CASE #01:

FIRST DIVISION

[G.R. No. 2484. April 11, 1906.]

JOHN FORTIS, plaintiff-appellee, vs. GUTIERREZ HERMANOS, defendants-

appellants.

Hartigan, Rohde & Gutierrez, for appellants. W. A. Kincaid, for appellee.

2. PARTNERSHIP; MANAGER; BOOKKEEPER; CONTRACT; VALIDITY. — The

general manager of a general partnership has authority to employ a
bookkeeper, and a contract thus made in 1900 was valid, though not in
writing.

3. CONTRACT; BOOKKEEPER; SALARY. — By the terms of the contract the

salary of the bookkeeper was to be 5 per cent of the net profits of the business:
Held, That this contract did not make the bookkeeper a partner.

DECISION

WILLARD, J p:

John Fortis, an employee of Gutierrez Hermanos during the years 1900, 1901,
and 1902, brought this action to recover a balance due him as salary for the
year 1902. He alleged that he was entitled, as salary, to 5 percent of the net
profits of the business of the defendants for said year. The complaint also
contained a cause of action for the sum of 600 pesos, money expended by
plaintiff for the defendants during the year 1903. The court below, in its
judgment, found that the contract had been made as claimed by the plaintiff;
that 5 per cent of the net profits of the business for the year 1902 amounted to
26,378.68 pesos, Mexican currency; that the plaintiff had received on account
of such salary 12,811.75 pesos, Mexican currency, and ordered judgment
against the defendants for the sum 13,566.93 pesos, Mexican currency, with
interest thereon from December 31, 1904. The court also ordered judgment
against the defendants for the 600 pesos mentioned in the complaint, and
interest thereon. The total judgment rendered against the defendants in favor
of the plaintiff, reduced to Philippine currency, amounted to P13,025.40. The
defendants moved for a new trial, which was denied, and they have brought the
case here by bill of exceptions.

(1) The evidence is sufficient to support the finding of the court below to the
effect that the plaintiff worked for the defendants during the year 1902 under a
contract by which he was to receive as compensation 5 percent of the net
profits of the business. The contract was made on the part of the defendants by
Miguel Alonzo Gutierrez. By the provisions of the articles of partnership he was
made one of the managers of the company, with full power to transact all of the
business thereof. As such manager he had authority to make a contract of
employment with the plaintiff.

(2) Before answering in the court below, the defendants presented a motion
that the complaint be made more definite and certain. This motion was denied.
To the order denying it the defendants excepted, and they have assigned as
error such ruling of the court below. There is nothing in the record to show
that the defendants were in any way prejudiced by this ruling of the court
below. If it were error it was error without prejudice, and not ground for
reversal. (Sec. 503, Code of Civil Procedure.)

(3) It is claimed by the appellants that the contract alleged in the complaint
made the Fortis a copartner of the Gutierrez Hermanos in the business which
they were carrying on. This contention cannot be sustained.

It was a mere contract of employment. Fortis had no voice nor vote in the
management of the affairs of the company. The fact that the compensation
received by him was to be determined with reference to the profits made by the
defendants in their business did not in any sense make by a partner therein.
The articles of partnership between the defendants provided that the profits
should be divided among the partners named in a certain proportion. The
contract made between the plaintiff and the then manager of the defendant
partnership did not in any way vary or modify this provision of the articles of
partnership. The profits of the business could not be determined until all of the
expenses had been paid. A part of the expenses to be paid for the year 1902
was the salary of the plaintiff. That salary had to be deducted before the net
profits of the business, which were to be divided among the partners, could be
ascertained. It was undoubtedly necessary in order to determine what the
salary of the plaintiff was, to determine what the profits of the business were,
after paying all of the expenses except his, but that determination was not the
final determination of the net profits of the business. It was made for the
purpose of fixing the basis upon which his compensation should be
determined.

(4) It was no necessary that the contract between the plaintiff and the
defendants should be made in writing. (Thunga Chui vs. Que Bentec, 1 1 Off.
Gaz., 818, October 8, 1903.)

(5) It appeared that Miguel Alonzo Gutierrez, with whom the plaintiff had made
the contract, had died prior to the trial of the action, and the defendants claim
that by reasons of the provisions of section 383, paragraph 7, of the Code of
Civil Procedure, plaintiff could not be a witness at the trial. That paragraph
provides that parties to an action against an executor or administrator upon a
claim or demand against the estate of a deceased person can not testify as to
any matter of fact occurring before the death of such deceased person. This
action was not brought against the administrator of Miguel Alonzo, nor was it
brought upon a claim against his estate. It was brought against a partnership
which was in existence at the time of the trial of the action, and which was
juridical person. The fact that Miguel Alonzo had been a partner in this
company, and that his interest therein might be affected by the result of this
suit, is not sufficient to bring the case within the provisions of the section
above cited.

(6) The plaintiff was allowed to testify against the objection and exception of the
defendants, that he had been paid as salary for the year 1900 a part of the
pro􏰀ts of the business. This evidence was competent for the purpose of
corroborating the testimony of the plaintiff as to the existence of the contract
set out in the complaint.

(7) The plaintiff was allowed to testify as to the contents of a certain letter
written by Miguel Gutierrez, one of the partners in the defendant company, to
Miguel Alonzo Gutierrez, another partner, which letter was read to plaintiff by
Miguel Alonzo. It is not necessary to inquire whether the court committed an
error in admitting this evidence. The case already made by the plaintiff was in
itself suf􏰀cient to prove the contract without reference to this letter. The error,
if any there were, was not prejudicial, and is not ground for reversal. (Sec. 503,
Code of Civil Procedure.)

(8) For the purpose of proving what the profits of the defendants were for the
year 1902, the plaintiff presented in evidence the ledger of defendants, which
contained an entry made on the 31st of December, 1902, as follows:

"Perdidas y Ganancias ...................................... a Varios Ps. 527,573.66

Utilidades liquidas obtenidas durante el ano y que abonamos conforme a la
proporcion que hemos establecido segun el convenio de sociedad."

The defendant presented as a witness on, the subject of pro􏰀ts Miguel

Gutierrez, one of the defendants, who testi􏰀ed, among other things, that there
were no pro􏰀ts during the year 1902, but, on the contrary, that the company
suffered considerable loss during that year. We do not think the evidence of
this witness suf􏰀ciently de􏰀nite and certain to overcome the positive evidence
furnished by the books of the defendants themselves.

(9) In reference to the cause of action relating to the 600 pesos, it appears that
the plaintiff left the employ of the defendants on the 19th of March, 1903; that
at their request he went to Hongkong, and was there for about two months
looking after the business of the defendants in the matter of the repair of a
certain steamship. The appellants in their brief say that the plaintiff is entitled
to no compensation for his services thus rendered, because by the provisions of
article 1711 of the Civil Code, in the absence of an agreement to the contrary,
the contract of agency is supposed to be gratuitous. That article i not
applicable to this case, because the amount of 600 pesos not claimed as
compensation for services but as a reimbursement for money expended by the
plaintiff in the business of the defendants. The article of the code that is
applicable is article 1728.

The judgment of the court below is af􏰀rmed, with the costs, of this instance
against the appellants. After the expiration of twenty days from the date of this
decision let 􏰀nal judgment be entered herein, and ten days thereafter let the
case be remanded to the lower court for execution. So ordered.

Arellano, C. J., Torres, Mapa, Johnson, and Carson, JJ., concur. Footnotes

CD Technologies Asia, Inc. © 2016 cdasiaonline.com

1. 2 Phil. Rep., 561.

CASE #02:

THIRD DIVISION

[G.R. No. 136448. November 3, 1999.]

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

Roberto A. Abad for petitioner.

Benjamin S. Benito & Associates for private respondent.

SYNOPSIS

Antonio Chua and Peter Yao entered into a contract in behalf of Ocean Quest
Fishing Corporation for the purchase of fishing nets from respondent
Philippine Fishing Gear Industries, Inc. Chua and Yao claimed that they were
engaged in business venture with petitioner Lim Tong Lim, who, however, was
not a signatory to the contract. The buyers failed to pay the fishing nets.
Respondent filed a collection against Chua, Yao and petitioner Lim in their
capacities as general partners because it turned out that Ocean Quest Fishing
Corporation is a non-existent corporation. The trial court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing
nets. The trial court rendered its decision ruling that respondent was entitled
to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent. Lim appealed to the Court of Appeals, but
the appellate court affirmed the decision of the trial court that petitioner Lim is
a partner and may thus be held liable as such. Hence, the present petition.
Petitioner claimed that since his name did not appear on any of the contracts
and since he never directly transacted with the respondent corporation, ergo,
he cannot be held liable. cIaCTS

The Supreme Court denied the petition. The Court ruled that having reaped the
benefits of the contract entered into by Chua and Yao, with whom he had an
existing relationship, petitioner Lim is deemed a part of said association and is
covered by the doctrine of corporation by estoppel. The Court also ruled that
under the principle of estoppel, those acting on behalf of a corporation and
those benefitted by it, knowing it to be without valid existence, are held liable
as general partners.

SYLLABUS
1. CIVIL LAW; PARTNERSHIP; AGREEMENT THAT ANY LOSS OR PROFIT
FROM THE SALE AND OPERATION OF THE BOATS WOULD BE DIVIDED
EQUALLY AMONG THEM SHOWS THAT THE PARTIES HAD INDEED FORMED
A PARTNERSHIP. — 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 boats. The fishing nets and the boats, both essential to
fishing, were obviously acquired in furtherance of their business. It would have
been inconceivable for Lim to involve himself so much in buying the boat but
not in the acquisition of the aforesaid equipment, without which the business
could not have proceeded. Given the preceding facts, it is clear that there was,
among petitioner Lim Tong Lim, 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.

2. ID.; ID.; COMPROMISE AGREEMENT OF THE PARTIES 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.

3. ID.; ID.; PETITIONER WAS A PARTNER, NOT A LESSOR. — 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.

4. MERCANTILE LAW; PRIVATE CORPORATIONS; HAVING REAPED THE

BENEFITS OF THE CONTRACT ENTERED INTO BY PERSONS WITH WHOM
HE PREVIOUSLY HAD AN EXISTING RELATIONSHIP, PETITIONER IS
DEEMED TO BE PART OF SAID ASSOCIATION AND IS COVERED BY THE
DOCTRINE OF CORPORATION BY ESTOPPEL. — 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
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 bene􏰄ted 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 􏰄shing vessel. It is di􏰅cult 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 benefitted 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.

5. REMEDIAL LAW; PROVISIONAL REMEDIES; ATTACHMENT; ISSUE OF

VALIDITY THEREOF, MOOT AND ACADEMIC. — Petitioner claims that the
Writ of Attachment was improperly issued against the nets. We agree with the
Court of Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it was placed
in the name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the 􏰆oats were speci􏰄cally manufactured and
tailor-made according to their own design, and were bought and used in the
􏰄shing 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 speci􏰄c
agreement, ownership of the nets remained with Respondent Philippine Fishing
Gear, until full payment thereof.

VITUG, J., concurring:

1. CIVIL LAW; PARTNERSHIP; EXTENT OF LIABILITY OF PARTNERS IN A

GENERAL PARTNERSHIP. — When a person by his act or deed represents
himself. as a partner in an existing partnership or with one or more persons
not actual partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with respect to
persons who rely upon the representation. The association formed by Chua,
Yao and Lim, should be, as it has been deemed, a de facto partnership with all
the consequent obligations for the purpose of enforcing the rights of third
persons. The liability of general partners (in a general partnership as so
opposed to a limited partnership) is laid down in Article 1816 which posits that
all partners shall be liable pro rata beyond the partnership assets for all the
contracts which may have been entered into in its name, under its signature,
and by a person authorized to act for the partnership.

2. ID.; ID.; ID.; INSTANCES WHEN THE PARTNERS CAN BE HELD

SOLIDARILY LIABLE WITH THE PARTNERSHIP. — This rule is to be construed
along with other provisions of the Civil Code which postulate that the partners
can be held solidarily liable with the partnership speci􏰄cally in these
instances. — (1) where, by any wrongful act or omission of any partner acting
in the ordinary course of the business of the partnership or with the authority
of his co-partners, loss or injury is caused to any person, not being a partner in
the partnership, or any penalty is incurred, the partnership is liable therefor to
the same extent as the partner so acting or omitting to act; (2) where one
partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and (3) where the partnership in
the course of its business receives money or property of a third person and the
money or property so received is misapplied by any partner while it is in the
custody of the partnership — consistently with the rules on the nature of civil
liability in delicts and quasi-delicts.

DECISION

PANGANIBAN, J p:

A partnership may be deemed to exist among parties who agree to borrow

money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of
their own to a "common fund." Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets. Being partners, they are all
liable for debts incurred by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.

The Case

In the Petition for Review onCertiorari 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; cdphil

2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modi􏰄cations 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 􏰄shing 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 of P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for 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

CD Technologies Asia, Inc. 2018 cdasiaonline.com

September 12, 1991 (date of auction sale); cdasia e. Cost of suit.

"With respect to the joint liability of defendants for the principal obligation or
for the unpaid price of nets and 􏰆oats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount of P600,045.00, this Court
noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to
avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the
plaintiff was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any judgment that plaintiff may be able
to secure in this case with the ownership and possession of the nets and 􏰆oats
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 􏰄led 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 satis􏰄ed from the
amount of P900,000.00 as this amount replaced the attached nets and 􏰆oats.
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 􏰆oats. 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 􏰆oats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED." 3 cdasia

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.

The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondent filed a collection suit against Chua, Yao and Petitioner Lim
Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certifcation from the Securities and Exchange
Commission. 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. LLpr

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. 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.

On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Attachment and
that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed
based (1) on the testimonies of the witnesses presented and (2) on a
Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN
which Chua and Yao had brought against Lim in the RTC of Malabon, Branch
72, for (a) a declaration of nullity of commercial documents; (b) a reformation of
contracts; (c) a declaration of ownership of 􏰄shing boats; (d) an injunction and
(e) damages. 10 The Compromise Agreement provided: cdll

"a)

"b)

"c)

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 􏰄shing 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;

If the four (4) vessel[s] and the 􏰄shing 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;

If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever
the de􏰄ciency shall be shouldered and paid to JL Holding Corporation by 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao." 11

The trial court noted that the Compromise Agreement was silent as to the
nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss. 12

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed
the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua
and Yao in a fishing business and may thus be held liable as 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 . . . . Obviously, the ultimate undertaking of the defendants
was to divide the pro􏰄ts 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 pro􏰄ts among themselves (Article 1767, New Civil
Code)."
13 cdtai
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

"II

"III

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.

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.

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 purchased from respondent, the Court must resolve this key issue:
whether by their acts, Lim, Chua and Yao could be deemed to have entered
into a partnership. cdasia

This Court's Ruling The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations
were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he
was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated
February 1, 1990, showed that he had merely leased to the two the main asset
of the purported partnership — the fishing boat F/B Lourdes. The lease was for
six months, with a monthly rental of P37,500 plus 25 percent of the gross
catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the
two lower courts clearly showed that there existed a partnership among Chua,
Yao and him, pursuant to Article 1767 of the Civil Code which provides:

"ARTICLE 1767. By the contract of partnership, two or more persons bind

themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves." llcd

Specifically, both lower courts ruled that a partnership among the three existed
based on the following factual findings:

(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. cdtai
(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 􏰄led 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 􏰄shing 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. cdtai

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 􏰄ndings 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 􏰄ndings 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
􏰄ndings mentioned above nulli􏰄ed petitioner's argument that the existence of
a partnership was based only on the Compromise Agreement. LLphil

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 denes 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 􏰄shing 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. prLL
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 - refer to the syllabus.

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

can be imputed only to Chua and Yao, and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

"Sec. 21. Corporation by estoppel. — All persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.

"One who assumes an obligation to an ostensible corporation as such, cannot

resist performance thereof on the ground that there was in fact no
corporation." LibLex

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 􏰄rst 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 bene􏰄ts
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who bene􏰄ted 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. cdrep

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.

CD Technologies Asia, Inc. 2018 cdasiaonline.com

Unquestionably, petitioner bene􏰄ted 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 di􏰅cult 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 bene􏰄ts 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 prLL

"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 o􏰅ce as an aid
to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities."

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued
against the nets. We agree with the Court of Appeals that this issue is now
moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the 􏰆oats were
speci􏰄cally manufactured and tailor-made according to their own design, and
were bought and used in the 􏰄shing 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 speci􏰄c 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. Cdpr

SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ.,concur. Vitug, J., pls. see concurring
opinion.
CASE # 03:

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.

SYLLABUS

1. TRIAL; ABSENCE OF ONE PARTY PURSUANT TO AGREEMENT; EFFECT

ON JUDGMENT. — If the parties to a case agreed to postpone the trial of the
same in view of a probable amicable settlement, neither of them can take
advantage of the other's absence in the hearing by appearing therein and
adducing evidence in his favor. The judgment rendered by the Court based on
such evidence should, in the interest of justice be set aside.

2. CONTRACTS; LEASE; CIRCUMSTANCES THAT NEGATE PARTNERSHIP. —

Where one of the parties to a contract does not contribute the capital he is
supposed to contribute to a common fund; does not furnish any help or
intervention in the management of the business subject of the contract; does
not demand from the other party an accounting of the expenses and earnings
of the business; and is absolutely silent with respect to any of the acts that a
partner should have done, but, on the other hand, receives a fixed monthly
sum from the other party, there can be no other conclusion than that the
contract between the parties is one of lease and not of partnership.

DECISION

LABRADOR, J p:
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 plaintiff 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 egrees of patrons of the theatre; (4) that after December
31, 1947, all improvements placed by the partnership shall belong to Mrs.
Yulo, but that 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
noticed 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 in the Court of First Instance of Manila on July 3, 1949 to declare
the lease of the premises one for an indefinite period. On August 17, 1949, the
owners on their part brought an action in the Municipal Court of Manila
against Mrs. Yulo and her husband and Yang Chiao Seng to eject them from
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 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 to her the amount agreed upon, Mrs. Yulo
instituted this action on May 26, 1954, alleging the existence of a partnership
between them, and that 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 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 P300 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 􏰀led 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 profits 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 one of partnership but one of
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 fund that
the said lobby was a 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 ground that 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 the parties had agreed to postpone the trial because of a probable
amicable settlement, the plaintiff could not take advantage of defendant's
absence at the time 􏰀xed for the hearing. The lower court, therefore, did not err
in setting aside its former judgment. The 􏰀nal 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 defendant-appellee to
prove that the relation between him and the plaintiff is one of 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 one 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 pro􏰀ts 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 a􏰁rm it in toto,
with costs against plaintiff-appellant.

CASE #04:

SECOND DIVISION

[G.R. No. 159333. July 31, 2006.]

ARSENIO T. MENDIOLA, petitioner, vs. COURT OF APPEALS, NATIONAL LABOR

RELATIONS COMMISSION, PACIFIC FOREST RESOURCES, PHILS., INC. and/or
CELLMARK AB, respondents.

DECISION

PUNO, J p:

On appeal are the Decision 1 and Resolution 2 of the Court of Appeals, dated January
30, 2003 and July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the
ruling 3 of the National Labor Relations Commission (NLRC), which in turn set aside
the July 30, 2001 Decision 4 of the labor arbiter. The labor arbiter declared illegal the
dismissal of petitioner from employment and awarded separation pay, moral and
exemplary damages, and attorney's fees.

The facts are as follows:

Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation

organized and existing under the laws of California, USA. It is a subsidiary of Cellulose
Marketing International, a corporation duly organized under the laws of Sweden, with
principal office in Gothenburg, Sweden.

Private respondent Pacfor entered into a "Side Agreement on Representative Office

known as Pacific Forest Resources (Phils.), Inc." 5 with petitioner Arsenio T. Mendiola
(ATM), effective May 1, 1995, "assuming that Pacfor-Phils. is already approved by the
Securities and Exchange Commission [SEC] on the said date." 6 The Side Agreement
outlines the business relationship of the parties with regard to the Philippine
operations of Pacfor. Private respondent will establish a Pacfor representative office in
the Philippines, to be known as Pacfor Phils, and petitioner ATM will be its President.
Petitioner's base salary and the overhead expenditures of the company shall be borne
by the representative office and funded by Pacfor/ATM, since Pacfor Phils. is equally
owned on a 50-50 equity by ATM and Pacfor-USA.

On July 14, 1995, the SEC granted the application of private respondent Pacfor for a
license to transact business in the Philippines under the name of Pacfor or Pacfor
Phils. In its application, private respondent Pacfor proposed to establish its
representative office in the Philippines with the purpose of monitoring and
coordinating the market activities for paper products. It also designated petitioner as
its resident agent in the Philippines, authorized to accept summons and processes in
all legal proceedings, and all notices affecting the corporation. 8

In March 1997, the Side Agreement was amended through a "Revised Operating and
Profit Sharing Agreement for the Representative Office Known as Pacific Forest
Resources (Philippines)," 9 where the salary of petitioner was increased to $78,000 per
annum. Both agreements show that the operational expenses will be borne by the
representative office and funded by all parties "as equal partners," while the profits
and commissions will be shared among them.

In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor Phils. Private respondent Pacfor, through
William Gleason, its President, replied that petitioner is not a part-owner of Pacfor
Phils. because the latter is merely Pacfor-USA's representative office and not an entity
separate and distinct from Pacfor-USA. "It's simply a 'theoretical company' with the
purpose of dividing the income 50-50." 11 Petitioner presumably knew of this
arrangement from the start, having been the one to propose to private respondent
Pacfor the setting up of a representative office, and "not a branch office" in the
Philippines to save on taxes. 12

Petitioner claimed that he was all along made to believe that he was in a joint venture
with them. He alleged he would have been better off remaining as an independent
agent or representative of Pacfor-USA as ATM Marketing Corp. 13 Had he known that
no joint venture existed, he would not have allowed Pacfor to take the profitable
business of his own company, ATM Marketing Corp. 14 Petitioner raised other issues,
such as the rentals of office furniture, salary of the employees, company car, as well as
commissions allegedly due him. The issues were not resolved, hence, in October 2000,
petitioner wrote Pacfor-USA demanding payment of unpaid commissions and office
furniture and equipment rentals, amounting to more than one million dollars. 15

On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner
to turn over to it all papers, documents, 􏰁les, records, and other materials in his or
ATM Marketing Corporation's possession that belong to Pacfor or Pacfor Phils. 16 On
December 18, 2000, private respondent Pacfor also required petitioner to remit more
than three hundred thousand-peso Christmas giveaway fund for clients of Pacfor
Phils.17 Lastly, private respondent Pacfor withdrew all its offers of settlement and
ordered petitioner to transfer title and turn over to it possession of the service car. 18

Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising
them not to deal with Pacfor Phils. In its letter to Intercontinental Paper Industries,
Inc., dated November 21, 2000, private respondent Pacfor stated:

Until further notice, please course all inquiries and communications for Pacific Forest
Resources (Philippines) to:

Pacific Forest Resources

200 Tamal Plaza, Suite 200 Corte Madera, CA, USA 94925 (415) 927 1700 phone
(415) 381 4358 fax

Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the
offices of ATM Marketing Corporation at Room 504, Concorde Building, Legaspi
Village, Makati City, Philippines. 19

In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated

December 2000, private respondent directed said client "to please communicate
directly with us on any further questions associated with these payments or any
future business. Do not communicate with [Pacfor] and/or [ATM]." 20

Petitioner construed these directives as a severance of the "unregistered partnership"

between him and Pacfor, and the termination of his employment as resident manager
of Pacfor Phils.21 In a memorandum to the employees of Pacfor Phils., dated January
29, 2001, he stated:

I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all
records to them effective December 19, 2000. The company records were turned over
only on January 26, 2001. This means our jobs with Paci􏰁c Forest were terminated
effective December 19, 2000. I am concerned about your welfare. I would like to help
you by offering you to work with ATM Marketing Corporation.

Please let me know if you are interested. 22

On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally
own Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis,
Pacfor Phils.' o􏰀ce furniture and equipment and the service car. He also reiterated his
demand for unpaid commissions, and proposed to offset these with the remaining
Christmas giveaway fund in his possession. 23 Furthermore, he did not renew the
lease contract with Pulp and Paper, Inc., the lessor of the office premises of Pacfor
Phils., wherein he was the signatory to the lease agreement. 24

On February 2, 2001, private respondent Pacfor placed petitioner on preventive

suspension and ordered him to show cause why no disciplinary action should be
taken against him. Private respondent Pacfor charged petitioner with willful
disobedience and serious misconduct for his refusal to turn over the service car and
the Christmas giveaway fund which he applied to his alleged unpaid commissions.
Private respondent also alleged loss of confidence and gross neglect of duty on the part
of petitioner for allegedly allowing another corporation owned by petitioner's relatives,
High End Products, Inc. (HEPI), to use the same telephone and facsimile numbers of
Pacfor, to possibly steal and divert the sales and business of private respondent for
HEPI's principal, International Forest Products, a competitor of private respondent. 25

Petitioner denied the charges. He reiterated that he considered the import of Pacfor
President William Gleason's letters as a "cessation of his position and of the existence
of Pacfor Phils." He likewise informed private respondent Pacfor that ATM Marketing
Corp. now occupies Pacfor Phils.' office premises, 26 and demanded payment of his
separation pay. 27 On February 15, 2001, petitioner filed his complaint for illegal
dismissal, recovery of separation pay, and payment of attorney's fees with the NLRC.
28

In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In
a memorandum dated March 5, 2001, private respondent directed petitioner to explain
why he should not be disciplined for serious misconduct and conflict of interest.
Private respondent charged petitioner anew with serious misconduct for the latter's
alleged act of fraud and misrepresentation in authorizing the release of an additional
peso salary for himself, besides the dollar salary agreed upon by the parties. Private
respondent also accused petitioner of disloyalty and representation of conflicting
interests for having continued using the Pacfor Phils.' office for operations of HEPI. In
addition, petitioner allegedly solicited business for HEPI from a competitor company of
private respondent Pacfor. 29

Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive
dismissal. By directing petitioner to turn over all office records and materials,
regardless of whether he may have retained copies, private respondent Pacfor virtually
deprived petitioner of his job by the gradual diminution of his authority as resident
manager. Petitioner's position as resident manager whose duty, among others, was to
maintain the security of its business transactions and communications was rendered
meaningless. The dispositive portion of the decision of the Labor Arbiter reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering herein

respondents Cellmark AB and Paci􏰁c Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least one
month for every year of service, whichever is higher (sic), as reinstatement is no longer
feasible by reason of the strained relations of the parties equivalent to 􏰁ve (5) months
in the amount of $32,000.00 plus the sum of P250,000.00; pay complainant the sum
of P500,000.00 as moral and exemplary damages and ten percent (10%) of the
amounts awarded as and for attorney's fees.

All other claims are dismissed for lack of basis.

SO ORDERED. 30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December
20, 2001, the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack
of jurisdiction and lack of merit. 31 It held there was no employer-employee
relationship between the parties. Based on the two agreements between the parties, it
concluded that petitioner is not an employee of private respondent Pacfor, but a full
co- owner (50/50 equity).

The NLRC denied petitioner's Motion for Reconsideration. 32

Petitioner was not successful on his appeal to the Court of Appeals. The appellate

court upheld the ruling of the NLRC.

Petitioner's Motion for Reconsideration 33 of the decision of the Court of Appeals was
denied.

Hence, this appeal. 34

Petitioner assigns the following errors:

A.

B.

THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND

ABUSED ITS DISCRETION IN RENDERING JUDGMENT AGAINST PETITIONER SINCE
JURISDICTION HAS BEEN ACQUIRED OVER THE SUBJECT MATTER OF THE CASE
AS THERE EXISTS EMPLOYER- EMPLOYEE RELATIONSHIP BETWEEN THE
PARTIES.

THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND

ABUSED ITS DISCRETION IN RULING THAT JURISDICTION OVER THE SUBJECT
MATTER CANNOT BE WAIVED AND MAY BE ALLEGED EVEN FOR THE FIRST TIME
ON APPEAL OR CONSIDERED BY THE COURT MOTU PROP[R]IO. 35

The first issue is whether an employer-employee relationship exists between petitioner

and private respondent Pacfor. caTIDE

Petitioner argues that he is an industrial partner of the partnership he formed with

private respondent Pacfor, and also an employee of the partnership. Petitioner insists
that an industrial partner may at the same time be an employee of the partnership,
provided there is such an agreement, which, in this case, is the "Side Agreement" and
the "Revised Operating and Profit Sharing Agreement." The Court of Appeals denied
the appeal of petitioner, holding that "the legal basis of the complaint is not
employment but perhaps partnership, co-ownership, or independent contractorship."
Hence, the Labor Code cannot apply.

We hold that petitioner is an employee of private respondent Pacfor and that no

partnership or co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the firm
capital and of all property that may be acquired thereby and through the efforts of the
members.36 The property or stock of the partnership forms a community of goods, a
common fund, in which each party has a proprietary interest. 37 In fact, the New Civil
Code regards a partner as a co-owner of specific partnership property. 38 Each
partner possesses a joint interest in the whole of partnership property. If the relation
does not have this feature, it is not one of partnership. 39 This essential element, the
community of interest, or co-ownership of, or joint interest in partnership property is
absent in the relations between petitioner and private respondent Pacfor. Petitioner is
not a part-owner of Pacfor Phils. William Gleason, private respondent Pacfor's
President established this fact when he said that Pacfor Phils. is simply a "theoretical
company" for the purpose of dividing the income 50-50. He stressed that petitioner
knew of this arrangement from the very start, having been the one to propose to
private respondent Pacfor the setting up of a representative office, and "not a branch
office" in the Philippines to save on taxes. Thus, the parties in this case, merely shared
profits. This alone does not make a partnership. 40

Besides, a corporation cannot become a member of a partnership in the absence of

express authorization by statute or charter. 41 This doctrine is based on the following
considerations: (1) that the mutual agency between the partners, whereby the
corporation would be bound by the acts of persons who are not its duly appointed and
authorized agents and officers, would be inconsistent with the policy of the law that
the corporation shall manage its own affairs separately and exclusively; and, (2) that
such an arrangement would improperly allow corporate property to become subject to
risks not contemplated by the stockholders when they originally invested in the
corporation.42 No such authorization has been proved in the case at bar. ITAaCc

Be that as it may, we hold that on the basis of the evidence, an employer-employee

relationship is present in the case at bar. The elements to determine the existence of
an employment relationship are: (a) the selection and engagement of the employee; (b)
the payment of wages; (c) the power of dismissal; and (d) the employer's power to
control the employee's conduct. The most important element is the employer's control
of the employee's conduct, not only as to the result of the work to be done, but also as
to the means and methods to accomplish it. 43

In the instant case, all the foregoing elements are present. First, it was private
respondent Pacfor which selected and engaged the services of petitioner as its resident
agent in the Philippines. Second, as stipulated in their Side Agreement, private
respondent Pacfor pays petitioner his salary amounting to $65,000 per annum which
was later increased to $78,000. Third, private respondent Pacfor holds the power of
dismissal, as may be gleaned through the various memoranda it issued against
petitioner, placing the latter on preventive suspension while charging him with various
offenses, including willful disobedience, serious misconduct, and gross neglect of duty,
and ordering him to show cause why no disciplinary action should be taken against
him.

Lastly and most important, private respondent Pacfor has the power of control over
the means and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual
exercise thereof. The principal consideration is whether the employer has the right to
control the manner of doing the work, and it is not the actual exercise of the right by
interfering with the work, but the right to control, which constitutes the test of the
existence of an employer-employee relationship. 44 In the case at bar, private
respondent Pacfor, as employer, clearly possesses such right of control. Petitioner, as
private respondent Pacfor's resident agent in the Philippines, is, exactly so, only an
agent of the corporation, a representative of Pacfor, who transacts business, and
accepts service on its behalf.

This right of control was exercised by private respondent Pacfor during the period of
November to December 2000, when it directed petitioner to turn over to it all records
of Pacfor Phils.; when it ordered petitioner to remit the Christmas giveaway fund
intended for clients of Pacfor Phils.; and, when it withdrew all its offers of settlement
and ordered petitioner to transfer title and turn over to it the possession of the service
car. It was also during this period when private respondent Pacfor sent letters to its
clients in the Philippines, particularly Intercontinental Paper Industries, Inc. and
DAVCOR, advising them not to deal with petitioner and/or Pacfor Phils. In its letter to
DAVCOR, private respondent Pacfor replied to the client's request for an invoice
payment extension, and formulated a revised payment program for DAVCOR. This is
one unmistakable proof that private respondent Pacfor exercises control over the
petitioner. DaEcTC

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

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

Although there is no reduction of the salary of petitioner, constructive dismissal is still

present because continued employment of petitioner is rendered, at the very least,
unreasonable.46 There is an act of clear discrimination, insensibility or disdain by the
employer that continued employment may become so unbearable on the part of the
employee so as to foreclose any choice on his part except to resign from such
employment. 47

The harassing acts of the private respondent are unjusti􏰁ed. They were undertaken
when petitioner sought clari􏰁cation from the private respondent about his supposed
50% equity on Pacfor Phils. Private respondent Pacfor invokes its rights as an owner.
Allegedly, its issuance of the foregoing directives against petitioner was a valid exercise
of management prerogative. We remind private respondent Pacfor that the exercise of
management prerogative is not absolute. "By its very nature, encompassing as it could
be, management prerogative must be exercised in good faith and with due regard to
the rights of labor — verily, with the principles of fair play at heart and justice in
mind." The exercise of management prerogative cannot be utilized as an implement to
circumvent our laws and oppress employees. 48

As resident agent of private respondent corporation, petitioner occupied a position

involving trust and con􏰁dence. In the light of the strained relations between the
parties, the full restoration of an employment relationship based on trust and
con􏰁dence is no longer possible. He should be awarded separation pay, in lieu of
reinstatement.

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30,
2003 Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, a􏰀rming the
December 20, 2001 Decision of the National Labor Relations Commission, are
ANNULLED and SET ASIDE. The July 30, 2001 Decision of the Labor Arbiter is
REINSTATED with the MODIFICATION that the amount of P250,000.00 representing
an alleged increase in petitioner's salary shall be deducted from the grant of
separation pay for lack of evidence.

SO ORDERED.

CASE #05:

THIRD DIVISION

[G.R. No. 75875. December 15, 1989.]

WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES

CHAMSAY, petitioners, vs. SANITARY WARES MANUFACTURING CORPORATION,
ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ,
respondents.

Belo, Abiera & Associates for petitioners in 75875.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

[G.R. No. 75951. December 15, 1989.]

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO,

ENRIQUE B. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG
and AVELINO V. CRUZ, petitioners, vs. THE COURT OF APPEALS, WOLFGANG
AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and
LUCIANO SALAZAR, respondents.

[G.R. Nos. 75975-76. December 15, 1989.]

LUCIANO E. SALAZAR, petitioner, vs. SANITARY WARES MANUFACTURING
CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE
R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V.
CRUZ and the COURT OF APPEALS, respondents.

SYLLABUS

1. COMMERCIAL LAW; JOINT VENTURE; WHETHER THERE EXISTS A JOINT

VENTURE DEPENDS UPON THE PARTIES' ACTUAL INTENTION WHICH IS
DETERMINED IN ACCORDANCE WITH THE RULES COVERING THE
INTERPRETATION AND CONSTRUCTION OF CONTRACTS. — The rule is that whether
the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction
of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp
678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd
668)

2. ID.; ID.; ESTABLISHED IN CASE AT BAR. — In the instant cases, our examination
of important provisions of the Agreement as well as the testimonial evidence presented
by the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent with a
joint venture and not with an ordinary corporation. Section 5 (a) of the agreement uses
the word "designated" and not "nominated" or "elected" in the selection of the nine
directors on a six to three ratio. Each group is assured of a 􏰀xed number of directors
in the board. Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testi􏰀ed that Section 16(c) of the Agreement that
"Nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder" was merely to
obviate the possibility of the enterprise being treated as partnership for tax purposes
and liabilities to third parties.

3. ID.; ID.; CONCEPT OF JOINT VENTURE; DISTINGUISHED FROM PARTNERSHIP.

— The point of query, however, is whether or not that provision is applicable to a joint
venture with clearly defined agreements: "The legal concept of 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 in fact hardly distinguishable from the
partnership, since their elements are similar — community of interest in the business,
sharing of pro􏰀ts 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 jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395
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). Moreover, the
usual rules as regards the construction and operations of contracts generally apply to
a contract of joint venture. (O'Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

4. ID.; ID.; RIGHT OF STOCKHOLDERS TO CUMULATE VOTES IN ELECTING

DIRECTORS LIES IN THE AGREEMENT OF PARTIES. — Bearing these principles in
mind, the correct view would be that the resolution of the question of whether or not
the ASI Group may vote their additional equity lies in the agreement of the parties.
The appellate court was correct in upholding the agreement of the parties as regards
the allocation of director seats under Section 5 (a) of the "Agreement," and the right of
each group of stockholders to cumulative voting in the process of determining who the
group's nominees would be under Section 3(a) (1) of the "Agreement." As pointed out
by SEC, Section 5(a) of the Agreement relates to the manner of nominating the
members of the board of directors while Section 3 (a) (1) relates to the manner of
voting for these nominees.

5. ID.; ANTI-DUMMY; LIMITS THE ELECTION OF ALIENS AS MEMBERS OF THE

BOARD OF DIRECTORS IN PROPORTION TO THEIR ALLOWANCE PARTICIPATION OF
THE ENTITY. — Equally important as the consideration of the contractual intent of the
parties is the consideration as regards the possible domination by the foreign investors
of the enterprise in violation of the nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted,
however, that the same law also limits the election of aliens as members of the board
of directors in proportion to their allowance participation of said entity.

DECISION

GUTIERREZ, JR., J p:

These consolidated petitions seek the review of the amended decision of the Court of
Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision
dated June 5, 1986, of the then Intermediate Appellate Court and directed that in all
subsequent elections for directors of Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3)
directors; that the Filipino stockholders shall not interfere in ASI's choice of its three
(3) nominees; that, on the other hand, the Filipino stockholders can nominate only six
(6) candidates and in the event they cannot agree on the six (6) nominees, they shall
vote only among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose
of manufacturing and marketing sanitary wares. One of the incorporators, Mr.
Baldwin Young went abroad to look for foreign partners, European or American who
could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an Agreement with Saniwares and
some Filipino investors whereby ASI and the Filipino investors agreed to participate in
the ownership of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad vitreous china and
sanitary wares. The parties agreed that the business operations in the Philippines
shall be carried on by an incorporated enterprise and that the name of the corporation
shall initially be "Sanitary Wares Manufacturing Corporation." LibLex

The Agreement has the following provisions relevant to the issues in these cases on
the nomination and election of the directors of the corporation:

"3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for.

(1) Cumulative voting for directors: xxx xxx xxx

"5. Management
(a) The management of the Corporation shall be vested in a

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Board of Directors, which shall consist of nine individuals. As long as American-

Standard shall own at least 30% of the outstanding stock of the Corporation, three of
the nine directors shall be designated by American- Standard, and the others six: shall
be designated by the other stockholders of the Corporation. (pp. 51 & 53, Rollo of
75875).

At the request of ASI, the agreement contained provisions designed to protect it as a

minority group, including the grant of veto powers over a number of corporate acts
and the right to designate certain o􏰁cers, such as a member of the Executive
Committee whose vote was required for important corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition
that at least 60% of the capital stock of the corporation shall be owned by Philippine
nationals.

The joint enterprise thus entered into by the Filipino investors and the American
corporation prospered. Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between the two groups. According
to the Filipino group, a basic disagreement was due to their desire to expand the
export operations of the company to which ASI objected as it apparently had other
subsidiaries of joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was held. The
meeting was presided by Baldwin Young. The minutes were taken by the Secretary,
Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders
then proceeded to the election of the members of the board of directors. The ASI group
nominated three persons namely; Wolfgang Aurbach, John Gri􏰁n and David P.
Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr.,
Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr.
Eduardo R. Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated
Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations
out of order on the basis of section 5 (a) of the Agreement, the consistent practice of
the parties during the past annual stockholders' meetings to nominate only nine
persons as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:

. . . . There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua,
protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that
all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, AC-
G.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar. The
Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Gri􏰁n
and David Whittingham, and the six originally nominated by Rogelio Vinluan, namely,

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Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, and Baldwin Young. The Secretary then certi􏰀ed for the election of the
following — Wolfgang Aurbach, John Gri􏰁n, David Whittingham, Ernesto Lagdameo,
Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan,
Baldwin Young. The representative of ASI then moved to recess the meeting which was
duly seconded. There was also a motion to adjourn (p. 28, Rollo, Ac-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests
against the adjournment were registered and having been ignored, Mr. Jaqua, the ASI
representative, stated that the meeting was not adjourned but only recessed and that
the meeting would be reconvened in the next room. The Chairman then threatened to
have the stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other
stockholders, allegedly representing 53 or 54% of the shares of Saniwares, decided to
continue the meeting at the elevator lobby of the American Standard Building. The
continued meeting was presided by Luciano E. Salazar, while Andres Gatmaitan acted
as Secretary. On the basis of the cumulative votes cast earlier in the meeting, the ASI
Group nominated its four nominees; Wolfgang Aurbach, John Gri􏰁n, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the
said 􏰀ve directors were certi􏰀ed as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6) nominees
for the four (4) remaining positions of directors and that the body decided not to break
the tie." (pp. 37-39, Rollo of 75975-76)

These incidents triggered off the 􏰀ling of separate petitions by the parties with the
Securities and Exchange Commission (SEC). The 􏰀rst petition 􏰀led was for
preliminary injunction by Saniwares, Ernesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No.
2417. The second petition was for quo warranto and application for receivership by
Wolfgang Aurbach, John Gri􏰁n, David Whittingham, Luciano E. Salazar and Charles
Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No.
2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of
parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation. LLphil

The two petitions were consolidated and tried jointly by a hearing o􏰁cer who rendered
a decision upholding the election of the Lagdameo Group and dismissing the quo
warranto petition of Salazar and Chamsay. The ASI Group and Salazar appealed the
decision to the SEC en banc which affirmed the hearing officer's decision.

The SEC decision led to the 􏰀ling of two separate appeals with the Intermediate
Appellate Court by Wolfgang Aurbach, John Gri􏰁n, David Whittingham and Charles
Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as
AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court in its
decision ordered the remand of the case to the Securities and Exchange Commission
with the directive that a new stockholders' meeting of Saniwares be ordered convoked
as soon as possible, under the supervision of the Commission.

Upon a motion for reconsideration 􏰀led by the appellees (Lagdameo Group) the
appellate court (Court of Appeals) rendered the questioned amended decision.

Petitioners Wolfgang Aurbach, John Gri􏰁n, David P. Whittingham and Charles

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Chamsay in G.R. No. 75875 assign the following errors:

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF

PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO
THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17, Rollo — 75875).

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on
the following grounds:

"11.1 That Amended Decision would sanction the CA's disregard of binding
contractual agreements entered into by stockholders and the replacement of the
conditions of such agreements with terms never contemplated by the stockholders but
merely dictated by the CA.

"11.2 The Amended decision would likewise sanction the unlawful deprivation of the
property rights of stockholders without due process of law in order that a favored
group of stockholders may be illegally bene􏰀ted and guaranteed a continuing
monopoly of the control of a corporation." (pp. 14-15, Rollo — 75975-76).

On the other hand, the petitioners in G.R. No. 75951 contend that: I

"THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING

THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE
LAW.

II

"THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE

PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANIWARES." (P. 24, Rollo —
75951).

The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the
year 1983 during its annual stockholders' meeting held on March 8, 1983. To answer
this question the following factors should be determined: (1) the nature of the
business established by the parties — whether it was a joint venture or a corporation
and (2) whether or not the ASI Group may vote their additional 10% equity during
elections of Saniwares' board of directors. LLjur

The rule is that whether the parties to a particular contract have thereby established
among themselves a joint venture or some other relation depends upon their actual
intention which is determined in accordance with the rules governing the
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interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and

Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20
Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual
intention of the parties should be viewed strictly on the "Agreement" dated August 15,
1962 wherein it is clearly stated that the parties' intention was to form a corporation
and not a joint venture.

They speci􏰀cally mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

"(c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder." (At p. 66, Rollo —
G.R. No. 75875)

They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo and Young
Group on the ground that it contravenes the parol evidence rule under section 7, Rule
130 of the Revised Rules of Court. According to them, the Lagdameo and Young Group
never pleaded in their pleading that the "Agreement" failed to express the true intent of
the parties.

The parol evidence Rule under Rule 130 provides:

"Evidence of written agreements — When the terms of an agreement have been

reduced to writing, it is to be considered as containing all such terms, and therefore,
there can be, between the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing, except in the following
cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply
and Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to
express the true intent of the parties, to wit:

xxx xxx xxx

"4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other (ASI) shall constitute the minority
stockholder. In any event, the evident intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into a joint venture enterprise, and if some
words in the Agreement appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together attributing to the doubtful ones
that sense which may result from all of them taken jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the

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intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC
Case No. 2417).

It has been ruled:

"In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint pro􏰀t, the question whether
they intended by their agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40, 192
NYS 653; Pyroa v. Brown􏰀eld (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423,
200 P 96 33 C.J. p. 871).

In the instant cases, our examination of important provisions of the Agreement as well
as the testimonial evidence presented by the Lagdameo and Young Group shows that
the parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an ordinary
corporation. As stated by the SEC:

"According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

Agreement with ASI in behalf of the Philippine nationals. He testi􏰀ed that ASI agreed
to accept the role of minority vis-a-vis the Philippine National group of investors, on
the condition that the Agreement should contain provisions to protest ASI as the
minority.

"An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the
Agreement]. ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain transactions [Sec. 3 (b)
(i)].

"The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right
to designate the president and plant manager [Sec. 5 (6)]. The Agreement further
provides that the sales policy of Saniwares shall be that which is normally followed by
ASI [Sec. 13 (a)] and that Saniwares should not export "Standard" products otherwise
than through ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI
agreed to provide technology and know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).

xxx xxx xxx

"It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes
of the board of directors for certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power. Furthermore, the grant to ASI
of the right to designate certain o􏰁cers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws; and most signi􏰀cantly to
the issues of this case, the provision that ASI shall designate 3 out of the 9 directors
and the other stockholders shall designate the other 6, clearly indicate that — 1) there
are two distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the balance of 60%, and that 2) ASI
is given certain protections as the minority stockholder.

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Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders." (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or
"elected" in the selection of the nine directors on a six to three ratio. Each group is
assured of a fixed number of directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture.

Baldwin Young also testi􏰀ed that Section 16(c) of the Agreement that "Nothing herein
contained shall be construed to constitute any of the parties hereto partners or joint
venturers in respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local 􏰀rm are constrained to seek the technology and
marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later. As the
Philippine 􏰀rm enlarges its operations and becomes pro􏰀table, the foreign group
undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions
can be lawfully prevented, the courts should extend protection especially in industries
where constitutional and legal requirements reserve controlling ownership to Filipino
citizens. cdll

The Lagdameo Group stated in their appellees' brief in the Court of Appeals:

"In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.

"'Sec. 100. Agreements by stockholders. — xxx xxx xxx

"'2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.'

"Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because it
has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single identi􏰀able interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
Young/Yutivo family count for another 13 stockholders, the Cham family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is

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respectfully submitted, they should be for purposes of determining how closely held
Saniwares is), there were as of 8 March 1983, practically only 17 stockholders of
Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).

"Secondly, even assuming that Saniwares is technically not a close corporation

because it has more than 20 stockholders, the undeniable fact is that it is a close-held
corporation. Surely, appellants cannot honestly claim that Saniwares is a public issue
or a widely held corporation.

"In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint venturers
(Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M &
St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495, 82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,
113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand. Law Rev., p. 680, 1958). These American cases dealt with
legal questions as to the extent to which the requirements arising from the corporate
form of joint venture corporations should control, and the courts ruled that
substantial justice lay with those litigants who relied on the joint venture agreement
rather than the litigants who relied on the orthodox principles of corporation law.

"As correctly held by the SEC Hearing Officer:

"'It is said that participants in a joint venture, in organizing the joint venture deviate
from the traditional pattern of corporation management. A noted authority has pointed
out that just as in close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the following: (1) require
greater than majority vote for shareholder and director action; (2) give certain
shareholders or groups of shareholders power to select a speci􏰀ed number of
directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O'Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, p. 16)'

"Thirdly, paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply
that agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:

"'Paragraph 2 refers to pooling and voting agreements in particular. Does this

provision necessarily imply that these agreements can be valid only in close
corporations as de􏰀ned by the Code? Suppose that a corporation has twenty 􏰀ve
stockholders, and therefore cannot qualify as a close corporation under section 96,
can some of them enter into an agreement to vote as a unit in the election of directors?
It is submitted that there is no reason for denying stockholders of corporations other
than close ones the right to enter into voting or pooling agreements to protect their
interests, as long as they do not intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of course, voting or pooling agreements are
perhaps more useful and more often resorted to

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in close corporations. But they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of close corporations
to those which comply with the requisites laid down by section 96, it is entirely
possible that a corporation which is in fact a close corporation will not come within the
de􏰀nition. In such case, its stockholders should not be precluded from entering into
contracts like voting agreements if these are otherwise valid. (Campos & Lopez-
Campos, op cit, p. 405)'

"In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include appellants." (Rollo G.R. No.
75951, pp. 90-94).
In regard to the question as to whether or not the ASI group may vote their additional
equity during elections of Saniwares' board of directors, the Court of Appeals correctly
stated:

"As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a) hereof
says that three of the nine directors shall be designated by ASI and the remaining six
by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats
is obviously in consonance with the minority position of ASI.

"Having entered into a well-de􏰀ned contractual relationship, it is imperative that the

parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntary waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as in
joint venture relationships between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.

"In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the
particular contractual rights and obligations which the parties have assumed for
themselves.

"On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.

"In our decision sought to be reconsidered, we opted to uphold the second over the
􏰀rst. Upon further re􏰂ection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize
and uphold the division of the stockholders into two groups, and at the same time
uphold the right of the stockholders within each group to

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cumulative voting in the process of determining who the group's nominees would be.
In practical terms, as suggested by appellant Luciano E. Salazar himself, this means
that if the Filipino stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only. During this voting, each
Filipino stockholder can cumulate his votes. ASI, however, should not be allowed to
interfere in the voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the board seats, a result which is
clearly contrary to the contractual intent of the parties.

"Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors." (Rollo — 75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group
has the right to vote their additional equity pursuant to Section 24 of the Corporation
Code which gives the stockholders of a corporation the right to cumulate their votes in
electing directors. Petitioner Salazar adds that this right if granted to the ASI Group
would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act
108, as amended). He cites section 2-a thereof which provides:

"And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section
1, promulgated May 28, 1975)"

The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that provision is
applicable to a joint venture with clearly defined agreements:

"The legal concept of a joint venture is of common law origin. It has no precise legal
de􏰀nition, but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar — community of
interest in the business, sharing of pro􏰀ts 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 jurisdictions is
that the partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction, and is thus
of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 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 speci􏰀c 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

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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).

Moreover, the usual rules as regards the construction and operations of contracts
generally apply to a contract of joint venture. (O'Hara v. Harman 14 App. Dev. (167) 43
NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the
question of whether or not the ASI Group may vote their additional equity lies in the
agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties
as regards the allocation of director seats under Section 5 (a) of the "Agreement," and
the right of each group of stockholders to cumulative voting in the process of
determining who the group's nominees would be under Section 3(a) (1) of the
"Agreement." As pointed out by SEC, Section 5(a) of the Agreement relates to the
manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election
of members of the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino
director who would be beholden to them would obliterate their minority status as
agreed upon by the parties. As aptly stated by the appellate court:

". . . . ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.

"Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors." (At p. 39, Rollo, 75875).

Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the
enterprise in violation of the nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted,
however, that the same law also limits the election of aliens as members of the board
of directors in proportion to their allowance participation of said entity. In the instant
case, the foreign Group (ASI) was limited to designate three directors. This is the
allowable participation of the ASI Group. Hence, in future dealings, this limitation of
six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of
directors there are provisions already agreed upon and embodied in the parties'
Agreement to protect the interests arising from the minority status of the foreign
investors. LexLib

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With these 􏰀ndings, we a􏰁rm the decisions of the SEC Hearing O􏰁cer and SEC which
were impliedly a􏰁rmed by the appellate court declaring Messrs. Wolfgang Aurbach,
John Gri􏰁n, David P. Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March 8, 1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951 )
object to a cumulative voting during the election of the board of directors of the
enterprise as ruled by the appellate court and submits that the six (6) directors
allotted the Filipino stockholders should be selected by consensus pursuant to section
5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate
or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise
if the Filipino stockholders are allowed to select their nominees separately and not as
a common slot determined by the majority of their group.

Section 5(a) of the Agreement which uses the word designates in the allocation of
board directors should not be interpreted in isolation. This should be construed in
relation to section 3 (a) (1 ) of the Agreement. As we stated earlier, section 3(a) (1 )
relates to the manner of voting for these nominees which is cumulative voting while
section 5(a) relates to the manner ofnominating the members of the board of directors.
The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now
impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the
cumulative voting procedure cannot, however, be ignored. The validity of the
cumulative voting procedure is dependent on the directors thus elected being genuine
members of the Filipino group, not voters whose interest is to increase the ASI share
in the management of Saniwares. The joint venture character of the enterprise must
always be taken into account, so long as the company exists under its original
agreement. Cumulative voting may not be used as a device to enable ASI to achieve
stealthily or indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority status of the
Filipino investors as well as to maintain the minority status of the foreign investors
group as earlier discussed. They should be maintained. cdll

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The amended
decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach, John
Gri􏰁n, David Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the
duly elected directors of Saniwares at the March 8, 1983 annual stockholders'
meeting. In all other respects, the questioned decision is AFFIRMED. Costs against the
petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.

CASE #07:

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.

Abello Concepcion Regala & Cruz for petitioners. Ricafrente Sanvicente &
Cacho Law Firm for respondents.

SYNOPSIS
Petitioners Luzviminda 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." Respondents 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, co-respondents Cesar and Carmelita Ramirez. Jesus Jose
withdrew from the partnership in January 1987 and his capital contribution of
P250,000 was refunded to him in cash by agreement of the partners. 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.
Thereafter, 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. Respondent 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. Before the Regional Trial Court (RTC) of
Makati, Branch 59, respondents subsequently filed a Complaint for the
collection of a sum of money from petitioners. The trial court 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 rendered judgment in favor of
respondents and against the petitioners ordering the latter to pay jointly and
severally respondents for actual damages in the amount of P250,000.00,
attorney's fees and the costs of suit." On appeal, the Court of Appeals 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 appellate court computed their liability and rendered judgment
ordering petitioners jointly and severally to pay and reimburse to respondents
the amount of P253,114.00. Hence, the present petition.

The Supreme Court set aside the assailed Decision and Resolution of the Court
of Appeals. The Court held 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." Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring
partners. 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 appellate
court's computation of the amount to be refunded to respondents as their
share was thus erroneous. 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.
The Court 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.

SYLLABUS

1. CIVIL LAW; PARTNERSHIP; IT IS THE PARTNERSHIP THAT MUST REFUND

THE EQUITY CONTRIBUTION OF THE PARTNERS. — 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." Since the capital was
contributed to the partnership, not to petitioners, it is the partnership that
must refund the equity of the retiring partners.

2. ID.; ID.; REFUND OF SHARES OF PARTNERS IS LIMITED TO TOTAL

AMOUNT OF THE PARTNERSHIP RESOURCES. — The trial court 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 rendered judgment in favor of
respondents and against the petitioners ordering the latter to pay jointly and
severally respondents for actual damages in the amount of P250,000.00,
attorney's fees and the costs of suit." 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 􏰂rst 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. 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. CSaIAc

3. ID.; ID.; THE IDEA THAT THE CAPITAL CONTRIBUTION AT THE

BEGINNING OF THE PARTNERSHIP REMAINS INTACT, UNIMPAIRED AND
AVAILABLE FOR DISTRIBUTION OR RETURN TO THE PARTNERS IS
SPECULATIVE, CONJECTURAL AND TOTALLY WITHOUT FACTUAL OR LEGAL
SUPPORT. — 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.

4. ID.; ID.; IN THE PURSUIT OF PARTNERSHIP BUSINESS, ITS CAPITAL IS

EITHER INCREASED BY PROFITS EARNED OR DECREASED BY LOSSES
SUSTAINED; IT DOES NOT REMAIN STATIC AND UNAFFECTED BY
CHANGING FORTUNES OF THE BUSINESS. — 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. However, notable therefrom is the omission of any provision for
the depreciation of the furniture and the equipment. The amortization of the
goodwill (initially valued at P500,000) is not rejected 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.

DECISION

PANGANIBAN, J p:
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
Decision 1 and the July 26, 2000 Resolution 2 of the Court of Appeals 3 (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 􏰂led a Complaint 11 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

Respondents 􏰂led an Urgent Motion for Leave to Sell or Otherwise Dispose of

Restaurant Furniture and Equipment 14 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 them 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:

1. (a)  Actual damages in the amount of P250,000.00

2. (b)  Attorney's fee in the amount of P30,000.00
3. (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 su􏰃cient evidence was
presented to show 􏰂nancial 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

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.

Issues

The Petition has merit.

This Court's Ruling

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 􏰂ndings were
amply supported by the evidence on record. Respondents consequently
demanded from petitioners the return of their one-third equity in the
partnership.

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.

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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 􏰂rst 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 pro􏰂ts 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 􏰂nancial statements presented before the trial court showed
that the business had made meager pro􏰂ts. 26 However, notable therefrom is
the omission of any provision for the depreciation 27 of the furniture and the
equipment. The amortization of the goodwill 28 (initially valued at P500,000) is
not re􏰄ected 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 􏰂nding that the partnership had an outstanding obligation in
the amount of P240,658 was not supported by evidence. We sustain the
contrary 􏰂nding of the RTC, which had rejected the contention that the
obligation belonged to the partnership for the following reason:

". . . [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 Certi􏰂cation 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 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. HDIaST

SO ORDERED.

CASE #08:

FIRST DIVISION

[G.R. No. 78133. October 18, 1988.]

MARIANO P. PASCUAL and RENATO P. DRAGON , petitioners, vs. THE

COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners. The Solicitor
General for respondents.

SYLLABUS

1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. — The sharing of returns

does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be
a clear intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party to transfer
or assign the whole property.

2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR

NOT LIABLE FOR THE PAYMENT THEREOF. — In the present case, there is
clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make them partners.
They shared in the gross profits as co-owners and paid their capital gains taxes
on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes. As petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.

DECISION

GANCAYCO, J p:
The distinction between co-ownership and an unregistered partnership or joint
venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels
of land from Juan Roque. The first two parcels of land were sold by petitioners
in 1968 to Marenir Development Corporation, while the three parcels of land
were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,
1970. Petitioners realized a net profit in the sale made in 1968 in the amount
of P165,224.70, while they realized a net profit of P60,000.00 in the sale made
in 1970. The corresponding capital gains taxes were paid by petitioners in 1973
and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners were assessed and required to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968
and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting
that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners

that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code; 1
that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under
P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due course, the respondent court by a
majority decision of March 30, 1987, 2 affirmed the decision and action taken
by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated inEvangelista, 3 an

unregistered partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that imposed on
the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated

that considering the circumstances of this case, although there might in fact be
a co- ownership between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership which made
them liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:

"A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF

THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED, THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA
CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE
EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE

PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY." (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this

Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which
together with their own personal funds they used in buying several real
properties. They appointed their brother to manage their properties with full
power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net pro􏰅ts
from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

"The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the
terms 'corporation' and 'partnership' as used in sections 24 and 84 of said
Code, the pertinent parts of which read:

'Sec. 24. Rate of the tax on corporations. — There shall be levied, assessed,
collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized
but not including duly registered general co-partnerships (companias
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
participation), associations or insurance companies, but does not include duly
registered general co-partnerships (companias colectivas).'

"Article 1767 of the Civil Code of the Philippines provides:

'By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves.'

"Pursuant to this article, the essential elements of a partnership are two,

namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the pro􏰅ts among the contracting
parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property
to a common fund. Hence, the issue narrows down to their intent in acting as
they did. Upon consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves,
because:

1. Said common fund was not something they found already in existence. It
was not a property inherited by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial portion thereof in order to
establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April
3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on
April 23, 1944, by the acquisition of another real estate for P108,825.00. Five
(5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and 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 petitioners in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business transactions
engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other

personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the
utilization thereof.

4. Since August, 1945,the properties have been under the management of one
person, namely, Simeon 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 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 circumstance is such
as to leave no room for doubt on the existence of said intent in petitioners
herein. Only one or two of the aforementioned circumstances were present in
the cases cited by petitioners herein, and, hence, those cases are not in point."
5

In the present case, there is no evidence that petitioners entered into an

agreement to contribute money, property or industry to a common fund, and
that they intended to divide the profits among themselves. Respondent
commissioner and/or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of
land and became co-owners thereof.

In Evangelista, there was a series of transactions where petitioners purchased

twenty-four (24) lots showing that the purpose was not limited to the
conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did
not sell the same nor make any improvements thereon. In 1966, they bought
another three (3) parcels of land from one seller. It was only 1968 when they
sold the two (2) parcels of land after which they did not make any additional or
new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such condition
existed for over fifteen (15) years. None of the circumstances are present in the
case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista
he said:

"I wish however to make the following observation: Article 1769 of the new Civil
Code lays down the rule for determining when a transaction should be deemed
a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

'(2) Co-ownership or co-possession does not itself establish a partnership,

whether such co-owners or co-possessors do or do not share any profits made
by the use of the property;

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

"From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property
held in common does not convert their venture into a partnership. Or the
sharing of the gross returns does not of itself establish a partnership whether
or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical personality
different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others
(Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

"It is evident that an isolated transaction whereby two or more persons

contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a
partnership.

'Persons who contribute property or funds for a common enterprise and agree
to share the gross returns of that enterprise in proportion to their contribution,
but who severally retain the title to their respective contribution, are not
thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Floyd D. Mechem,
2nd Ed., section 83, p. 74.)

'A joint purchase of land, by two, does not constitute a co-partnership in

respect thereto; nor does an agreement to share the pro􏰅ts and losses on the
sale of land create a partnership; the parties are only tenants in common.'
(Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
'Where plaintiff, his brother, and another agreed to become owners of a single
tract of realty, holding as tenants in common, and to divide the pro􏰅ts 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.' (Magee vs. Magee,
123 N.E. 673, 233 Mass. 341.)

'In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and
such a community of interest, as far as third persons are concerned as enables
each party to make contract, manage the business and dispose of the whole
property.' — Municipal Paving Co. vs. Herring, 150 P. 1067, 50 III 470.)

'The common ownership of property does not itself create a partnership

between the owners, though they may use it for the purpose of making gains;
and they may, without becoming partners, agree among themselves as to the
management, and use of such property and the application of the proceeds
therefrom.' — (Spurlock vs. Wilson, 142 S.W. 363, 160 No. App. 14.)" 6

The sharing of returns does not in itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the freedom of
each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the

petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross pro􏰅ts as co-
owners and paid their capital gains taxes on their net pro􏰅ts and availed of the
tax amnesty thereby. Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can be
held liable for said de􏰅ciency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the
partnership.7 However, as petitioners have availed of the bene􏰅ts of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
WHEREFORE, the petition is hereby GRANTED and the decision of the
respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and
SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.