashiers, accountants, clerks, messengers, etc., for the same, and for that reason the
said Menzi & Co., Inc., charged each year, from and after 1922, as expenses of said business,
which pertained to the fertilizer department, as certain amount as salaries and wages to cover
the proportional part of the overhead expenses of Menzi & Co., Inc.; that the same method is
followed in each of the several departments of the business of Menzi & Co., Inc., that each and
every year from and after 1922, a just proportion of said overhead expenses were charged to
said fertilizer departments and entered on the books thereof, with the knowledge and consent
of the plaintiff, and included in the auditors' reports, which were examined, accepted and
approved by him, and he is now estopped from saying that such expenses were not legitimate
and just expenses of said business.
FOURTH CAUSE OF ACTION
As fourth cause of action, the plaintiff alleged:
I. That he hereby reproduces paragraph I, II, III, IV, and V of the first cause of action.
II. That the defendant Menzi & Co., Inc., through the defendant J. M. Menzi and P. C.
Schlobohm, has paid, with the funds of the partnership between the defendant entity and the
plaintiff, the income tax due from said defendant entity for the fertilizer business, thereby

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defrauding the partnership in the amount of P10,361.72 of which 35 per cent belongs exclusively
to the plaintiff, amounting to P3,626.60.
III. That the plaintiff has, during the period of the contract, paid with his own money the income
tax corresponding to his share which consists in 35 per cent of the profits of the fertilizer business,
expending about P5,000 without ever having made any claim for reimbursement against the
partnership, inasmuch as it has always been understood among the partners that each of them
would pay his own income tax.
Wherefore, the plaintiff prays the court to order the defendants jointly and severally to pay the plaintiff
the sum of P3,362.60, with legal interest from the date of the filing of the original complaint until its
payment.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;
2. That under the Income Tax Law Menzi & Co., Inc., was obliged to and did make return to the
Government of the Philippine Islands each year during the period of the agreement, Exhibit A,
of the income of its whole business, including its fertilizer department; that the proportional share
of such income taxes found to be due on the business of the fertilizer department was charged
as a proper and legitimate expense of that department, in the same manner as was done in
the other departments of its business; that inasmuch as the agreement with the plaintiff was an
employment agreement, he was required to make his own return under the Income Tax Law
and to pay his own income taxes, instead of having them paid at the source, as might be done
under the law, so that he would be entitled to the personal exemptions allowed by the law; that
the income taxes paid by the said Menzi & Co., Inc., pertaining to the business, were duly
entered on the books of that department, and included in the auditors' reports hereinbefore
referred to, which reports were examined, accepted and approved by the plaintiff, with full
knowledge of their contents, and he is now estopped from saying that such taxes are not a
legitimate expense of said business.
FIFTH CAUSE OF ACTION
As fifth cause of action, plaintiff alleged:
I. That hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That the plaintiff has discovered that the defendants Menzi & Co., Inc., had been receiving,
during the period of the contract Exhibit A, from foreign firms selling fertilizing material, a secret
commission equivalent to 5 per cent of the total value of the purchases of fertilizing material
made by the partnership constituted between the plaintiff and the defendant Menzi Co., Inc.,
and that said 5 per cent commission was not entered by the defendants in the books of the
business, to the credit and benefit of the partnership constituted between the plaintiff and the
defendant, but to the credit of the defendant Menzi Co., Inc., which appropriated it to itself.
III. That the exact amount, or even the approximate amount of the fraud thus suffered by the
plaintiff cannot be determined, because the entries referring to these items do not appear in
the partnership books, although the plaintiff believes and alleges that they do appear in the
private books of the defendant Menzi & Co., Inc., which the latter has refused to furnish,
notwithstanding the demands made therefore by the auditors and the lawyers of the plaintiff.
IV. That taking as basis the amount of the purchases of some fertilizing material made by the
partnership during the first four years of the contract Exhibit A, the plaintiff estimates that this 5
per cent commission collected by the defendant Menzi Co., Inc., to the damage and prejudice
of the plaintiff, amounts to P127,375.77 of which 35 per cent belongs exclusively to the plaintiff.
Wherefore, the plaintiff prays the court to order the defendants to pay jointly and severally to the
plaintiff the amount of P44,581.52, or the exact amount owed upon this ground, after both parties have
adduced their evidence upon the point.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraph 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;

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2. That the defendant, Menzi & Co., Inc., did have during the period of said agreement, Exhibit
A, and has now what is called a "Propaganda Agency Agreement" which the Deutsches
Kalesyndikat, G.M.B., of Berlin, which is a manufacturer of potash, by virtue of which said Menzi
& Co., Inc., was to receive for its propaganda work in advertising and bringing about sales of its
potash a commission of 5 per cent on all orders of potash received by it from the Philippine
Islands; that during the period of said agreement, Exhibit A, orders were sent to said concern for
potash, through C. Andre & Co., of Hamburg, as the agent of the said Menzi & Co., Inc., upon
which the said Menzi & Co., Inc., received a 5 per cent commission, amounting in all to P2,222.32
for the propaganda work which it did for said firm in the Philippine Islands; that said
commissioners were not in any sense discounts on the purchase price of said potash, and have
no relation to the fertilizer business of which the plaintiff was to receive a share of the net profits
for his services, and consequently were not credited to that department;
3. That in going over the books of Menzi Co., Inc., it has been found that there are only two items
of commissions, which were received from the United Supply Co., of San Francisco, in the total
of sum $66.51, which through oversight, were not credited on the books of the fertilizer
department of Menzi & Co., Inc., but due allowance has now been given to the department
for such item.
SIXTH CAUSE OF ACTION
As sixth cause of action, plaintiff alleged:
I. That hereby reproduces paragraphs I, II, III, IV and V, of the first cause of action.
II. That the defendant Menzi Co., Inc., in collusion with and through the defendants J.M. Menzi
and P.C. Schlobohm and their assistants, has tampered with the books of the business making
fictitious transfers in favor of the defendant Menzi & Co., Inc., of merchandise belonging to the
partnership, purchased with the latter's money, and deposited in its warehouses, and then sold
by Menzi & Co., Inc., to third persons, thereby appropriating to itself the profits obtained from
such resale.
III. That it is impossible to ascertain the amount of the fraud suffered by the plaintiff in this respect
as the real amount obtained from such sales can only be ascertained from the examination of
the private books of the defendant entity, which the latter has refused to permit notwithstanding
the demand made for the purpose by the auditors and the lawyers of the plaintiff, and no basis
of computation can be established, even approximately, to ascertain the extent of the fraud
sustained by the plaintiff in this respect, by merely examining the partnership books.
Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to
make a sworn statement as to all the profits received from the sale to third persons of the fertilizers
pertaining to the partnership, and the profits they have appropriated, ordering them jointly and
severally to pay 35 per cent of the net amount, with legal interest from the filing of the original
complaint until the payment thereof.
Defendant alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer:
2. That under the express terms of the employment agreement, Exhibit A, the defendant, Menzi
& Co., Inc., had the right to import into the Philippine Islands in the course of its fertilizer business
and sell fro its exclusive account and benefit simple fertilizer ingredients; that the only materials
imported by it and sold during the period of said agreement were simple fertilizer ingredients,
which had nothing whatever to do with the business of mixed fertilizers, of which the plaintiff was
to receive a share of the net profits as a part of his compensation.
SEVENTH CAUSE OF ACTION
As seventh cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That during the existence of the contract Exhibit A, the defendant Menzi & Co., Inc., for the
account of the partnership constituted between itself and the plaintiff, and with the latter's
money, purchased from a several foreign firms various simple fertilizing material for the use of
the partnership.
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III. That in the paid invoices for such purchases there are charged, besides the cost price of the
merchandise, other amounts for freight, insurance, duty, etc., some of which were not entirely
thus spent and were later credited by the selling firms to the defendant Menzi & Co., Inc.
IV. That said defendant Menzi & Co., Inc., through and in collusion with the defendants J.M.
Menzi and P.C. Schlobohm upon receipt of the credit notes remitted by the selling firms of
fertilizing material, for rebates upon freight, insurance, duty, etc., charged in the invoice but not
all expended, did not enter them upon the books to the credit of the partnership constituted
between the defendant and the plaintiff, but entered or had them entered to the credit on
Menzi & Co., Inc., thereby defrauding the plaintiff of 35 per cent of the value of such reductions.
V. That the total amount, or even the approximate amount of this fraud cannot be ascertained
without an examination of the private books of Menzi & Co., Inc., which the latter has refused
to permit notwithstanding the demand to this effect made upon them by the auditors and the
lawyers of the plaintiff.
Wherefore, the plaintiff prays the court to order the defendants J.M. Menzi and P.C. Schlobohm, to
make a sworn statement as to the total amount of such rebates, and to sentence the defendants to
pay the plaintiff jointly and severally 35 per cent of the net amount.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer:
2. That during the period of said employment agreement, Exhibit A, the defendant, Menzi & Co.,
Inc., received from its agent, C. Andre & Co., of Hamburg, certain credits pertaining to the
fertilizer business in the profits of which the plaintiff was interested, by way of refunds of German
Export Taxes, in the total sum of P1,402.54; that all of department as received, but it has just
recently been discovered that through error an additional sum of P216.22 was credited to said
department, which does not pertain to said business in the profits of which the plaintiff is
interested.
EIGHT CAUSE OF ACTION
A eighth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV and V of the first cause of action.
II. That on or about April 21, 1927, that is, before the expiration of the contract Exhibit A of the
complaint, the defendant Menzi & Co., Inc., acting as manager of the fertilizer business
constituted between said defendant and the plaintiff, entered into a contract with the
Compañia General de Tabacos de Filipinas for the sale of said entity of three thousand tons of
fertilizers of the trade mark "Corona No. 1", at the rate of P111 per ton, f. o. b. Bais, Oriental
Negros, to be delivered, as they were delivered, according to information received by the
plaintiff, during the months of November and December, 1927, and January, February, March,
and April, 1928.
III. That both the contract mentioned above and the benefits derived therefrom, which the
plaintiff estimates at P90,000, Philippine currency, belongs to the fertilizer business constituted
between the plaintiff and the defendant, of which 35 per cent, or P31,500, belongs to said
plaintiff.
IV. That notwithstanding the expiration of the partnership contract Exhibit A, on April 27, 1927,
the defendants have not rendered a true accounting of the profits obtained by the business
during the last four months thereof, as the purposed balance submitted to the plaintiff was
incorrect with regard to the inventory of merchandise, transportation equipment, and the value
of the trade marks, for which reason such proposed balance did not represent the true status
of the business of the partnership on April 30, 1927.
V. That the proposed balance submitted to the plaintiff with reference to the partnership
operations during the last four months of its existence, was likewise incorrect, inasmuch as it did
not include the profit realized or to be realized from the contract entered into with the
Compañia General de Tabacos de Filipinas, notwithstanding the fact that this contract was
negotiated during the existence of the partnership, and while the defendant Menzi & Co., Inc.,
was the manager thereof.
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VI. That the defendant entity now contends that the contract entered into with the Compañia
General de Tabacos de Filipinas belongs to it exclusively, and refuses to give the plaintiff his
share consisting in 35 per cent of the profits produced thereby.
Wherefore, the plaintiff prays the honorable court to order the defendants to render a true and
detailed account of the business during the last four months of the existence of the partnership, i. e.,
from January 1, 1927 to April 27, 1927, and to sentence them likewise to pay the plaintiff 35 per cent of
the net profits.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;
2. That the said order for 3,000 tons of mixed fertilizer, received by Menzi & Co., Inc., from the
Compañia General de Tabacos Filipinas on April 21, 1927, was taken by it in the regular course
of its fertilizer business, and was to be manufactured and delivered in December, 1927, and up
to April, 1928; that the employment agreement of the plaintiff expired by its own terms on April
27, 1927, and he has not been in any way in the service of the defendant, Menzi & Co., Inc.,
since that time, and he cannot possibly have any interest in the fertilizers manufactured and
delivered by the said Menzi & Co., Inc., after the expiration of his contract for any service
rendered to it.
NINTH CAUSE OF ACTION
As ninth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of the first cause of action.
II. That during the period of the contract Exhibit A, the partnership constituted thereby registered
in the Bureau of Commerce and Industry the trade marks "CORONA NO. 1", CORONA NO. 2",
"ARADO", and "HOZ", the plaintiff and the defendant having by their efforts succeeded in
making them favorably known in the market.
III. That the plaintiff and the defendant, laboring jointly, have succeeded in making the fertilizing
business a prosperous concern to such an extent that the profits obtained from the business
during the five years it has existed, amount to approximately P1,000,000, Philippine currency.
IV. That the value of the good will and the trade marks of a business of this nature amounts to
at least P1,000,000, of which sum 35 per cent belongs to the plaintiff, or, P350,000.
V. That at the time of the expiration of the contract Exhibit A, the defendant entity,
notwithstanding and in spite of the plaintiff's insistent opposition, has assumed the charge of
liquidating the fertilizing business, without having rendered a monthly account of the state of
the liquidation, as required by law, thereby causing the plaintiff damages.
VI. That the damages sustained by the plaintiff, as well as the amount of his share in the
remaining property of the plaintiff, and may only be truly and correctly ascertained by
compelling the defendants J. M. Menzi and P. C. Schlobohm to declare under oath and explain
to the court in detail the sums obtained from the sale of the remaining merchandise, after the
expiration of the partnership contract.
VII. That after the contract Exhibit A had expired, the defendant continued to use for its own
benefit the good-will and trade marks belonging to the partnership, as well as its transportation
equipment and other machinery, thereby indicating its intention to retain such good-will, trade
marks, transportation equipment and machinery, for the manufacture of fertilizers, by virtue of
which the defendant is bound to pay the plaintiff 35 per cent of the value of said property.
VIII. That the true value of the transportation equipment and machinery employed in the
preparation of the fertilizers amounts of P20,000, 35 per cent of which amount to P7,000.
IX. That the plaintiff has repeatedly demanded that the defendant entity render a true and
detailed account of the state of the liquidation of the partnership business, but said defendants
has ignored such demands, so that the plaintiff does not, and this date, know whether the
liquidation of the business has been finished, or what the status of it is at present.
Wherefore, the plaintiff prays the Honorable Court:
1. To order the defendants J.M. Menzi and P.C. Schlobohm to render a true and detailed
account of the status of business in liquidation, that is, from April 28, 1927, until it is finished,
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ordering all the defendants to pay the plaintiff jointly and severally 35 per cent of the net
amount.
2. To order the defendants to pay the plaintiff jointly and severally the amount of P350,000, which
is 35 per cent of the value of the goodwill and the trade marks of the fertilizer business;
3. To order the defendants to pay the plaintiff jointly and severally the amount of P7,000 which
is 35 per cent of the value of the transportation equipment and machinery of the business; and
4. To order the defendants to pay the costs of this trial, and further, to grant any other remedy
that this Honorable Court may deem just and equitable.
Defendants alleged:
1. That they repeat and make a part of this special defense paragraphs 1, 2, 3 and 4, of the
special defense to the first cause of action in this amended answer;
2. That the good-will, if any, of said fertilizer business of the defendant, Menzi & Co., Inc., pertains
exclusively to it, and the plaintiff can have no interest therein of any nature under his said
employment agreement; that the trade-marks mentioned by the plaintiff in his amended
complaint, as a part of such good-will, belonged to and have been used by the said Menzi &
Co., Inc., in its fertilizer business from and since its organization, and the plaintiff can have no
rights to or interest therein under his said employment agreement; that the transportation
equipment pertains to the fertilizer department of Menzi & Co., Inc., and whenever it has been
used by the said Menzi & Co., Inc., in its own business, due and reasonable compensation for its
use has been allowed to said business; that the machinery pertaining to the said fertilizer business
was destroyed by fire in October, 1926, and the value thereof in the sum of P20,000 was
collected from the Insurance Company, and the plaintiff has been given credit for 35 per cent
of that amount; that the present machinery used by Menzi & Co., Inc., was constructed by it,
and the costs thereof was not charged to the fertilizer department, and the plaintiff has no right
to have it taken into consideration in arriving at the net profits due to him under his said
employment agreement.
The dispositive part of the decision of the trial court is as follows:
Wherefore, let judgment be entered:
(a) Holding that the contract entered into by the parties, evidenced by Exhibit A, as a contract
of general regular commercial partnership, wherein Menzi & Co., Inc., was the capitalist, and
the plaintiff, the industrial partner;
(b) Holding the plaintiff, by the mere fact of having signed and approved the balance sheets,
Exhibits C to C-8, is not estopped from questioning the statements of the accounts therein
contained;
(c) Ordering Menzi & Co., Inc., upon the second ground of action, to pay the plaintiff the sum
of P 60,385.67 with legal interest from the date of the filing of the original complaint until paid;
(d) Dismissing the third cause of action;
(e) Ordering Menzi & Co., Inc., upon the fourth cause of action, to pay the plaintiff the sum of
P3,821.41, with legal interest from the date of the filing of the original until paid;
(f ) Dismissing the fifth cause of action;
(g) Dismissing the sixth cause of action;
(h) Dismissing the seventh cause of action;
(i) Ordering the defendant Menzi & Co., Inc., upon the eighth cause of action, to pay the
plaintiff the sum of P6,578.38 with legal interest from January 1, 1929, the date of the liquidation
of the fertilizer business, until paid;
(j ) Ordering Menzi & Co., Inc., upon the ninth cause of action to pay the plaintiff the sum of
P196,709.20 with legal interest from the date of the filing of the original complaint until paid;
(k) Ordering the said defendant corporation, in view of the plaintiff's share of the profits of the
business accruing from January 1, 1927 to December 31, 1928, to pay the plaintiff 35 per cent
of the net balance shown in Exhibits 51 and 51-A, after deducting the item of P2,410 for income
tax, and any other sum charged for interest under the entry "Purchases";

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(l) Ordering the defendant corporation, in connection with the final liquidation set in Exhibit 52
and 52-A, to pay the plaintiff the sum of P17,463.54 with legal interest from January 1, 1929, until
fully paid;
(m) Dismissing the case with reference to the other defendants, J. M. Menzi and P. C.
Schlobohm; and
(n) Menzi & Co., Inc., shall pay the costs of the trial.
The appellant makes the following assignment of error:
I. The trial court erred in finding and holding that the contract Exhibit A constitutes a regular
collective commercial copartnership between the defendant corporation, Menzi & Co., Inc.,
and the plaintiff, Francisco Bastida, and not a contract of employment.
II. The trial court erred in finding and holding that the defendant, Menzi & Co., Inc., had
wrongfully charged to the fertilizer business in question the sum of P10,918.33 as income taxes
partners' balances, foreign drafts, local drafts, and on other credit balances in the sum of
P172,530.49, and that 35 per cent thereof, or the sum of P60,358.67, with legal interest thereon
from the date of filing his complaint, corresponds to the plaintiff.
III. The trial court erred finding and holding that the defendant, Menzi & Co., Inc., had wrongfully
charged to the fertilizer business in question the sum of P10,918.33 as income taxes for the years
1923, 1924, 1925 and 1926, and that the plaintiff is entitled to 35 per cent thereof, or the sum of
P3,821.41, with legal interest thereon from the date of filing his complaint, and in disallowing the
item of P2,410 charged as income tax in the liquidation in Exhibits 51 and 51 A for the period
from January 1 to April 27, 1927.
IV. The trial court erred in refusing to find and hold under the evidence in this case that the
contract, Exhibit A was daring the whole period thereof considered by the parties and
performed by them as a contract of employment in relation to the fertilizer business of the
defendant, and that the accounts of said business were kept by the defendant, Menzi & Co.,
Inc., on that theory with the knowledge and consent of the plaintiff, and that at the end of each
year for five years a balance sheet and profit and loss statement of said business were prepared
from the books of account of said business on the same theory and submitted to the plaintiff,
and that each year said balance sheet and profit and loss statement were examined,
approved and signed by said contract in accordance therewith with full knowledge of the
manner in which said business was conducted and the charges for interest and income taxes
made against the same and that by reason of such facts, the plaintiff is now estopped from
raising any question as to the nature of said contract or the propriety of such charges.
V. The trial court erred in finding and holding that the plaintiff, Francisco Bastida, is entitled to 35
per cent of the net profits in the sum of P18,795.38 received by the defendant, Menzi & Co., Inc.,
from its contract with the Compañia General de Tabacos de Filipinas, or the sum of P6.578.38,
with legal interest thereon from January 1, 1929, the date upon which the liquidation of said
business was terminated.
VI. The trial court erred in finding and holding that the value of the good-will of the fertilizer
business in question was P562,312, and that the plaintiff, Francisco Bastida, was entitled to 35
per cent of such valuation, or the sum of P196,709.20, with legal interest thereon from the date
of filing his complaint.
VII. The trial court erred in rendering judgment in favor of the plaintiff and against defendant,
Menzi & Co., Inc., (a) on the second cause of action, for the sum of P60,385.67, with legal interest
thereon from the date of filing the complaint; (b) on the fourth cause of action, for the sum of
P3,821.41, with legal interest thereon from the date of filing the complaint; (c) on the eight cause
of action, for the sum of P6,578.38, with legal interest thereon from January 1, 1929; and (d) on
the ninth cause of action, for the sum of P196,709.20, with legal interest thereon from the date
of filing the original complaint; and (e) for the costs of the action, and in not approving the final
liquidation of said business, Exhibits 51 and 51-A and 52 and 52-A, as true and correct, and
entering judgment against said defendant only for the amounts admitted therein as due the
plaintiff with legal interest, with the costs against the plaintiff.
VIII. The trial court erred in overruling the defendants' motion for a new trial.
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It appears from the evidence that the defendants corporation was organized in 1921 for purpose of
importing and selling general merchandise, including fertilizers and fertilizer ingredients. It appears
through John Bordman and the Menzi-Bordman Co. the good-will, trade-marks, business, and other
assets of the old German firm of Behn, Meyer & Co., Ltd., including its fertilizer business with its stocks
and trade-marks. Behn, Meyer & Co., Ltd., had owned and carried on this fertilizer business from 1910
until that firm was taken over the Alien Property Custodian in 1917. Among the trade-marks thus
acquired by the appellant were those known as the "ARADO", "HOZ", and "CORONA". They were
registered in the Bureau of Commerce and Industry in the name of Menzi & Co. The trade marks
"ARADO" and "HOZ" had been used by Behn, Meyer & Co., Ltd., in the sale of its mixed fertilizers, and
the trade mark "CORONA" had been used in its other business. The "HOZ" trade-mark was used by John
Bordman and the Menzi-Bordman Co. in the continuation of the fertilizer business that had belonged
to Behn, Meyer & Co., Ltd.
The business of Menzi & Co., Inc., was divided into several different departments, each of which was in
charge of a manager, who received a fixed salary and a percentage of the profits. The corporation
had to borrow money or obtain credits from time to time and to pay interest thereon. The amount paid
for interest was charged against the department concerned, and the interest charges were taken into
account in determining the net profits of each department. The practice of the corporation was to
debit or credit each department with interest at the bank rate on its daily balance. The fertilizer business
of Menzi & Co., Inc., was carried on in accordance with this practice under the "Sundries Department"
until July, 1923, and after that as a separate department.
In November, 1921, the plaintiff, who had had some experience in mixing and selling fertilizer, went to
see Toehl, the manager of the sundries department of Menzi & Co., Inc., and told him that he had a
written contract with the Philippine Sugar Centrals Agency for 1,250 tons of mixed fertilizers, and that
he could obtain other contracts, including one from the Calamba Sugar Estates for 450 tons, but the
he did not have the money to buy the ingredients to fill the order and carry on the on the business. He
offered to assign to Menzi & Co., Inc., his contract with the Philippine Sugar Centrals Agency and to
supervise the mixing of the fertilizer and to obtain other orders for fifty per cent of the net profits that
Menzi & Co., might derive therefrom. J.M. Menzi, the general manager of Menzi & Co., accepted
plaintiff's offer. Plaintiff assigned to Menzi & Co., Inc., his contract with the Sugar Centrals Agency, and
the defendant corporation proceeded to fill the order. Plaintiff supervised the mixing of the fertilizer.
On January 10, 1922 the defendant corporation at plaintiff's request gave him the following letter,
Exhibit B:
MANILA, 10 de enero de 1922
Sr. FRANCISCO BASTIDA
Manila
MUY SR. NUESTRO: Interin formalizamos el contrato que, en principio, tenemos convenido para la
explotacion del negocio de abono y fertilizantes, por la presente venimos en confirmar su derecho de
50 por ciento de las untilidades que se deriven del contrato obtenido por Vd. de la Philippine Sugar
Centrals (por 1250 tonel.) y del contrato con la Calamba Sugar Estates, asi como de cuantos contratos
se cierren con definitiva de nuestro contrato mutuo, lo que formalizacion definitiva de nuestro contrato
mutuo, lo que hacemos para garantia y seguridad de Vd.
MENZI & CO.,
Por (Fdo.) W. TOEHL
Menzi & Co., Inc., continued to carry on its fertilizer business under this arrangement with the plaintiff. It
ordered ingredients from the United States and other countries, and the interest on the drafts for the
purchase of these materials was changed to the business as a part of the cost of the materials. The
mixed fertilizers were sold by Menzi & Co., Inc., between January 19 and April 1, 1922 under its
"CORONA" brand. Menzi & Co., Inc., had only one bank account for its whole business. The fertilizer
business had no separate capital. A fertilizer account was opened in the general ledger, and interest
at the rate charged by the Bank of the Philippine Islands was debited or credited to that account on
the daily balances of the fertilizer business. This was in accordance with appellant's established
practice, to which the plaintiff assented.

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On or about April 24, 1922 the net profits of the business carried on under the oral agreement were
determined by Menzi & Co., Inc., after deducting interest charges, proportional part of warehouse rent
and salaries and wages, and the other expenses of said business, and the plaintiff was paid some
twenty thousand pesos in full satisfaction of his share of the profits.
Pursuant to the aforementioned verbal agreement, confirmed by the letter, Exhibit B, the defendant
corporation April 27, 1922 entered a written contract with the plaintiff, marked Exhibit A, which is the
basis of the present action.
The fertilizer business was carried on by Menzi & Co., Inc., after the execution of Exhibit A in practically
the same manner as it was prior thereto. The intervention of the plaintiff was limited to supervising the
mixing of the fertilizers in Menzi & Co.'s, Inc., bodegas.
The trade-marks used in the sale of the fertilizer were registered in the Bureau of Commerce & Industry
in the name of Menzi & Co., Inc., and the fees were paid by that company. They were not changed
to the fertilizer business, in which the plaintiff was interested. Only the fees for registering the formulas
in the Bureau of Science were charged to the fertilizer business, and the total amount thereof was
credited to this business in the final liquidation on April 27, 1927.
On May 3, 1924 the plaintiff made a contract with Menzi & Co., Inc., to furnish it all the stems and scraps
to tobacco that it might need for its fertilizer business either in the Philippine Islands or for export to other
countries. This contract is rendered to in the record as the "Vastago Contract". Menzi & Co., Inc.,
advanced the plaintiff, paying the salaries of his employees, and other expenses in performing his
contract.
White, Page & Co., certified public accountants, audited the books of Menzi & Co., Inc., every month,
and at the end of each year they prepared a balance sheet and a profit and loss statement of the
fertilizer business. These statements were delivered to the plaintiff for examination, and after he had
had an opportunity of verifying them he approved them without objection and returned them to Menzi
& Co., Inc.
Plaintiff collected from Menzi Co., Inc., as his share or 35 per cent of the net profits of the fertilizer
business the following amounts:
1922 . . . . . . . . . . . . . . . . . . . . . P1,874.73

1923 . . . . . . . . . . . . . . . . . . . . . 30,212.62

1924 . . . . . . . . . . . . . . . . . . . . . 101,081.56

1925 . . . . . . . . . . . . . . . . . . . . . 35,665.03

1926 . . . . . . . . . . . . . . . . . . . . . 27,649.98

Total . . . . . . . . . . . . . . . . . . . . P196,483.92
To this amount must be added plaintiff's share of the net profits from January 1 to April 27, 1927,
amounting to P34,766.87, making a total of P231,250.79.
Prior to the expiration of the contract, Exhibit A, the manager of Menzi & Co. Inc., notified the plaintiff
that the contract for his services would not be renewed.
When plaintiff's contract expired on April 27, 1927, the fertilizer department of Menzi & Co., Inc., had
on hand materials and ingredients and two Ford trucks of the book value of approximately P75,000,
and accounts receivable amounting to P103,000. There were claims outstanding and bills to pay.
Before the net profits could be finally determined, it was necessary to dispose of the materials and
equipment, collect the outstanding accounts for Menzi & Co., Inc., prepared a balance sheet and a
profit and loss statement for the period from January 1 to April 27, 1927 as a basis of settlement, but the
plaintiff refused to accept it, and filed the present action.
Menzi & Co., Inc., then proceeded to liquidate fertilizer business in question. In October, 1927 it
proposed to the plaintiff that the old and damaged stocks on hand having a book value of P40,000,
which the defendant corporation had been unable to dispose of, be sold at public or private sale, or

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divided between the parties. The plaintiff refused to agree to this. The defendant corporation then
applied to the trial court for an order for the sale of the remaining property at public auction, but
apparently the court did not act on the petition.
The old stocks were taken over by Menzi & Co., Inc., and the final liquidation of the fertilizer business
was completed in December, 1928 and a final balance sheet and a profit and loss statement were
submitted to the plaintiff during the trial. During the liquidation the books of Menzi & Co., Inc., for the
whole period of the contract in question were reaudited by White, Page & Co.., certain errors of
bookkeeping were discovered by them. After making the corrections they found the balance due the
plaintiff to be P21,633.20.
Plaintiff employed a certified public accountant, Vernon Thompson, to examine the books and
vouchers of Menzi & Co. Thompson assumed the plaintiff and Menzi & Co., Inc., to be partners, and
that Menzi & Co., Inc., was obliged to furnish free of charge all the capital the partnership should need.
He naturally reached very different conclusions from those of the auditors of Menzi Co., Inc.
We come now to a consideration of appellant's assignment of error. After considering the evidence
and the arguments of counsel, we are unanimously of the opinion that under the facts of this case the
relationship established between Menzi & Co. and by the plaintiff was to receive 35 per cent of the net
profits of the fertilizer business of Menzi & Co., Inc., in compensation for his services of supervising the
mixing of the fertilizers. Neither the provisions of the contract nor the conduct of the parties prior or
subsequent to its execution justified the finding that it was a contract of copartnership. Exhibit A, as
appears from the statement of facts, was in effect a continuation of the verbal agreement between
the parties, whereby the plaintiff worked for the defendant corporation for one-half of the net profits
derived by the corporation from certain fertilizer contracts. Plaintiff was paid his share of the profits from
those transactions after Menzi & Co., Inc., had deducted the same items of expense which he now
protests. Plaintiff never made any objection to defendant's manner of keeping the accounts or to the
charges. The business was continued in the same manner under the written agreement, Exhibit A, and
for four years the plaintiff never made any objection. On the contrary he approved and signed every
year the balance sheet and the profit and loss statement. It was only when plaintiff's contract was
about to expire and the defendant corporation had notified him that it would not renew it that the
plaintiff began to make objections.
The trial court relied on article 116 of the Code of Commerce, which provides that articles of
association by which two or more persons obligate themselves to place in a common fund any
property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter what
its class may be, provided it has been established in accordance with the provisions of this Code; but
in the case at bar there was no common fund, that is, a fund belonging to the parties as joint owners
or partners. The business belonged to Menzi & Co., Inc. The plaintiff was working for Menzi & Co., Inc.
Instead of receiving a fixed salary or a fixed salary and a small percentage of the net profits, he was
to receive 35 per cent of the net profits as compensation for his services. Menzi & Co., Inc., was to
advanced him P300 a month on account of his participation in the profits. It will be noted that no
provision was made for reimbursing Menzi & Co., Inc., in case there should be no net profits at the end
of the year. It is now well settled that the old rule that sharing profits as profits made one a partner is
overthrown. (Mechem, second edition, p. 89.)
It is nowhere stated in Exhibit A that the parties were establishing a partnership or intended to become
partners. Great stress in laid by the trial judge and plaintiff's attorneys on the fact that in the sixth
paragraph of Exhibit A the phrase "en sociedad con" is used in providing that defendant corporation
not engage in the business of prepared fertilizers except in association with the plaintiff (en sociedad
con). The fact is that en sociedad con as there used merely means en reunion con or in association
with, and does not carry the meaning of "in partnership with".
The trial judge found that the defendant corporation had not always regarded the contract in question
as an employment agreement, because in its answer to the original complaint it stated that before
the expiration of Exhibit A it notified the plaintiff that it would not continue associated with him in said
business. The trial judge concluded that the phrase "associated with", used by the defendant
corporation, indicated that it regarded the contract, Exhibit A, as an agreement of copartnership.

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In the first place, the complaint and answer having been superseded by the amended complaint and
the answer thereto, and the answer to the original complaint not having been presented in evidence
as an exhibit, the trial court was not authorized to take it into account. "Where amended pleadings
have been filed, allegations in the original pleadings are held admissible, but in such case the original
pleadings can have no effect, unless formally offered in evidence." (Jones on Evidence, sec. 273;
Lucido vs. Calupitan, 27 Phil., 148.)
In the second place, although the word "associated" may be related etymologically to the Spanish
word "socio", meaning partner, it does not in its common acceptation imply any partnership relation.
The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation obligated itself to
pay to the plaintiff 35 per cent of the net profits of the fertilizer business, to advance to him P300 a
month on account of his share of the profits, and to grant him permission during 1923 to absent himself
from the Philippines for not more than one year are utterly incompatible with the claim that it was the
intention of the parties to form a copartnership. Various other reasons for holding that the parties were
not partners are advanced in appellant's brief. We do not deem it necessary to discuss them here. We
merely wish to add that in the Vastago contract, Exhibit A, the plaintiff clearly recognized Menzi & Co.,
Inc., as the owners of the fertilizer business in question.
As to the various items of the expense rejected by the trial judge, they were in our opinion proper
charges and erroneously disallowed, and this would true even if the parties had been partners.
Although Menzi & Co., Inc., agreed to furnish the necessary financial aid for the fertilizer business, it did
not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost of
securing the necessary credit. Some of the contentions of the plaintiff and his expert witness Thompson
are so obviously without merit as not to merit serious consideration. For instance, they objected to the
interest charges on draft for materials purchased abroad. Their contention is that the corporation
should have furnished the money to purchase these materials for cash, overlooking the fact that the
interest was added to the cost price, and that the plaintiff was not prejudiced by the practice
complained of. It was also urged, and this seems to us the height of absurdity, that the defendant
corporation should have furnished free of charge such financial assistance as would have made it
unnecessary to discount customers' notes, thereby enabling the business to reap the interest. In other
words, the defendant corporation should have enabled the fertilizer department to do business on a
credit instead of a cash basis.
The charges now complained of, as we have already stated, are the same as those made under the
verbal agreement, upon the termination of which the parties made a settlement; the charges in
question were acquiesced in by the plaintiff for years, and it is now too late for him to contest them.
The decision of this court in the case of Kriedt vs. E.C. McCullough & Co. (37 Phil., 474), is in point. A
portion of the syllabus of that case reads as follows:
1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS ACTS OF PARTIES. — Acts done by the
parties to a contract in the course of its performance are admissible in evidence upon the
question of its meaning, as being their own contemporaneous interpretation of its terms.
2. ID, ID; ACTION OF PARTIES UNDER PRIOR CONTRACT. — In an action upon a contract
containing a provision a doubtful application it appeared that under a similar prior contract the
parties had, upon the termination of said contract, adjusted their rights and made a settlement
in which the doubtful clause had been given effect in conformity with the interpretation placed
thereon by one of the parties. Held: That this action of the parties under the prior contract could
properly be considered upon the question of the interpretation of the same clause in the later
contract.
3. ID.; ID.; ACQUIESCENCE. — Where one of the parties to a contract acquiesces in the
interpretation placed by the other upon a provision of doubtful application, the party so
acquiescing is bound by such interpretation.
4. ID.; ID.; ILLUSTRATION. — One of the parties to a contract, being aware at the time of the
execution thereof that the other placed a certain interpretation upon a provision of doubtful
application, nevertheless proceeded, without raising any question upon the point, to perform
the services which he was bound to render under the contract. Upon the termination of the
contract by mutual consent a question was raised as to the proper interpretation of the doubtful
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provision. Held: That the party raising such question had acquiesced in the interpretation placed
upon the contract by the other party and was bound thereby.
The trial court held that the plaintiff was entitled to P6,578.38 or 35 per cent of the net profits derived
by Menzi & Co., Inc., from its contract for fertilizers with the Tabacalera. This finding in our opinion is not
justified by the evidence. This contract was obtained by Menzi & Co., Inc., shortly before plaintiff's
contract with the defendant corporation expired. Plaintiff tried to get the Tabacalera contract for
himself. When this contract was filled, plaintiff had ceased to work for Menzi & Co., Inc., and he has no
right to participate in the profits derived therefrom.
Appellant's sixth assignment of error is that the trial court erred in finding the value of the good-will of
the fertilizer business in question to be P562,312, and that the plaintiff was entitled to 35 per cent thereof
or P196,709.20. In reaching this conclusion the trial court unfortunately relied on the opinion of the
accountant, Vernon Thompson, who assumed, erroneously as we have seen, that the plaintiff and
Menzi & Co., Inc., were partners; but even if they had been partners there would have been no good-
will to dispose of. The defendant corporation had a fertilizer business before it entered into any
agreement with the plaintiff; plaintiff's agreement was for a fixed period, five years, and during that
time the business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s warehouses
and after the expiration of plaintiff's contract Menzi & Co., Inc., continued its fertilizer business, as it had
a perfect right to do. There was really nothing to which any good-will could attach. Plaintiff maintains,
however, that the trade-marks used in the fertilizer business during the time that he was connected
with it acquired great value, and that they have been appropriated by the appellant to its own use.
That seems to be the only basis of the alleged good-will, to which a fabulous valuation was given. As
we have seen, the trade- marks were not new. They had been used by Behn, Meyer & Co. in its business
for other goods and one of them for fertilizer. They belonged to Menzi & Co., Inc., and were registered
in its name; only the expense of registering the formulas in the Bureau of Science was charged to the
business in which the plaintiff was interested. These trade-marks remained the exclusive property of
Menzi & Co., and the plaintiff had no interest therein on the expiration of his contract.
The balance due the plaintiff, as appears from Exhibit 52, is P21,633.20. We are satisfied by the evidence
that said balance is correct.
For the foregoing reasons, the decision appealed from is modified and the defendant corporation is
sentenced to pay the plaintiff twenty-one thousand, six hundred and thirty-three pesos and twenty
centavos (P21,633.20), with legal interest thereon from the date of the filing of the complaint on June
17, 1927, without a special finding as to costs.

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Republic of the Philippines

SUPREME COURT
SECOND DIVISION
G.R. No. 126881 October 3, 2000
HEIRS OF TAN ENG KEE, petitioners,
vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG
LAY,respondents.
DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March 13,
1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion
of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint
dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse
of the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio,
collectively known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother
TAN ENG LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional
Trial Court of Baguio City was for accounting, liquidation and winding up of the alleged partnership
formed after World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners
filed an amended complaint4 impleading private respondent herein BENGUET LUMBER COMPANY, as
represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated
May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan
Eng Lay, pooling their resources and industry together, entered into a partnership engaged in the
business of selling lumber and hardware and construction supplies. They named their enterprise
"Benguet Lumber" which they jointly managed until Tan Eng Kee's death. Petitioners herein averred
that the business prospered due to the hard work and thrift of the alleged partners. However, they
claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership "Benguet
Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a
ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the profits of the business.
Petitioners prayed for accounting of the partnership assets, and the dissolution, winding up and
liquidation thereof, and the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or
partners in a business venture and/or particular partnership called Benguet Lumber and as such
should share in the profits and/or losses of the business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet
Lumber Co. Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee
have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as
partner in a particular partnership have descended to the plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of
Benguet Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber
Company, Inc. so the plaintiffs know their proper share in the business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet
Lumber Company, Inc. until such time that said corporation is finally liquidated are directed to
submit the name of any person they want to be appointed as receiver failing in which this Court
will appoint the Branch Clerk of Court or another one who is qualified to act as such.
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g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing
the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the
assailed decision reversing the judgment of the trial court. Petitioners' motion for reconsideration 7 was
denied by the Court of Appeals in a Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and
Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners
complained that Exhibits "4" to "4-U" offered by the defendants before the trial court, consisting of
payrolls indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based on
the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870
against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged
falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial
Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment 9 dismissing the
cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO
FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS
NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES;
AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY
OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT
TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH
WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A
PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE
THE SECURITIES AND EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET
LUMBER COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF
BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST
BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER
WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE
ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A PARTNERSHIP
(PAGE 16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL
OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE

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EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND
NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not
be disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it must be
emphasized, does not include review of factual issues. Thus:
Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment
or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court
or other courts whenever authorized by law, may file with the Supreme Court a verified petition
for review on certiorari. The petition shall raise only questions of law which must be distinctly set
forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze
the evidentiary basis on which the lower court rendered judgment. Review of factual issues is therefore
warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and
such findings are contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered,
will justify a different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on which
they are based; and
(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence
but such findings are contradicted by the evidence on record.12
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs mentioned
only the existence of a partnership, the Court in turn went beyond that by justifying the existence
of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing between the
parties, equal proprietary interest and the exercise by the parties equally of the conduct of the
business, thus:
xxx xxx xxx
We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber
before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because
during the war, the entire stocks of the pre-war Benguet Lumber were confiscated if not burned
by the Japanese. After the war, because of the absence of capital to start a lumber and
hardware business, Lay and Kee pooled the proceeds of their individual businesses earned from
buying and selling military supplies, so that the common fund would be enough to form a
partnership, both in the lumber and hardware business. That Lay and Kee actually established
the Benguet Lumber in Baguio City, was even testified to by witnesses. Because of the pooling
of resources, the post-war Benguet Lumber was eventually established. That the father of the
plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the affairs of
the business during Kee's lifetime, jointly, (2) they were the ones giving orders to the employees,
(3) they were the ones preparing orders from the suppliers, (4) their families stayed together at
the Benguet Lumber compound, and (5) all their children were employed in the business in
different capacities.
xxx xxx xxx
It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm
account, no firm letterheads submitted as evidence, no certificate of partnership, no
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agreement as to profits and losses, and no time fixed for the duration of the partnership. There
was even no attempt to submit an accounting corresponding to the period after the war until
Kee's death in 1984. It had no business book, no written account nor any memorandum for that
matter and no license mentioning the existence of a partnership [citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification dated
March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the only registered owner of the
Benguet Lumber and Hardware. His application for registration, effective 1954, in fact
mentioned that his business started in 1945 until 1985 (thereafter, the incorporation). The
deceased, Kee, on the other hand, was merely an employee of the Benguet Lumber Company,
on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to "4-U",
inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he
was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the
proprietor.
xxx xxx xxx
We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any
form, but when an immovable is constituted, the execution of a public instrument becomes
necessary. This is equally true if the capitalization exceeds P3,000.00, in which case a public
instrument is also necessary, and which is to be recorded with the Securities and Exchange
Commission. In this case at bar, we can easily assume that the business establishment, which
from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded
P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a
compound. The execution of a public instrument, on the other hand, was never established by
the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and the
members of his family. There is no proof either that the capital assets of the partnership, assuming
them to be in existence, were maliciously assigned or transferred by Lay, supposedly to the
corporation and since then have been treated as a part of the latter's capital assets, contrary
to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room in the
bunk house in Trinidad, but within the compound of the lumber establishment, as testified to by
Tandoc; 2) that both Lay and Kee were seated on a table and were "commanding people" as
testified to by the son, Elpidio Tan; 3) that both were supervising the laborers, as testified to by
Victoria Choi; and 4) that Dionisio Peralta was supposedly being told by Kee that the proceeds
of the 80 pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or
written. However, if it involves real property or where the capital is P3,000.00 or more, the
execution of a contract is necessary; 2) the capacity of the parties to execute the contract; 3)
money property or industry contribution; 4) community of funds and interest, mentioning
equality of the partners or one having a proportionate share in the benefits; and 5) intention to
divide the profits, being the true test of the partnership. The intention to join in the business
venture for the purpose of obtaining profits thereafter to be divided, must be established. We
cannot see these elements from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged
that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we
have held that whether a partnership exists is a factual matter; consequently, since the appeal is
brought to us under Rule 45, we cannot entertain inquiries relative to the correctness of the assessment
of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial court had
reached conflicting conclusions, perforce we must examine the record to determine if the reversal was
justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A
contract of partnership is defined by law as one where:

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. . . two or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.14
Thus, in order to constitute a partnership, it must be established that (1) two or more persons
bound themselves to contribute money, property, or industry to a common fund, and (2) they
intend to divide the profits among themselves.15 The agreement need not be formally reduced
into writing, since statute allows the oral constitution of a partnership, save in two instances: (1)
when immovable property or real rights are contributed,16 and (2) when the partnership has a
capital of three thousand pesos or more.17 In both cases, a public instrument is required.18 An
inventory to be signed by the parties and attached to the public instrument is also indispensable
to the validity of the partnership whenever immovable property is contributed to the
partnership.19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it
said is akin to a particular partnership.20 A particular partnership is distinguished from a joint adventure,
to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although
the business of pursuing to a successful termination may continue for a number of years; a
partnership generally relates to a continuing business of various transactions of a certain kind.21
A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners,
in which each party has an equal proprietary interest in the capital or property contributed, and where
each party exercises equal rights in the conduct of the business."22 Nonetheless, in Aurbach, et. al. v.
Sanitary Wares Manufacturing Corporation, et. al.,23 we expressed the view that a joint venture may
be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable from the
partnership, since their elements are similar — community of interest in the business, sharing of
profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12
289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is
that the partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint venture
with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos
Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of
partnership but there is none. The alleged partnership, though, was never formally organized. In
addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was
allegedly formed sometime in 1945, although the contrary may well be argued that nothing prevented
the parties from complying with the provisions of the New Civil Code when it took effect on August 30,
1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A review of the record persuades us that

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the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by
petitioners falls short of the quantum of proof required to establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could
have expounded on the precise nature of the business relationship between them. In the absence of
evidence, we cannot accept as an established fact that Tan Eng Kee allegedly contributed his
resources to a common fund for the purpose of establishing a partnership. The testimonies to that effect
of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be noted that it is not with the
number of witnesses wherein preponderance lies;24 the quality of their testimonies is to be considered.
None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company,
except perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo. 25 He stated
that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to
get 80 pieces of G.I. sheets supposedly owned by both brothers.26 Tan Eng Lay, however, denied
knowledge of this meeting or of the conversation between Peralta and his brother.27 Tan Eng Lay
consistently testified that he had his business and his brother had his, that it was only later on that his
said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession
(specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in
existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners
share in the profits and losses.29 Each has the right to demand an accounting as long as the partnership
exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the partners at the
start of the business and all the partners are more interested in seeing the firm grow rather than get
immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in the situation in
the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to
take ordinary care of his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place,
she did not furnish any help or intervention in the management of the theatre. In the third
place, it does not appear that she has even demanded from defendant any accounting of the
expenses and earnings of the business. Were she really a partner, her first concern should have
been to find out how the business was progressing, whether the expenses were legitimate,
whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts
that a partner should have done; all that she did was to receive her share of P3,000.00 a month,
which cannot be interpreted in any manner than a payment for the use of the premises which
she had leased from the owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties considered
this offer as the real contract between them.33 [emphasis supplied]
A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee
appeared never to have made any such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting
to show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The
authenticity of these documents was questioned by petitioners, to the extent that they filed criminal
charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal cases were dismissed
for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received sums as wages
of an employee. In connection therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not
partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property which the returns
are derived;

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(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that
he is a partner in the business, but no such inference shall be drawn if such profits were received
in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee,
not a partner. Even if the payrolls as evidence were discarded, petitioners would still be back to square
one, so to speak, since they did not present and offer evidence that would show that Tan Eng Kee
received amounts of money allegedly representing his share in the profits of the enterprise. Petitioners
failed to show how much their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet
Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee and Tan Eng
Lay intended to divide the profits of the business between themselves, which is one of the essential
features of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership
from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees;
that both were supervising the employees; that both were the ones who determined the price at which
the stocks were to be sold; and that both placed orders to the suppliers of the Benguet Lumber
Company. They also point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at
the Benguet Lumber Company compound, a privilege not extended to its ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers and
privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet
Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his
subordinates. So long, therefore, that an employee's position is higher in rank, it is not unusual
that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the
owner, can order materials from suppliers for and in behalf of Benguet Lumber. Furthermore,
even a partner does not necessarily have to perform this particular task. It is, thus, not an
indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this
privilege was not accorded to other employees, the undisputed fact remains that Tan Eng Kee
is the brother of Tan Eng Lay. Naturally, close personal relations existed between them. Whatever
privileges Tan Eng Lay gave his brother, and which were not given the other employees, only
proves the kindness and generosity of Tan Eng Lay towards a blood relative.
(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection
with the pricing of stocks, this does not adequately prove the existence of a partnership relation
between them. Even highly confidential employees and the owners of a company sometimes
argue with respect to certain matters which, in no way indicates that they are partners as to
each other.35
In the instant case, we find private respondent's arguments to be well-taken. Where circumstances
taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective
effect of these circumstances may be such as to support a finding of the existence of the parties'
intent.36 Yet, in the case at bench, even the aforesaid circumstances when taken together are not
persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the
operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that
as a member of the family, he occupied a niche above the rank-and-file employees. He would have
enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber
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Company compound. He would have moral, if not actual, superiority over his fellow employees,
thereby entitling him to exercise powers of supervision. It may even be that among his duties is to place
orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus
to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even
in a business organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of.
Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is
hereby AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.

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FIRST DIVISION
G.R. No. 127405 September 20, 2001
MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:

The inherent powers of a Court to amend and control its processes and orders so as to make them
conformable to law and justice includes the right to reverse itself, especially when in its honest opinion
it has committed an error or mistake in judgment, and that to adhere to its decision will cause injustice
to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for Reconsideration
of our Decision dated October 4, 2000. They maintain that there was no partnership between petitioner
Belo, on the one hand, and respondent Nenita A. Anay, on the other hand; and that the latter being
merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo
acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed by respondent's
own witness, Elizabeth Bantilan, during her cross-examination. Furthermore, Bantilan testified that it was
Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William Belo
with Geminesse Enterprise?
A - William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.
Q - What do you mean by guarantor?
A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as
guarantor for us. We can borrow money from him.
Q - You mentioned a certain Peter Lo. Who is this Peter Lo?
A - Peter Lo is based in Singapore.
Q - What is the role of Peter Lo in the Geminesse Enterprise?
A - He is the one fixing our orders that open the L/C.
Q - You mean Peter Lo is the financier?
A - Yes, he is the financier.
Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I
correct?
A - Yes, sir2
The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled
that the business relationship created between petitioner Tocao and respondent Anay was an informal
partnership, which was not even recorded with the Securities and Exchange Commission. As such, it
was understandable that Belo, who was after all petitioner Tocao's good friend and confidante, would
occasionally participate in the affairs of the business, although never in a formal or official
capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence in
Geminesse Enterprise's meetings was merely as guarantor of the company and to help petitioner
Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the
business enterprise. Respondent herself professed lack of knowledge that petitioner Belo received any
share in the net income of the partnership.5 On the other hand, petitioner Tocao declared that
petitioner Belo was not entitled to any share in the profits of Geminesse Enterprise.6 With no
participation in the profits, petitioner Belo cannot be deemed a partner since the essence of a
partnership is that the partners share in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent had
no cause of action against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad faith
for failing to account for stocks of Geminesse Enterprise amounting to P208,250.00 and that,
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accordingly, her claim for damages should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondent's sudden ouster from the partnership by petitioner
Tocao, her act of withholding whatever stocks were in her possession and control was justified, if only
to serve as security for her claims against the partnership. However, while we do not agree that the
same renders private respondent in bad faith and should bar her claim for damages, we find that the
said sum of P208,250.00 should be deducted from whatever amount is finally adjudged in her favor on
the basis of the formal account of the partnership affairs to be submitted to the Regional Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY
GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS the complaint, docketed as
Civil Case No. 88-509, as against petitioner William T. Belo only. The sum of P208,250.00 shall be
deducted from whatever amount petitioner Marjorie Tocao shall be held liable to pay respondent
after the normal accounting of the partnership affairs.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-12541 August 28, 1959
ROSARIO U. YULO, assisted by her husband JOSE C. YULO, plaintiffs-appellants,
vs.
YANG CHIAO SENG, defendant-appellee.
Punzalan, Yabut, Eusebio & Tiburcio for appellants.
Augusto Francisco and Julian T. Ocampo for appellee.
LABRADOR, J.:

Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan, presiding,
dismissing plaintiff's complaint as well as defendant's counterclaim. The appeal is prosecuted by
plaintiff.
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the palintiff
Mrs. Rosario U. Yulo, proposing the formation of a partnership between them to run and operate a
theatre on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila. The principal
conditions of the offer are (1) that Yang Chiao Seng guarantees Mrs. Yulo a monthly participation of
P3,000 payable quarterly in advance within the first 15 days of each quarter, (2) that the partnership
shall be for a period of two years and six months, starting from July 1, 1945 to December 31, 1947, with
the condition that if the land is expropriated or rendered impracticable for the business, or if the owner
constructs a permanent building thereon, or Mrs. Yulo's right of lease is terminated by the owner, then
the partnership shall be terminated even if the period for which the partnership was agreed to be
established has not yet expired; (3) that Mrs. Yulo is authorized personally to conduct such business in
the lobby of the building as is ordinarily carried on in lobbies of theatres in operation, provided the said
business may not obstruct the free ingress and agrees of patrons of the theatre; (4) that after December
31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but if the partnership
agreement is terminated before the lapse of one and a half years period under any of the causes
mentioned in paragraph (2), then Yang Chiao Seng shall have the right to remove and take away all
improvements that the partnership may place in the premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a partnership
agreement establishing the "Yang & Company, Limited," which was to exist from July 1, 1945 to
December 31, 1947. It states that it will conduct and carry on the business of operating a theatre for
the exhibition of motion and talking pictures. The capital is fixed at P100,000, P80,000 of which is to be
furnished by Yang Chiao Seng and P20,000, by Mrs. Yulo. All gains and profits are to be distributed
among the partners in the same proportion as their capital contribution and the liability of Mrs. Yulo, in
case of loss, shall be limited to her capital contribution (Exh. "B").
In June , 1946, they executed a supplementary agreement, extending the partnership for a period of
three years beginning January 1, 1948 to December 31, 1950. The benefits are to be divided between
them at the rate of 50-50 and after December 31, 1950, the showhouse building shall belong exclusively
to the second party, Mrs. Yulo.
The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia Carrion
Santa Marina and Maria Carrion Santa Marina. In the contract of lease it was stipulated that the lease
shall continue for an indefinite period of time, but that after one year the lease may be cancelled by
either party by written notice to the other party at least 90 days before the date of cancellation. The
last contract was executed between the owners and Mrs. Yulo on April 5, 1948. But on April 12, 1949,
the attorney for the owners notified Mrs. Yulo of the owner's desire to cancel the contract of lease on
July 31, 1949. In view of the above notice, Mrs. Yulo and her husband brought a civil action to the Court
of First Instance of Manila on July 3, 1949 to declare the lease of the premises. On February 9, 1950, the
Municipal Court of Manila rendered judgment ordering the ejectment of Mrs. Yulo and Mr. Yang. The
judgment was appealed. In the Court of First Instance, the two cases were afterwards heard jointly,
and judgment was rendered dismissing the complaint of Mrs. Yulo and her husband, and declaring the
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contract of lease of the premises terminated as of July 31, 1949, and fixing the reasonable monthly
rentals of said premises at P100. Both parties appealed from said decision and the Court of Appeals,
on April 30, 1955, affirmed the judgment.
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of the
business. Yang answered the letter saying that upon the advice of his counsel he had to suspend the
payment (of the rentals) because of the pendency of the ejectment suit by the owners of the land
against Mrs. Yulo. In this letter Yang alleges that inasmuch as he is a sublessee and inasmuch as Mrs.
Yulo has not paid to the lessors the rentals from August, 1949, he was retaining the rentals to make
good to the landowners the rentals due from Mrs. Yulo in arrears (Exh. "E").
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this action on
May 26, 1954, alleging the existence of a partnership between them and that the defendant Yang
Chiao Seng has refused to pay her share from December, 1949 to December, 1950; that after
December 31, 1950 the partnership between Mrs. Yulo and Yang terminated, as a result of which,
plaintiff became the absolute owner of the building occupied by the Cine Astor; that the reasonable
rental that the defendant should pay therefor from January, 1951 is P5,000; that the defendant has
acted maliciously and refuses to pay the participation of the plaintiff in the profits of the business
amounting to P35,000 from November, 1949 to October, 1950, and that as a result of such bad faith
and malice on the part of the defendant, Mrs. Yulo has suffered damages in the amount of P160,000
and exemplary damages to the extent of P5,000. The prayer includes a demand for the payment of
the above sums plus the sum of P10,000 for the attorney's fees.
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and the
defendant was one of lease and not of partnership; that the partnership was adopted as a subterfuge
to get around the prohibition contained in the contract of lease between the owners and the plaintiff
against the sublease of the said property. As to the other claims, he denies the same and alleges that
the fair rental value of the land is only P1,100. By way of counterclaim he alleges that by reason of an
attachment issued against the properties of the defendant the latter has suffered damages amounting
to P100,000.
The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The court heard
evidence of the plaintiff in the absence of the defendant and thereafter rendered judgment ordering
the defendant to pay to the plaintiff P41,000 for her participation in the business up to December, 1950;
P5,000 as monthly rental for the use and occupation of the building from January 1, 1951 until
defendant vacates the same, and P3,000 for the use and occupation of the lobby from July 1, 1945
until defendant vacates the property. This decision, however, was set aside on a motion for
reconsideration. In said motion it is claimed that defendant failed to appear at the hearing because
of his honest belief that a joint petition for postponement filed by both parties, in view of a possible
amicable settlement, would be granted; that in view of the decision of the Court of Appeals in two
previous cases between the owners of the land and the plaintiff Rosario Yulo, the plaintiff has no right
to claim the alleged participation in the profit of the business, etc. The court, finding the above motion,
well-founded, set aside its decision and a new trial was held. After trial the court rendered the decision
making the following findings: that it is not true that a partnership was created between the plaintiff
and the defendant because defendant has not actually contributed the sum mentioned in the Articles
of Partnership, or any other amount; that the real agreement between the plaintiff and the defendant
is not of the partnership but one of the lease for the reason that under the agreement the plaintiff did
not share either in the profits or in the losses of the business as required by Article 1769 of the Civil Code;
and that the fact that plaintiff was granted a "guaranteed participation" in the profits also belies the
supposed existence of a partnership between them. It. therefore, denied plaintiff's claim for damages
or supposed participation in the profits.
As to her claim for damages for the refusal of the defendant to allow the use of the supposed lobby of
the theatre, the court after ocular inspection found that the said lobby was very narrow space leading
to the balcony of the theatre which could not be used for business purposes under existing ordinances
of the City of Manila because it would constitute a hazard and danger to the patrons of the theatre.
The court, therefore, dismissed the complaint; so did it dismiss the defendant's counterclaim, on the

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ground that the defendant failed to present sufficient evidence to sustain the same. It is against this
decision that the appeal has been prosecuted by plaintiff to this Court.
The first assignment of error imputed to the trial court is its order setting aside its former decision and
allowing a new trial. This assignment of error is without merit. As that parties agreed to postpone the
trial because of a probable amicable settlement, the plaintiff could not take advantage of
defendant's absence at the time fixed for the hearing. The lower court, therefore, did not err in setting
aside its former judgment. The final result of the hearing shown by the decision indicates that the setting
aside of the previous decision was in the interest of justice.
In the second assignment of error plaintiff-appellant claims that the lower court erred in not striking out
the evidence offered by the defendant-appellee to prove that the relation between him and the
plaintiff is one of the sublease and not of partnership. The action of the lower court in admitting
evidence is justified by the express allegation in the defendant's answer that the agreement set forth
in the complaint was one of lease and not of partnership, and that the partnership formed was
adopted in view of a prohibition contained in plaintiff's lease against a sublease of the property.
The most important issue raised in the appeal is that contained in the fourth assignment of error, to the
effect that the lower court erred in holding that the written contracts, Exhs. "A", "B", and "C, between
plaintiff and defendant, are one of lease and not of partnership. We have gone over the evidence
and we fully agree with the conclusion of the trial court that the agreement was a sublease, not a
partnership. The following are the requisites of partnership: (1) two or more persons who bind
themselves to contribute money, property, or industry to a common fund; (2) intention on the part of
the partners to divide the profits among themselves. (Art. 1767, Civil Code.).
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not
furnish any help or intervention in the management of the theatre. In the third place, it does not appear
that she has ever demanded from defendant any accounting of the expenses and earnings of the
business. Were she really a partner, her first concern should have been to find out how the business
was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She
was absolutely silent with respect to any of the acts that a partner should have done; all that she did
was to receive her share of P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always
acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows that
both parties considered this offer as the real contract between them.
Plaintiff claims the sum of P41,000 as representing her share or participation in the business from
December, 1949. But the original letter of the defendant, Exh. "A", expressly states that the agreement
between the plaintiff and the defendant was to end upon the termination of the right of the plaintiff
to the lease. Plaintiff's right having terminated in July, 1949 as found by the Court of Appeals, the
partnership agreement or the agreement for her to receive a participation of P3,000 automatically
ceased as of said date.
We find no error in the judgment of the court below and we affirm it in toto, with costs against plaintiff-
appellant.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9996 October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
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.
CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed
and the petition for review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together
with their personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property has
an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property
has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m.
including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of
1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista
to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all
letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks
for them;
7. That after having bought the above-mentioned real properties the petitioners had the same
rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which
amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental
income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of
P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:
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INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and P6,157.09

compromise

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question, with costs against the
respondent.
After appropriate proceedings, the Court of Tax Appeals the 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:

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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: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general copartnerships. (compañias
colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
properly, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of
another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioners in February,
1943. In other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business and
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even
try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
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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
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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.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B.
OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

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

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gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned

from the following year-end balances:
Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept by Lorenzo T. 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 purposes their shares in the net income derived from
said properties and securities and/or from transactions involving them (Exhibit 3, supra;
t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo
T. Oña who, as heretofore pointed out, invested them in real properties and securities.
(See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)
decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and
P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that they have
formed an unregistered partnership. Finding no merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June
12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23

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Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692,
Jan. 6, 1958, so that the questioned assessment refers solely to the income tax proper for
the years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously
referring to the compromise in lieu of the criminal liability for failure of petitioners to file
the corporate income tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp.
1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM
THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by
the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by
them from the deceased Julia Buñales and the profits derived from transactions involving the same,
or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24
and 84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a common fund the profits earned
by the properties owned by them in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares in the inheritance are concerned,
the total income thereof should be considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not
the various amounts already paid by them for the same years 1955 and 1956 as individual income
taxes on their respective shares of the profits accruing from the properties they owned in common be
deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered
partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was
judicially approved as early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the administration or
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management of the head of the family, the widower and father 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 Revenue
did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such being the case, and We see no
reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-
owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed
earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves
pursuant to the project of partition approved in 1949, "the properties remained under the management
of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceed from the sales thereof in real properties and securities," as
a result of which said properties and investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these became
possible because, admittedly, petitioners never actually received any share of the income or profits
from Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the common
fund for their ventures, even as they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as reported by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise
admitted that all the profits from these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these circumstances, it is Our considered
view that from the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common
fund in undertaking several transactions or in business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered
as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them becoming thereby
unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until
the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that
after knowing their respective shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of anyone chosen by them and
engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs
in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal
Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-partnership.
As already indicated, for tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined in a project partition either duly
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executed in an extrajudicial settlement or approved by the court in the corresponding testate or

intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and the incomes thereof, for each of
them to manage and dispose of as exclusively his own without the intervention of the other heirs, and,
accordingly he becomes liable individually for all taxes in connection therewith. If after such partition,
he allows his share to be held in common with his co-heirs under a single management to be used with
the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that:
"The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the returns are derived," and,
for that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra,
this Court clearly differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under Sections 24 and 84(b) of the
National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on
this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships," which constitute precisely one
of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created
or organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporation. Again, pursuant to said section 84(b),the term "corporation"
includes, among others, "joint accounts,(cuentas en participacion)" and "associations",
none of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition
essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... .
(7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships — with the exception only of duly registered general copartnerships
— within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.
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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
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corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed
what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons
who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm
with costs against petitioners.

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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
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

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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;

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(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 Appeals14 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;
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(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.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24193 June 28, 1968
MAURICIO AGAD, plaintiff-appellant,
vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:

In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First Instance
of Davao, we are called upon to determine the applicability of Article 1773 of our Civil Code to the
contract of partnership on which the complaint herein is based.
Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August
29, 1952, copy of which is attached to the complaint as Annex "A" — partners in a fishpond business,
to the capital of which Agad contributed P1,000, with the right to receive 50% of the profits; that from
1952 up to and including 1956, Mabato who handled the partnership funds, had yearly rendered
accounts of the operations of the partnership; and that, despite repeated demands, Mabato had
failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his complaint against
Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the partnership for the
period from 1957 to 1963, in addition to P1,000 as attorney's fees, and ordering the dissolution of the
partnership, as well as the winding up of its affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of
said partnership, upon the ground that the contract therefor had not been perfected, despite the
execution of Annex "A", because Agad had allegedly failed to give his P1,000 contribution to the
partnership capital. Mabato prayed, therefore, that the complaint be dismissed; that Annex "A" be
declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary damages,
as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause
of action and that the lower court had no jurisdiction over the subject matter of the case, because it
involves principally the determination of rights over public lands. After due hearing, the court issued
the order appealed from, granting the motion to dismiss the complaint for failure to state a cause of
action. This conclusion was predicated upon the theory that the contract of partnership, Annex "A", is
null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond referred in
said instrument had not been attached thereto. A reconsideration of this order having been denied,
Agad brought the matter to us for review by record on appeal.
Articles 1771 and 1773 of said Code provide:
Art. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto,
if inventory of said property is not made, signed by the parties; and attached to the public
instrument.
The issue before us hinges on whether or not "immovable property or real rights" have
been contributed to the partnership under consideration. Mabato alleged and the lower court held
that the answer should be in the affirmative, because "it is really inconceivable how a partnership
engaged in the fishpond business could exist without said fishpond property (being) contributed to the
partnership." It should be noted, however, that, as stated in Annex "A" the partnership was established
"to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the partners
contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum
of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
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That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency,
of which One Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One
Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither said
fishpond nor a real right thereto was contributed to the partnership or became part of the capital
thereof, even if a fishpond or a real right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order appealed
from should be, as it is hereby set aside and the case remanded to the lower court for further
proceedings, with the costs of this instance against defendant-appellee, Severino Mabato. It is so
ordered.

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Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. NOS. 166299-300 December 13, 2005
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, 2004 1 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.
4.02 In addition . . . the joint venture/partnership … had also acquired [various other assets], but
Eduardo caused to 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

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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 agreed
to do, if any, under Annex "A-1", are unenforceable under the provisions of the Statute of Frauds.7
For his part, Yang - who was served with summons long after the other defendants submitted their
answer – moved 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.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative Defenses.9 To this motion,
petitioner interposed an Opposition with ex-Parte Motion to Set the Case for Pre-trial.10
Acting on the separate motions immediately adverted to above, the trial court, in an Omnibus Order
dated March 5, 2003, denied the affirmative defenses and, except for Yang, set the case for pre-trial
on April 10, 2003.11
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:
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek reconsideration of
the April 2, 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
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court, the first denying his motion to dismiss the basic complaint and, the second, denying his motion
for reconsideration.
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.
Following the submission by the parties of their respective Memoranda of Authorities, the appellate
court came out with the herein assailed Decision dated March 31, 2004, finding for Eduardo and Yang,
as lead petitioners therein, disposing as follows:
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of certiorari in these
consolidated 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.
SO ORDERED.17 (Emphasis in the original; words in bracket added.)
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".
In time, petitioner moved for reconsideration but his motion was denied by the CA in its equally
assailed Resolution of December 7, 2004.18 .
Hence, petitioner’s present recourse, on the contention that the CA erred:
A. When it ruled that there was no partnership created by the actionable document because this was
not a public instrument and immovable properties were contributed to the partnership.
B. When it ruled that the actionable document did not create a demandable right in favor of
petitioner.
C. When it ruled that the complaint stated no cause of action against [respondent] Robert Yang; and
D. When it ruled that petitioner has changed his theory on appeal when all that Petitioner had done
was to support his pleaded cause of action by another legal perspective/argument.
The petition lacks merit.
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 conducted of what he deems to be partnership/joint venture property.19
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
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:
Art. 1771. A partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary.
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Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities
and Exchange Commission.
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.
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.
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 involving more than P3,000.00 in money or property, Annex "A-
1" cannot be presented for notarization, let alone 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 Decision 26 about the
probative value and legal effect of Annex "A-1" commends itself for concurrence:
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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,28since 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).
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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)
It is at once apparent that what respondent Eduardo imposed upon himself under the above passage,
if he indeed wrote Annex "A-1", is a promise which is not to be performed within one year from
"contract" execution on June 22, 1973. Accordingly, the agreement embodied in Annex "A-1" is
covered by the Statute of Frauds and ergounenforceable for non-compliance therewith.30 By force of
the statute of frauds, an agreement that by its terms is not to be performed within a year from the
making thereof shall be unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing and subscribed by the party charged. Corollarily, no action can be proved unless
the requirement exacted by the statute of frauds is complied with.31
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family
businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated
amount or the equity 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 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
In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific performance
anchored on an actionable document of partnership which is legally inexistent or void or, at best,
unenforceable does not state a cause of action as against respondent Eduardo and the corporate
defendants. And if no of action can successfully 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.
As may be noted, petitioner has not, in his complaint, provide the logical nexus that would tie Yang to
him as his partner. In fact, attendant circumstances would indicate the contrary. Consider:
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 Eduardo." 33 But Yang denies kinship with the Litonjua family and petitioner has not
disputed the disclaimer.
2. In some detail, petitioner mentioned what he had contributed to the joint venture/partnership with
Eduardo and 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 by the CA, the actionable document did not contain
such provision, let alone mention the name of Yang. How, indeed, could a person be considered a
partner when the document purporting to establish the partnership contract did not even mention his
name.
3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business partners in the
[respondent] corporations," while "Bobby is his and Eduardo’s partner in their Odeon Theater
investment’ (par. 2.03). This means that the partnership between petitioner and Eduardo came first;
Yang became their partner in their Odeon Theater investment thereafter. Several paragraphs later,
however, petitioner would contradict himself by alleging that his "investment and that of Eduardo and
Yang in the Odeon theater business has expanded through a reinvestment of profit income and direct
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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 refers to the corporate respondents as "progeny" of the Odeon Theatre business.34
Needless to stress, petitioner has not sufficiently established in his complaint the legal vinculum whence
he sourced his right to drag Yang into the fray. The Court of Appeals, in its assailed decision, captured
and formulated the legal situation in the following wise:
[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
Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with petitioner and the
…respondent. However, there was NO allegation in the complaint which directly alleged how the
supposed contractual relation was created between [petitioner] and …Yang. More importantly,
however, the foregoing ruling of this Court that the purported partnership between [Eduardo] is void
and legally inexistent directly affects said claim against …Yang. Since [petitioner] is trying to establish
his claim against … Yang by linking him to the legally inexistent partnership . . . such attempt had
become futile because there was NOTHING that would contractually connect [petitioner] and …
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 investment in the Odeon Theater. A statement of facts on those
matters is pivotal to the complaint as they would constitute the ultimate facts necessary to establish
the elements of a cause of action against … Yang. 35
Pressing its point, the CA later stated in its resolution denying petitioner’s motion for reconsideration the
following:
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 … that insofar as [Yang] is concerned, he is not even mentioned in the
said actionable document. We are therefore puzzled how a person not mentioned in a document
purporting to establish a partnership could be considered a partner.36 (Words in bracket ours).
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 venture/partnership theory which he adopted and consistently
pursued in his complaint, petitioner embraced the 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:
8. Whether or not the actionable document creates a partnership, joint venture, or whatever, is a legal
matter. What 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 may be noted that one kind of innominate contract is
what is known as du ut facias (I give that you may do).37
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).38
Springing surprises on the opposing party is offensive to the sporting idea of fair play, justice and due
process; hence, the proscription against a party shifting from one theory at the trial court to a new and
different theory in the appellate court.39 On the same rationale, an issue which was neither averred in
the complaint cannot be raised for the first time on appeal.40 It is not difficult, therefore, to agree with
the CA when it made short shrift of petitioner’s innominate contract theory on the basis of the foregoing
basic reasons.
Petitioner’s protestation that his act of introducing the concept of innominate contract was not a case
of changing 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
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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 paragraphs later, in the same notion, petitioner
faults the appellate court for reading, with myopic eyes, the actionable document solely as
establishing a partnership/joint venture. Verily, the cited paragraphs are a study of a 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. and [petitioner], no immovables were contributed to this partnership. xxx
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 his document does not create a partnership or a joint venture. This is
… a myopic reading of the actionable document.
Per the Court’s own count, petitioner used in his complaint the mixed words "joint venture/partnership"
nineteen (19) 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 properties of their joint venture/partnership". Given this
consideration, petitioner’s right of action against respondents Eduardo and Yang doubtless pivots on
the existence of the partnership between the three of them, as purportedly evidenced by the undated
and unsigned Annex "A-1". A void Annex "A-1", as an actionable document of partnership, 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.
WHEREFORE, the instant petition is DENIED and the impugned Decision and Resolution of the Court of
Appeals AFFIRMED.
Cost against the petitioner.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-25532 February 28, 1969
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947
by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as
the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the
partnership. On 1 October 1947, the limited partnership was registered with the Securities and
Exchange Commission. The firm engaged, among other activities, in the importation, marketing,
distribution and operation of automatic phonographs, radios, television sets and amusement
machines, their parts and accessories. It had an office and held itself out as a limited partnership,
handling and carrying merchandise, using invoices, bills and letterheads bearing its trade-name,
maintaining its own books of accounts and bank accounts, and had a quota allocation with the
Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale
was duly recorded with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by the
herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment,
consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig
resulting in a determination of a deficiency income tax against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in
accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed
to the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965,
reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax
court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William
J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav
Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig
and their subsequent acquisition of the interests of remaining partner Carlson in the partnership
dissolved the limited partnership, and if they did not, the fiction of juridical personality of the partnership
should be disregarded for income tax purposes because the spouses have exclusive ownership and
control of the business; consequently the income tax return of respondent Suter for the years in question
should have included his and his wife's individual incomes and that of the limited partnership, in
accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:
(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-
residents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....
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In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948
is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New Civil
Code, and that since its juridical personality had not been affected and since, as a limited partnership,
as contra distinguished from a duly registered general partnership, it is taxable on its income similarly
with corporations, Suter was not bound to include in his individual return the income of the limited
partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant
upon the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws
of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under
the Civil Code, which applies in the absence of express provision in the Code of Commerce,
persons prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners necessarily
brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the
Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947),
a universal partnership requires either that the object of the association be all the present property of
the partners, as contributed by them to the common fund, or else "all that the partners may acquire
by their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was
not such a universal partnership, since the contributions of the partners were fixed sums of money,
P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were
forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition,
1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid
Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero
o podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos
a la tesis permisiva de los contratos de sociedad particular entre esposos, ya que ningun
precepto de nuestro Codigo los prohibe, y hay que estar a la norma general segun la que toda
persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su resolution
de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one
of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig
were separately owned and contributed by them before their marriage; and after they were joined in
wedlock, such contributions remained their respective separate property under the Spanish Civil Code
(Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality
of its own, distinct and separate from that of its partners (unlike American and English law that does
not recognize such separate juridical personality), the bypassing of the existence of the limited
partnership as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and
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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.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-33580 February 6, 1931
MAXIMILIANO SANCHO, plaintiff-appellant,
vs.
SEVERIANO LIZARRAGA, defendant-appellee.
Jose Perez Cardenas and Jose M. Casal for appellant.
Celso B. Jamora and Antonio Gonzalez for appellee.
ROMUALDEZ, J.:

The plaintiff brought an action for the rescission of a partnership contract between himself and the
defendant, entered into on October 15, 1920, the reimbursement by the latter of his 50,000 peso
investment therein, with interest at 12 per cent per annum form October 15, 1920, with costs, and any
other just and equitable remedy against said defendant.
The defendant denies generally and specifically all the allegations of the complaint which are
incompatible with his special defenses, cross-complaint and counterclaim, setting up the latter and
asking for the dissolution of the partnership, and the payment to him as its manager and administrator
of P500 monthly from October 15, 1920, until the final dissolution, with interest, one-half of said amount
to be charged to the plaintiff. He also prays for any other just and equitable remedy.
The Court of First Instance of Manila, having heard the cause, and finding it duly proved that the
defendant had not contributed all the capital he had bound himself to invest, and that the plaintiff
had demanded that the defendant liquidate the partnership, declared it dissolved on account of the
expiration of the period for which it was constituted, and ordered the defendant, as managing partner,
to proceed without delay to liquidate it, submitting to the court the result of the liquidation together
with the accounts and vouchers within the period of thirty days from receipt of notice of said judgment,
without costs.
The plaintiff appealed from said decision making the following assignments of error:
1. In holding that the plaintiff and appellant is not entitled to the rescission of the partnership
contract, Exhibit A, and that article 1124 of the Civil Code is not applicable to the present case.
2. In failing to order the defendant to return the sum of P50,000 to the plaintiff with interest from
October 15, 1920, until fully paid.
3. In denying the motion for a new trial.
In the brief filed by counsel for the appellee, a preliminary question is raised purporting to show that
this appeal is premature and therefore will not lie. The point is based on the contention that inasmuch
as the liquidation ordered by the trial court, and the consequent accounts, have not been made and
submitted, the case cannot be deemed terminated in said court and its ruling is not yet appealable.
In support of this contention counsel cites section 123 of the Code of Civil Procedure, and the decision
of this court in the case of Natividad vs. Villarica (31 Phil., 172).
This contention is well founded. Until the accounts have been rendered as ordered by the trial court,
and until they have been either approved or disapproved, the litigation involved in this action cannot
be considered as completely decided; and, as it was held in said case of Natividad vs .Villarica, also
with reference to an appeal taken from a decision ordering the rendition of accounts following the
dissolution of partnership, the appeal in the instant case must be deemed premature.
But even going into the merits of the case, the affirmation of the judgment appealed from is inevitable.
In view of the lower court's findings referred to above, which we cannot revise because the parol
evidence has not been forwarded to this court, articles 1681 and 1682 of the Civil Code have been
properly applied. Owing to the defendant's failure to pay to the partnership the whole amount which
he bound himself to pay, he became indebted to it for the remainder, with interest and any damages
occasioned thereby, but the plaintiff did not thereby acquire the right to demand rescission of the
partnership contract according to article 1124 of the Code. This article cannot be applied to the case
in question, because it refers to the resolution of obligations in general, whereas article 1681 and 1682
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specifically refer to the contract of partnership in particular. And it is a well known principle that special
provisions prevail over general provisions.
By virtue of the foregoing, this appeal is hereby dismissed, leaving the decision appealed from in full
force, without special pronouncement of costs. So ordered.

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