G.R. No.

78133 October 18, 1988

respondent Court of Tax Appeals docketed as CTA

Case No. 3045. In due course, the respondent
MARIANO P. PASCUAL and RENATO P. DRAGON,
court by a majority decision of March 30, 1987, 2
petitioners,
affirmed the decision and action taken by
vs.
respondent commissioner with costs against
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF petitioners.
TAX APPEALS, respondents.
It ruled that on the basis of the principle
De la Cuesta, De las Alas and Callanta Law
enunciated in Evangelista 3 an unregistered
Offices for petitioners.
partnership was in fact formed by petitioners
which like a corporation was subject to corporate
The Solicitor General for respondents
income tax distinct from that imposed on the
partners.
GANCAYCO, J.:
The distinction between co-ownership and an
unregistered partnership or joint venture for
income tax purposes is the issue in this
petition.
On June 22, 1965, petitioners bought two (2)
parcels of land from Santiago Bernardino, et al.
and on May 28, 1966, they bought another three
(3) parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in
1968 toMarenir Development Corporation, while the
three parcels of land were sold by petitioners to
Erlinda Reyes and Maria Samson on March 19,1970.
Petitioners realized a net profit in the sale
made in 1968 in the amount of P165,224.70, while
they realized a net profit of P60,000.00 in the
sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and
1974 by availing of the tax amnesties granted in
the said years.

In a separate dissenting opinion, Associate Judge

Constante Roaquin stated that considering the
circumstances of this case, although there might
in fact be a co-ownership between the
petitioners, there was no adequate basis for the
conclusion that they thereby formed an
unregistered partnership which made "hem liable
for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke
as basis thereof the following alleged errors of
the respondent court:
A.
IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT COMMISSIONER, TO
THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.

B.
IN MAKING A FINDING, SOLELY ON THE BASIS OF
ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED
PARTNERSHIP EXISTED THUS IGNORING THE
However, in a letter dated March 31, 1979 of then REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
Acting BIR Commissioner Efren I. Plana,
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP
petitioners were assessed and required to pay a
EXISTS.
total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and
C.
IN FINDING THAT THE INSTANT CASE IS SIMILAR
1970.
TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE
DECIDED ALONGSIDE THE EVANGELISTA CASE.
Petitioners protested the said assessment in a
letter of June 26, 1979 asserting that they had
D.
IN RULING THAT THE TAX AMNESTY DID NOT
availed of tax amnesties way back in 1974.
RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY.
In a reply of August 22, 1979, respondent
(pp. 12-13, Rollo.)
Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in The petition is meritorious.
the real estate transactions formed an
unregistered partnership or joint venture taxable The basis of the subject decision of the
as a corporation under Section 20(b) and its
respondent court is the ruling of this Court in
income was subject to the taxes prescribed under Evangelista. 4
Section 24, both of the National Internal Revenue
Code 1 that the unregistered partnership was
In the said case, petitioners borrowed a sum of
subject to corporate income tax as distinguished money from their father which together with their
from profits derived from the partnership by them own personal funds they used in buying several
which is subject to individual income tax; and
real properties. They appointed their brother to
that the availment of tax amnesty under P.D. No. manage their properties with full power to lease,
23, as amended, by petitioners relieved
collect, rent, issue receipts, etc. They had the
petitioners of their individual income tax
real properties rented or leased to various
liabilities but did not relieve them from the tax tenants for several years and they gained net
liability of the unregistered partnership. Hence, profits from the rental income. Thus, the
the petitioners were required to pay the
Collector of Internal Revenue demanded the
deficiency income tax assessed.
payment of income tax on a corporation, among
others, from them.
Petitioners filed a petition for review with the

In resolving the issue, this Court held as

follows:

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
The issue in this case is whether petitioners are P237,234.14. The number of lots (24) acquired and
subject to the tax on corporations provided for
transcations undertaken, as well as the brief
in section 24 of Commonwealth Act No. 466,
interregnum between each, particularly the last
otherwise known as the National Internal Revenue three purchases, is strongly indicative of a
Code, as well as to the residence tax for
pattern or common design that was not limited to
corporations and the real estate dealers' fixed
the conservation and preservation of the
tax. With respect to the tax on corporations, the aforementioned common fund or even of the
issue hinges on the meaning of the terms
property acquired by petitioners in February,
corporation and partnership as used in sections
1943. In other words, one cannot but perceive a
24 and 84 of said Code, the pertinent parts of
character of habituality peculiar to business
which read:
transactions engaged in for purposes of gain.
Sec. 24. Rate of the tax on corporations.There
shall be levied, assessed, collected, and paid
annually upon the total net income received in
the preceding taxable year from all sources by
every corporation organized in, or existing under
the laws of the Philippines, no matter how
created or organized but not including duly
registered general co-partnerships (companies
collectives), a tax upon such income equal to the
sum of the following: ...

3.
The aforesaid lots were not devoted to
residential purposes or to other personal uses,
of petitioners herein. The properties were leased
separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30
by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest
that there has been any change in the utilization
thereof.

4.
Since August, 1945, the properties have
been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to
collect rents, to issue receipts, to bring suits,
to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs
relative to said properties have been handled as
if the same belonged to a corporation or business
Article 1767 of the Civil Code of the Philippines enterprise operated for profit.
provides:
5.
The foregoing conditions have existed for
By the contract of partnership two or more
more than ten (10) years, or, to be exact, over
persons bind themselves to contribute money,
fifteen (15) years, since the first property was
property, or industry to a common fund, with the acquired, and over twelve (12) years, since
intention of dividing the profits among
Simeon Evangelists became the manager.
themselves.
6.
Petitioners have not testified or
Pursuant to this article, the essential elements introduced any evidence, either on their purpose
of a partnership are two, namely: (a) an
in creating the set up already adverted to, or on
agreement to contribute money, property or
the causes for its continued existence. They did
industry to a common fund; and (b) intent to
not even try to offer an explanation therefor.
divide the profits among the contracting parties.
The first element is undoubtedly present in the
Although, taken singly, they might not suffice to
case at bar, for, admittedly, petitioners have
establish the intent necessary to constitute a
agreed to, and did, contribute money and property partnership, the collective effect of these
to a common fund. Hence, the issue narrows down
circumstances is such as to leave no room for
to their intent in acting as they did. Upon
doubt on the existence of said intent in
consideration of all the facts and circumstances petitioners herein. Only one or two of the
surrounding the case, we are fully satisfied that aforementioned circumstances were present in the
their purpose was to engage in real estate
cases cited by petitioners herein, and, hence,
transactions for monetary gain and then divide
those cases are not in point. 5
the same among themselves, because:
In the present case, there is no evidence that
1.
Said common fund was not something they
petitioners entered into an agreement to
found already in existence. It was not a property contribute money, property or industry to a
inherited by them pro indiviso. They created it
common fund, and that they intended to divide the
purposely. What is more they jointly borrowed a
profits among themselves. Respondent commissioner
substantial portion thereof in order to establish and/ or his representative just assumed these
said common fund.
conditions to be present on the basis of the fact
that petitioners purchased certain parcels of
2.
They invested the same, not merely in one
land and became co-owners thereof.
transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for
In Evangelists, there was a series of
P100,000.00. On April 3, 1944, they purchased 21 transactions where petitioners purchased twentylots for P18,000.00. This was soon followed, on
four (24) lots showing that the purpose was not
Sec. 84(b). The term "corporation" includes
partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participation), associations or insurance
companies, but does not include duly registered
general co-partnerships (companies colectivas).

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.

of other circumstances showing a contrary

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

A joint purchase of land, by two, does not

constitute a co-partnership in respect thereto;
nor does an agreement to share the profits and
losses on the sale of land create a partnership;
In Evangelista, the properties were leased out to the parties are only tenants in common. (Clark
tenants for several years. The business was under vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed.,
the management of one of the partners. Such
1157.)
condition existed for over fifteen (15) years.
None of the circumstances are present in the case Where plaintiff, his brother, and another agreed
at bar. The co-ownership started only in 1965 and to become owners of a single tract of realty,
ended in 1970.
holding as tenants in common, and to divide the
profits of disposing of it, the brother and the
Thus, in the concurring opinion of Mr. Justice
other not being entitled to share in plaintiffs
Angelo Bautista in Evangelista he said:
commission, no partnership existed as between the
three parties, whatever their relation may have
I wish however to make the following observation been as to third parties. (Magee vs. Magee 123
Article 1769 of the new Civil Code lays down the N.E. 673, 233 Mass. 341.)
rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said
In order to constitute a partnership inter sese
article paragraphs 2 and 3, provides;
there must be: (a) An intent to form the same;
(b) generally participating in both profits and
(2)
Co-ownership or co-possession does not
losses; (c) and such a community of interest, as
itself establish a partnership, whether such co- far as third persons are concerned as enables
owners or co-possessors do or do not share any
each party to make contract, manage the business,
profits made by the use of the property;
and dispose of the whole property.-Municipal
Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
(3)
The sharing of gross returns does not of
itself establish a partnership, whether or not
The common ownership of property does not itself
the persons sharing them have a joint or common
create a partnership between the owners, though
right or interest in any property from which the they may use it for the purpose of making gains;
returns are derived;
and they may, without becoming partners, agree
among themselves as to the management, and use of
From the above it appears that the fact that
such property and the application of the proceeds
those who agree to form a co- ownership share or therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160
do not share any profits made by the use of the
No. App. 14.) 6
property held in common does not convert their
venture into a partnership. Or the sharing of the The sharing of returns does not in itself
gross returns does not of itself establish a
establish a partnership whether or not the
partnership whether or not the persons sharing
persons sharing therein have a joint or common
therein have a joint or common right or interest right or interest in the property. There must be
in the property. This only means that, aside from a clear intent to form a partnership, the
the circumstance of profit, the presence of other existence of a juridical personality different
elements constituting partnership is necessary,
from the individual partners, and the freedom of
such as the clear intent to form a partnership,
each party to transfer or assign the whole
the existence of a juridical personality
property.
different from that of the individual partners,
and the freedom to transfer or assign any
In the present case, there is clear evidence of
interest in the property by one with the consent co-ownership between the petitioners. There is no
of the others (Padilla, Civil Code of the
adequate basis to support the proposition that
Philippines Annotated, Vol. I, 1953 ed., pp. 635- they thereby formed an unregistered partnership.
636)
The two isolated transactions whereby they
purchased properties and sold the same a few
It is evident that an isolated transaction
years thereafter did not thereby make them
whereby two or more persons contribute funds to
partners. They shared in the gross profits as cobuy certain real estate for profit in the absence owners and paid their capital gains taxes on

their net profits and availed of the tax amnesty

thereby. Under the circumstances, they cannot be
considered to have formed an unregistered
partnership which is thereby liable for corporate
income tax, as the respondent commissioner
proposes.
And even assuming for the sake of argument that
such unregistered partnership appears to have
been formed, since there is no such existing
unregistered partnership with a distinct
personality nor with assets that can be held
liable for said deficiency corporate income tax,
then petitioners can be held individually liable
as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have
availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they
are thereby relieved of any further tax liability
arising therefrom.

with SHELL. For practical purposes and in order

not to run counter to the company's policy of
appointing only one dealer, it was agreed that
petitioner would apply for the dealership.
Respondent Remedios helped in managing the
bussiness with petitioner from May 3, 1966 up to
February 16, 1967.
On May 26, 1966, the parties herein entered into
an Additional Cash Pledge Agreement with SHELL
wherein it was reiterated that the P 15,000.00
advance rental shall be deposited with SHELL to
cover advances of fuel to petitioner as dealer
with a proviso that said agreement "cancels and
supersedes the Joint Affidavit dated 11 April
1966 executed by the co-owners." 2

For sometime, the petitioner submitted financial

statements regarding the operation of the
business to private respondents, but therafter
petitioner failed to render subsequent
WHEREFROM, the petition is hereby GRANTED and the accounting. Hence through Atty. Angeles, a demand
decision of the respondent Court of Tax Appeals
was made on petitioner to render an accounting of
of March 30, 1987 is hereby REVERSED and SET
the profits.
ASIDE and another decision is hereby rendered
relieving petitioners of the corporate income tax The financial report of December 31, 1968 shows
liability in this case, without pronouncement as that the business was able to make a profit of P
to costs.
87,293.79 and that by the year ending 1969, a
profit of P 150,000.00 was realized. 3
SO ORDERED.
Thus, on August 25, 1970 private respondents
Cruz, Grio-Aquino and Medialdea, JJ., concur.
filed a complaint in the Court of First Instance
of Rizal against petitioner praying among others
Narvasa, J., took no part.
that the latter be ordered:
ELIGIO ESTANISLAO, JR., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, REMEDIOS
ESTANISLAO, EMILIO and LEOCADIO SANTIAGO,
respondents.
Agustin O. Benitez for petitioner.
Benjamin C. Yatco for private respondents.

GANCAYCO, J.:
By this petition for certiorari the Court is
asked to determine if a partnership exists
between members of the same family arising from
their joint ownership of certain properties.
Petitioner and private respondents are brothers
and sisters who are co-owners of certain lots at
the corner of Annapolis and Aurora Blvd.,
QuezonCity which were then being leased to the
Shell Company of the Philippines Limited (SHELL).
They agreed to open and operate a gas station
thereat to be known as Estanislao Shell Service
Station with an initial investment of P 15,000.00
to be taken from the advance rentals due to them
from SHELL for the occupancy of the said lots
owned in common by them. A joint affidavit was
executed by them on April 11, 1966 which was
prepared byAtty. Democrito Angeles 1 They agreed
to help their brother, petitioner herein, by
allowing him to operate and manage the gasoline
service station of the family. They negotiated

1.
to execute a public document embodying all
the provisions of the partnership agreement
entered into between plaintiffs and defendant as
provided in Article 1771 of the New Civil Code;
2.
to render a formal accounting of the
business operation covering the period from May
6, 1966 up to December 21, 1968 and from January
1, 1969 up to the time the order is issued and
that the same be subject to proper audit;
3.
to pay the plaintiffs their lawful shares
and participation in the net profits of the
business in an amount of no less than P
l50,000.00 with interest at the rate of 1% per
month from date of demand until full payment
thereof for the entire duration of the business;
and
4.
to pay the plaintiffs the amount of P
10,000.00 as attorney's fees and costs of the
suit (pp. 13-14 Record on Appeal.)
After trial on the merits, on October 15, 1975,
Hon. Lino Anover who was then the temporary
presiding judge of Branch IV of the trial court,
rendered judgment dismissing the complaint and
counterclaim and ordering private respondents to
pay petitioner P 3,000.00 attorney's fee and
costs. Private respondent filed a motion for
reconsideration of the decision. On December 10,
1975, Hon. Ricardo Tensuan who was the newly
appointed presiding judge of the same branch, set
aside the aforesaid derision and rendered another
decision in favor of said respondents.

The dispositive part thereof reads as follows:

Deeds of Quezon City, in favor of the LESSEE SHELL COMPANY OF THE PHILIPPINES LIMITED a
corporation duly licensed to do business in the
Philippines;

WHEREFORE, the Decision of this Court dated

October 14, 1975 is hereby reconsidered and a new
judgment is hereby rendered in favor of the
(2)
That we have requested the said SHELL
plaintiffs and as against the defendant:
COMPANY OF THE PHILIPPINE LIMITED advanced
rentals in the total amount of FIFTEEN THOUSAND
(1)
Ordering the defendant to execute a public PESOS (P l5,000.00) Philippine Currency, so that
instrument embodying all the provisions of the
we can use the said amount to augment our capital
partnership agreement entered into between
investment in the operation of that gasoline
plaintiffs and defendant as provided for in
station constructed ,by the said company on our
Article 1771, Civil Code of the Philippines;
two lots aforesaid by virtue of an outstanding
Lease Agreement we have entered into with the
(2)
Ordering the defendant to render a formal
said company;
accounting of the business operation from April
1969 up to the time this order is issued, the
(3)
That the and SHELL COMPANY OF THE
same to be subject to examination and audit by
PHILIPPINE LIMITED out of its benevolence and
the plaintiff,
desire to help us in aumenting our capital
investment in the operation of the said gasoline
(3)
Ordering the defendant to pay plaintiffs
station, has agreed to give us the said amount of
their lawful shares and participation in the net P 15,000.00, which amount will partake the nature
profits of the business in the amount of P
of ADVANCED RENTALS;
150,000.00, with interest thereon at the rate of
One (1%) Per Cent per month from date of demand
(4)
That we have freely and voluntarily agreed
until full payment thereof;
that upon receipt of the said amount of FIFTEEN
THOUSAND PESOS (P l6,000.00) from he SHELL
(4)
Ordering the defendant to pay the
COMPANY OF THE PHILIPPINES LIMITED, the said sum
plaintiffs the sum of P 5,000.00 by way of
as ADVANCED RENTALS to us be applied as monthly
attorney's fees of plaintiffs' counsel; as well
rentals for the sai two lots under our Lease
as the costs of suit. (pp. 161-162. Record on
Agreement starting on the 25th of May, 1966 until
Appeal).
such time that the said of P 15,000.00 be
applicable, which time to our estimate and onePetitioner then interposed an appeal to the Court half months from May 25, 1966 or until the 10th
of Appeals enumerating seven (7) errors allegedly of October, 1966 more or less;
committed by the trial court. In due course, a
decision was rendered by the Court of Appeals on (5)
That we have likewise agreed among
November 28,1978 affirming in toto the decision
ourselves that the SHELL COMPANY OF THE
of the lower court with costs against petitioner. PHILIPPINES LIMITED execute an instrument for us
*
to sign embodying our conformity that the said
amount that it will generously grant us as
A motion for reconsideration of said decision
requested be applied as ADVANCED RENTALS; and
filed by petitioner was denied on January 30,
1979. Not satisfied therewith, the petitioner now (6)
FURTHER AFFIANTS SAYETH NOT.,
comes to this court by way of this petition for
certiorari alleging that the respondent court
(b)
The Additional Cash Pledge Agreement of May
erred:
20,1966, Exhibit 6, is as follows:
1.
In interpreting the legal import of the
Joint Affidavit (Exh. 'A') vis-a-vis the
Additional Cash Pledge Agreement (Exhs. "B2","6", and "L"); and

WHEREAS, under the lease Agreement dated 13th

November, 1963 (identified as doc. Nos. 491 &
1407, Page Nos. 99 & 66, Book Nos. V & III,
Series of 1963 in the Notarial Registers of
Notaries Public Rosauro Marquez, and R.D.
2.
In declaring that a partnership was
Liwanag, respectively) executed in favour of
established by and among the petitioner and the
SHELL by the herein CO-OWNERS and another Lease
private respondents as regards the ownership and Agreement dated 19th March 1964 . . . also
or operation of the gasoline service station
executed in favour of SHELL by CO-OWNERS Remedios
business.
and MARIA ESTANISLAO for the lease of adjoining
portions of two parcels of land at Aurora Blvd./
Petitioner relies heavily on the provisions of
Annapolis, Quezon City, the CO OWNERS RECEIVE a
the Joint Affidavit of April 11, 1966 (Exhibit A) total monthly rental of PESOS THREE THOUSAND
and the Additional Cash Pledge Agreement of May
THREE HUNDRED EIGHTY TWO AND 29/100 (P 3,382.29),
20, 1966 (Exhibit 6) which are herein reproduced- Philippine Currency;
(a)
The joint Affidavit of April 11, 1966,
Exhibit A reads:
(1)
That we are the Lessors of two parcels of
land fully describe in Transfer Certificates of
Title Nos. 45071 and 71244 of the Register of

WHEREAS, CO-OWNER Eligio Estanislao Jr. is the

Dealer of the Shell Station constructed on the
leased land, and as Dealer under the Cash Pledge
Agreement dated llth May 1966, he deposited to
SHELL in cash the amount of PESOS TEN THOUSAND (P
10,000), Philippine Currency, to secure his

purchase on credit of Shell petroleum products; . increase his credit limit as dealer. As above. .
stated it provided therein that "This agreement,
therefore, cancels and supersedes the Joint
WHEREAS, said DEALER, in his desire, to be
Affidavit dated 11 April 1966 executed by the COgranted an increased the limit up to P 25,000,
OWNERS."
has secured the conformity of his CO-OWNERS to
waive and assign to SHELL the total monthly
Petitioner contends that because of the said
rentals due to all of them to accumulate the
stipulation cancelling and superseding that
equivalent amount of P 15,000, commencing 24th
previous Joint Affidavit, whatever partnership
May 1966, this P 15,000 shall be treated as
agreement there was in said previous agreement
additional cash deposit to SHELL under the same
had thereby been abrogated. We find no merit in
terms and conditions of the aforementioned Cash
this argument. Said cancelling provision was
Pledge Agreement dated llth May 1966.
necessary for the Joint Affidavit speaks of P
15,000.00 advance rentals starting May 25, 1966
NOW, THEREFORE, for and in consideration of the
while the latter agreement also refers to advance
foregoing premises,and the mutual covenants among rentals of the same amount starting May 24, 1966.
the CO-OWNERS herein and SHELL, said parties have There is, therefore, a duplication of reference
agreed and hereby agree as follows:
to the P 15,000.00 hence the need to provide in
the subsequent document that it "cancels and
l.
The CO-OWNERS dohere by waive in favor of
supersedes" the previous one. True it is that in
DEALER the monthly rentals due to all CO-OWNERS, the latter document, it is silent as to the
collectively, under the above describe two Lease statement in the Joint Affidavit that the P
Agreements, one dated 13th November 1963 and the 15,000.00 represents the "capital investment" of
other dated 19th March 1964 to enable DEALER to
the parties in the gasoline station business and
increase his existing cash deposit to SHELL, from it speaks of petitioner as the sole dealer, but
P 10,000 to P 25,000, for such purpose, the SHELL this is as it should be for in the latter
CO-OWNERS and DEALER hereby irrevocably assign to document SHELL was a signatory and it would be
SHELL the monthly rental of P 3,382.29 payable to against its policy if in the agreement it should
them respectively as they fall due, monthly,
be stated that the business is a partnership with
commencing 24th May 1966, until such time that
private respondents and not a sole proprietorship
the monthly rentals accumulated, shall be equal
of petitioner.
to P l5,000.
Moreover other evidence in the record shows that
2.
The above stated monthly rentals
there was in fact such partnership agreement
accumulated shall be treated as additional cash
between the parties. This is attested by the
deposit by DEALER to SHELL, thereby in increasing testimonies of private respondent Remedies
his credit limit from P 10,000 to P 25,000. This Estanislao and Atty. Angeles. Petitioner
agreement, therefore, cancels and supersedes the submitted to private respondents periodic
Joint affidavit dated 11 April 1966 executed by
accounting of the business. 4 Petitioner gave a
the CO-OWNERS.
written authority to private respondent Remedies
Estanislao, his sister, to examine and audit the
3.
Effective upon the signing of this
books of their "common business' aming negosyo).
agreement, SHELL agrees to allow DEALER to
5 Respondent Remedios assisted in the running of
purchase from SHELL petroleum products, on
the business. There is no doubt that the parties
credit, up to the amount of P 25,000.
hereto formed a partnership when they bound
themselves to contribute money to a common fund
4.
This increase in the credit shall also be
with the intention of dividing the profits among
subject to the same terms and conditions of the
themselves. 6 The sole dealership by the
above-mentioned Cash Pledge Agreement dated llth petitioner and the issuance of all government
May 1966. (Exhs. "B-2," "L," and "6"; emphasis
permits and licenses in the name of petitioner
supplied)
was in compliance with the afore-stated policy of
SHELL and the understanding of the parties of
In the aforesaid Joint Affidavit of April 11,
having only one dealer of the SHELL products.
1966 (Exhibit A), it is clearly stipulated by the
parties that the P 15,000.00 advance rental due
Further, the findings of facts of the respondent
to them from SHELL shall augment their "capital
court are conclusive in this proceeding, and its
investment" in the operation of the gasoline
conclusion based on the said facts are in
station, which advance rentals shall be credited accordancewith the applicable law.
as rentals from May 25, 1966 up to four and onehalf months or until 10 October 1966, more or
WHEREFORE, the judgment appealed from is AFFIRMED
less covering said P 15,000.00.
in toto with costs against petitioner. This
decision is immediately executory and no motion
In the subsequent document entitled "Additional
for extension of time to file a motion for
Cash Pledge Agreement" above reproduced (Exhibit reconsideration shag beentertained.
6), the private respondents and petitioners
assigned to SHELL the monthly rentals due them
SO ORDERED.
commencing the 24th of May 1966 until such time
that the monthly rentals accumulated equal P
G.R. No. L-17295
July 30, 1962
15,000.00 which private respondents agree to be a
cash deposit of petitioner in favor of SHELL to
ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendantappellee.

That the State, through Congress, and in the

manner provided by law, had the right to enact
Republic Act No. 1180 and to provide therein that
only Filipinos and concerns wholly owned by
Felicisimo E. Escaran for plaintiffs-appellants. Filipinos may engage in the retail business can
Office of the Solicitor General for defendantnot be seriously disputed. That this provision
appellee.
was clearly intended to apply to partnership
already existing at the time of the enactment of
DIZON, J.:
the law is clearly showing by its provision
giving them the right to continue engaging in
Action for declaratory relief filed in the Court their retail business until the expiration of
of First Instance of Iloilo by Ang Pue & Company, their term or life.
Ang Pue and Tan Siong against the Secretary of
Commerce and Industry to secure judgment
To argue that because the original articles of
"declaring that plaintiffs could extend for five partnership provided that the partners could
years the term of the partnership pursuant to the extend the term of the partnership, the
provisions of plaintiffs' Amendment to the
provisions of Republic Act 1180 cannot be
Article of Co-partnership."
adversely affect appellants herein, is to
erroneously assume that the aforesaid provision
The answer filed by the defendant alleged, in
constitute a property right of which the partners
substance, that the extension for another five
can not be deprived without due process or
years of the term of the plaintiffs' partnership without their consent. The agreement contain
would be in violation of the provisions of
therein must be deemed subject to the law
Republic Act No. 1180.
existing at the time when the partners came to
agree regarding the extension. In the present
It appears that on May 1, 1953, Ang Pue and Tan
case, as already stated, when the partners
Siong, both Chinese citizens, organized the
amended the articles of partnership, the
partnership Ang Pue & Company for a term of five provisions of Republic Act 1180 were already in
years from May 1, 1953, extendible by their
force, and there can be not the slightest doubt
mutual consent. The purpose of the partnership
that the right claimed by appellants to extend
was "to maintain the business of general
the original term of their partnership to another
merchandising, buying and selling at wholesale
five years would be in violation of the clear
and retail, particularly of lumber, hardware and intent and purpose of the law aforesaid.
other construction materials for commerce, either
native or foreign." The corresponding articles of WHEREFORE, the judgment appealed from is
partnership (Exhibit B) were registered in the
affirmed, with costs.
Office of the Securities & Exchange Commission on
June 16, 1953.
Bengzon, C.J., Padilla, Labrador, Concepcion,
Barrera, Paredes, Regala and Makalintal, JJ.,
On June 19, 1954 Republic Act No. 1180 was
concur.
enacted to regulate the retail business. It
Bautista Angelo and Reyes, J.B.L., JJ., took no
provided, among other things, that, after its
part.
enactment, a partnership not wholly formed by
Filipinos could continue to engage in the retail G.R. No. L-68118
October 29, 1985
business until the expiration of its term.
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P.
On April 15, 1958 prior to the expiration of
OBILLOS and REMEDIOS P. OBILLOS, brothers and
the five-year term of the partnership Ang Pue &
sisters, petitioners
Company, but after the enactment of the Republic vs.
Act 1180, the partners already mentioned amended COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
the original articles of part ownership (Exhibit APPEALS, respondents.
B) so as to extend the term of life of the
partnership to another five years. When the
Demosthenes B. Gadioma for petitioners.
amended articles were presented for registration
in the Office of the Securities & Exchange
Commission on April 16, 1958, registration was
refused upon the ground that the extension was in AQUINO, J.:
violation of the aforesaid Act.
This case is about the income tax liability of
From the decision of the lower court dismissing
four brothers and sisters who sold two parcels of
the action, with costs, the plaintiffs interposed land which they had acquired from their father.
this appeal.
On March 2, 1973 Jose Obillos, Sr. completed
The question before us is too clear to require an payment to Ortigas & Co., Ltd. on two lots with
extended discussion. To organize a corporation or areas of 1,124 and 963 square meters located at
a partnership that could claim a juridical
Greenhills, San Juan, Rizal. The next day he
personality of its own and transact business as
transferred his rights to his four children, the
such, is not a matter of absolute right but a
petitioners, to enable them to build their
privilege which may be enjoyed only under such
residences. The company sold the two lots to
terms as the State may deem necessary to impose. petitioners for P178,708.12 on March 13 (Exh. A

and B, p. 44, Rollo). Presumably, the Torrens

titles issued to them would show that they were
co-owners of the two lots.

residential purposes. If later on they found it

not feasible to build their residences on the
lots because of the high cost of construction,
then they had no choice but to resell the same to
In 1974, or after having held the two lots for
dissolve the co-ownership. The division of the
more than a year, the petitioners resold them to profit was merely incidental to the dissolution
the Walled City Securities Corporation and Olga
of the co-ownership which was in the nature of
Cruz Canda for the total sum of P313,050 (Exh. C things a temporary state. It had to be terminated
and D). They derived from the sale a total profit sooner or later. Castan Tobeas says:
of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an Como establecer el deslinde entre la comunidad
income tax on one-half thereof or of P16,792.
ordinaria o copropiedad y la sociedad?
In April, 1980, or one day before the expiration
of the five-year prescriptive period, the
Commissioner of Internal Revenue required the
four petitioners to pay corporate income tax on
the total profit of P134,336 in addition to
individual income tax on their shares thereof He
assessed P37,018 as corporate income tax, P18,509
as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.

El criterio diferencial-segun la doctrina mas

generalizada-esta: por razon del origen, en que
la sociedad presupone necesariamente la
convencion, mentras que la comunidad puede
existir y existe ordinariamente sin ela; y por
razon del fin objecto, en que el objeto de la
sociedad es obtener lucro, mientras que el de la
indivision es solo mantener en su integridad la
cosa comun y favorecer su conservacion.

Not only that. He considered the share of the

profits of each petitioner in the sum of P33,584
as a " taxable in full (not a mere capital gain
of which is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the
accumulated interest.

Reflejo de este criterio es la sentencia de 15 de

Octubre de 1940, en la que se dice que si en
nuestro Derecho positive se ofrecen a veces
dificultades al tratar de fijar la linea
divisoria entre comunidad de bienes y contrato de
sociedad, la moderna orientacion de la doctrina
cientifica seala como nota fundamental de
diferenciacion aparte del origen de fuente de que
Thus, the petitioners are being held liable for
surgen, no siempre uniforme, la finalidad
deficiency income taxes and penalties totalling
perseguida por los interesados: lucro comun
P127,781.76 on their profit of P134,336, in
partible en la sociedad, y mera conservacion y
addition to the tax on capital gains already paid aprovechamiento en la comunidad. (Derecho Civil
by them.
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
The Commissioner acted on the theory that the
four petitioners had formed an unregistered
partnership or joint venture within the meaning
of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).

Article 1769(3) of the Civil Code provides that

"the sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common right
or interest in any property from which the
returns are derived". There must be an
unmistakable intention to form a partnership or
joint venture.*

The petitioners contested the assessments. Two

Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
Such intent was present in Gatchalian vs.
Collector of Internal Revenue, 67 Phil. 666,
We hold that it is error to consider the
where 15 persons contributed small amounts to
petitioners as having formed a partnership under purchase a two-peso sweepstakes ticket with the
article 1767 of the Civil Code simply because
agreement that they would divide the prize The
they allegedly contributed P178,708.12 to buy the ticket won the third prize of P50,000. The 15
two lots, resold the same and divided the profit persons were held liable for income tax as an
among themselves.
unregistered partnership.
To regard the petitioners as having formed a
taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy.
That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no
such intention. They were co-owners pure and
simple. To consider them as partners would
obliterate the distinction between a co-ownership
and a partnership. The petitioners were not
engaged in any joint venture by reason of that
isolated transaction.

The instant case is distinguishable from the

cases where the parties engaged in joint ventures
for profit. Thus, in Oa vs.
** This view is supported by the following
rulings of respondent Commissioner:

Co-owership distinguished from partnership.We

find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De
Leon heirs, the Longa heirs inherited the
'hacienda' in question pro-indiviso from their
deceased parents; they did not contribute or
invest additional ' capital to increase or expand
Their original purpose was to divide the lots for the inherited properties; they merely continued

dedicating the property to the use to which it

had been put by their forebears; they
individually reported in their tax returns their
corresponding shares in the income and expenses
of the 'hacienda', and they continued for many
years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the
'hacienda') value and to continue the existing
contractual relations with the Central Azucarera
de Bais for milling purposes. Longa vs. Aranas,
CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered
pratnership.Co-Ownership who own properties
which produce income should not automatically be
considered partners of an unregistered
partnership, or a corporation, within the purview
of the income tax law. To hold otherwise, would
be to subject the income of all
co-ownerships of inherited properties to the tax
on corporations, inasmuch as if a property does
not produce an income at all, it is not subject
to any kind of income tax, whether the income tax
on individuals or the income tax on corporation.
(De Leon vs. CI R, CTA Case No. 738, September
11, 1961, cited in Araas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May
25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the
inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it
was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs.
Commissioner of Internal Revenue, 24 SCRA 198,
where father and son purchased a lot and
building, entrusted the administration of the
building to an administrator and divided equally
the net income, and from Evangelista vs.
Collector of Internal Revenue, 102 Phil. 140,
where the three Evangelista sisters bought four
pieces of real property which they leased to
various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had
formed an unregistered partnership.

A partnership may be deemed to exist among

parties who agree to borrow money to pursue a
business and to divide the profits or losses that
may arise therefrom, even if it is shown that
they have not contributed any capital of their
own to a "common fund." Their contribution may be
in the form of credit or industry, not
necessarily cash or fixed assets. Being partner,
they are all liable for debts incurred by or on
behalf of the partnership. The liability for a
contract entered into on behalf of an
unincorporated association or ostensible
corporation may lie in a person who may not have
directly transacted on its behalf, but reaped
benefits from that contract.
The Case
In the Petition for Review on Certiorari before
us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in
the appealed decision, the same is hereby
affirmed. 2
The decretal portion of the Quezon City Regional
Trial Court (RTC) ruling, which was affirmed by
the CA, reads as follows:
WHEREFORE, the Court rules:
1.
That plaintiff is entitled to the writ of
preliminary attachment issued by this Court on
September 20, 1990;
2.
That defendants are jointly liable to
plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason
of the special and unique facts and circumstances
and the proceedings that transpired during the
trial of this case;

a.
P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered by the
Agreement plus P68,000.00 representing the unpaid
price of the floats not covered by said
In the instant case, what the Commissioner should Agreement;
have investigated was whether the father donated
the two lots to the petitioners and whether he
b.
12% interest per annum counted from date of
paid the donor's tax (See Art. 1448, Civil Code). plaintiff's invoices and computed on their
We are not prejudging this matter. It might have respective amounts as follows:
already prescribed.
i.
Accrued interest of P73,221.00 on Invoice
WHEREFORE, the judgment of the Tax Court is
No. 14407 for P385,377.80 dated February 9, 1990;
reversed and set aside. The assessments are
cancelled. No costs.
ii.
Accrued interest for P27,904.02 on Invoice
No. 14413 for P146,868.00 dated February 13,
SO ORDERED.
1990;
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC.,
respondent.

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

PANGANIBAN, J.:

d.

c.
P50,000.00 as and for attorney's fees, plus
P8,500.00 representing P500.00 per appearance in
court;
P65,000.00 representing P5,000.00 monthly

rental for storage charges on the nets counted

from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e.

Lim, who however was not a signatory to the

agreement. The total price of the nets amounted
to P532,045. Four hundred pieces of floats worth
P68,000 were also sold to the Corporation. 4

Cost of suit.

With respect to the joint liability of defendants

for the principal obligation or for the unpaid
price of nets and floats in the amount of
P532,045.00 and P68,000.00, respectively, or for
the total amount P600,045.00, this Court noted
that these items were attached to guarantee any
judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties,
and, to avoid further deterioration of the nets
during the pendency of this case, it was ordered
sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole
and winning bidder. The proceeds of the sale paid
for by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced the
attached property as a guaranty for any judgment
that plaintiff may be able to secure in this case
with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to
plaintiff as the highest bidder in the public
auction sale. It has also been noted that
ownership of the nets [was] retained by the
plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the
plaintiff attached its own properties. It [was]
for this reason also that this Court earlier
ordered the attachment bond filed by plaintiff to
guaranty damages to defendants to be cancelled
and for the P900,000.00 cash bidded and paid for
by plaintiff to serve as its bond in favor of
defendants.
From the foregoing, it would appear therefore
that whatever judgment the plaintiff may be
entitled to in this case will have to be
satisfied from the amount of P900,000.00 as this
amount replaced the attached nets and floats.
Considering, however, that the total judgment
obligation as computed above would amount to only
P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who
are not entitled to damages and who did not put
up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not
the owners of the nets and floats. For this
reason, the defendants are hereby relieved from
any and all liabilities arising from the monetary
judgment obligation enumerated above and for
plaintiff to retain possession and ownership of
the nets and floats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of
Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation,"
Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase
of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged
in a business venture with Petitioner Lim Tong

The buyers, however, failed to pay for the

fishing nets and the floats; hence, private
respondents filed a collection suit against Chua,
Yao and Petitioner Lim Tong Lim with a prayer for
a writ of preliminary attachment. The suit was
brought against the three in their capacities as
general partners, on the allegation that "Ocean
Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the
Securities and Exchange Commission. 5 On
September 20, 1990, the lower court issued a Writ
of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board
F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a
Manifestation admitting his liability and
requesting a reasonable time within which to pay.
He also turned over to respondent some of the
nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to
have waived his right to cross-examine witnesses
and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the
lifting of the Writ of Attachment. 6 The trial
court maintained the Writ, and upon motion of
private respondent, ordered the sale of the
fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and
deposited with the said court the sales proceeds
of P900,000. 7
On November 18, 1992, the trial court rendered
its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment
and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent. 8
The trial court ruled that a partnership among
Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on
a Compromise Agreement executed by the three 9 in
Civil Case No. 1492-MN which Chua and Yao had
brought against Lim in the RTC of Malabon, Branch
72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of
contracts; (c) a declaration of ownership of
fishing boats; (d) an injunction and (e) damages.
10 The Compromise Agreement provided:
a)
That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL Holdings
Corporation and/or Lim Tong Lim;
b)
If the four (4) vessel[s] and the fishing
net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be
divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao;

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

The Petition is devoid of merit.

The trial court noted that the Compromise

Agreement was silent as to the nature of their
obligations, but that joint liability could be
presumed from the equal distribution of the
profit and loss. 21

and Petitioner's Liability

Lim appealed to the Court of Appeals (CA) which,

as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that
petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a
such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate
court ruled:
The evidence establishes that all the defendants
including herein appellant Lim Tong Lim undertook
a partnership for a specific undertaking, that is
for commercial fishing . . . . Oviously, the
ultimate undertaking of the defendants was to
divide the profits among themselves which is what
a partnership essentially is . . . . By a
contract of partnership, two or more persons bind
themselves to contribute money, property or
industry to a common fund with the intention of
dividing the profits among themselves (Article
1767, New Civil Code). 13
Hence, petitioner brought this recourse before
this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this
Court to reverse the assailed Decision on the
following grounds:
I
THE COURT OF APPEALS ERRED IN HOLDING,
BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO
AND PETITIONER LIM ENTERED INTO IN A SEPARATE
CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.

First and Second Issues:

Existence of a Partnership

In arguing that he should not be held liable for

the equipment purchased from respondent,
petitioner controverts the CA finding that a
partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone.
Furthermore, he disclaims any direct
participation in the purchase of the nets,
alleging that the negotiations were conducted by
Chua and Yao only, and that he has not even met
the representatives of the respondent company.
Petitioner further argues that he was a lessor,
not a partner, of Chua and Yao, for the "Contract
of Lease " dated February 1, 1990, showed that he
had merely leased to the two the main asset of
the purported partnership the fishing boat F/B
Lourdes. The lease was for six months, with a
monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of
petitioner. The facts as found by the two lower
courts clearly showed that there existed a
partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:
Art. 1767 By the contract of partnership, two
or more persons bind themselves to contribute
money, property, or industry to a common fund,
with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a
partnership among the three existed based on the
following factual findings: 15
(1)
That Petitioner Lim Tong Lim requested
Peter Yao who was engaged in commercial fishing
to join him, while Antonio Chua was already Yao's
partner;

(2)
That after convening for a few times, Lim,
Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson
II
SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT for the sum of P3.35 million;
HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, (3)
That they borrowed P3.25 million from Jesus
THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING Lim, brother of Petitioner Lim Tong Lim, to
LIABILITY TO PETITIONER LIM AS WELL.
finance the venture.
III
THE TRIAL COURT IMPROPERLY ORDERED THE
(4)
That they bought the boats from CMF Fishing
SEIZURE AND ATTACHMENT OF PETITIONER LIM'S GOODS. Corporation, which executed a Deed of Sale over
these two (2) boats in favor of Petitioner Lim
In determining whether petitioner may be held
Tong Lim only to serve as security for the loan
liable for the fishing nets and floats from
extended by Jesus Lim;
respondent, the Court must resolve this key
issue: whether by their acts, Lim, Chua and Yao
(5)
That Lim, Chua and Yao agreed that the
could be deemed to have entered into a
refurbishing, re-equipping, repairing, dry
partnership.
docking and other expenses for the boats would be
shouldered by Chua and Yao;
This Court's Ruling

(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.

this Court, absent any cogent proof that the

present action is embraced by one of the
exceptions to the rule. 16 In assailing the
factual findings of the two lower courts,
petitioner effectively goes beyond the bounds of
a petition for review under Rule 45.

Compromise Agreement
(7)
That in pursuance of the business
agreement, Peter Yao and Antonio Chua bought nets Not the Sole Basis of Partnership
from Respondent Philippine Fishing Gear, in
behalf of "Ocean Quest Fishing Corporation,"
Petitioner argues that the appellate court's sole
their purported business name.
basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that
(8)
That subsequently, Civil Case No. 1492-MN
the settlement was entered into only to end the
was filed in the Malabon RTC, Branch 72 by
dispute among them, but not to adjudicate their
Antonio Chua and Peter Yao against Lim Tong Lim
preexisting rights and obligations. His arguments
for (a) declaration of nullity of commercial
are baseless. The Agreement was but an embodiment
documents; (b) reformation of contracts; (c)
of the relationship extant among the parties
declaration of ownership of fishing boats; (4)
prior to its execution.
injunction; and (e) damages.
A proper adjudication of claimants' rights
(9)
That the case was amicably settled through mandates that courts must review and thoroughly
a Compromise Agreement executed between the
appraise all relevant facts. Both lower courts
parties-litigants the terms of which are already have done so and have found, correctly, a
enumerated above.
preexisting partnership among the parties. In
implying that the lower courts have decided on
From the factual findings of both lower courts,
the basis of one piece of document alone,
it is clear that Chua, Yao and Lim had decided to petitioner fails to appreciate that the CA and
engage in a fishing business, which they started the RTC delved into the history of the document
by buying boats worth P3.35 million, financed by and explored all the possible consequential
a loan secured from Jesus Lim who was
combinations in harmony with law, logic and
petitioner's brother. In their Compromise
fairness. Verily, the two lower courts' factual
Agreement, they subsequently revealed their
findings mentioned above nullified petitioner's
intention to pay the loan with the proceeds of
argument that the existence of a partnership was
the sale of the boats, and to divide equally
based only on the Compromise Agreement.
among them the excess or loss. These boats, the
purchase and the repair of which were financed
Petitioner Was a Partner,
with borrowed money, fell under the term "common
fund" under Article 1767. The contribution to
Not a Lessor
such fund need not be cash or fixed assets; it
could be an intangible like credit or industry.
We are not convinced by petitioner's argument
That the parties agreed that any loss or profit
that he was merely the lessor of the boats to
from the sale and operation of the boats would be Chua and Yao, not a partner in the fishing
divided equally among them also shows that they
venture. His argument allegedly finds support in
had indeed formed a partnership.
the Contract of Lease and the registration papers
showing that he was the owner of the boats,
Moreover, it is clear that the partnership
including F/B Lourdes where the nets were found.
extended not only to the purchase of the boat,
but also to that of the nets and the floats. The His allegation defies logic. In effect, he would
fishing nets and the floats, both essential to
like this Court to believe that he consented to
fishing, were obviously acquired in furtherance
the sale of his own boats to pay a debt of Chua
of their business. It would have been
and Yao, with the excess of the proceeds to be
inconceivable for Lim to involve himself so much divided among the three of them. No lessor would
in buying the boat but not in the acquisition of do what petitioner did. Indeed, his consent to
the aforesaid equipment, without which the
the sale proved that there was a preexisting
business could not have proceeded.
partnership among all three.
Given the preceding facts, it is clear that there
was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They
purchased the boats, which constituted the main
assets of the partnership, and they agreed that
the proceeds from the sales and operations
thereof would be divided among them.
We stress that under Rule 45, a petition for
review like the present case should involve only
questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on

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 by virtue of which it received advantages and
is the petitioner himself. After all, he is the
benefits.
brother of the creditor, Jesus Lim.
On the other hand, a third party who, knowing an
We stress that it is unreasonable indeed, it is association to be unincorporated, nonetheless
absurd for petitioner to sell his property to
treated it as a corporation and received benefits
pay a debt he did not incur, if the relationship from it, may be barred from denying its corporate
among the three of them was merely that of
existence in a suit brought against the alleged
lessor-lessee, instead of partners.
corporation. In such case, all those who
benefited from the transaction made by the
Corporation by Estoppel
ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts
Petitioner argues that under the doctrine of
they impliedly assented to or took advantage of.
corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we
There is no dispute that the respondent,
disagree.
Philippine Fishing Gear Industries, is entitled
to be paid for the nets it sold. The only
Sec. 21 of the Corporation Code of the
question here is whether petitioner should be
Philippines provides:
held jointly 18 liable with Chua and Yao.
Petitioner contests such liability, insisting
Sec. 21.
Corporation by estoppel. All
that only those who dealt in the name of the
persons who assume to act as a corporation
ostensible corporation should be held liable.
knowing it to be without authority to do so shall Since his name does not appear on any of the
be liable as general partners for all debts,
contracts and since he never directly transacted
liabilities and damages incurred or arising as a with the respondent corporation, ergo, he cannot
result thereof: Provided however, That when any
be held liable.
such ostensible corporation is sued on any
transaction entered by it as a corporation or on Unquestionably, petitioner benefited from the use
any tort committed by it as such, it shall not be of the nets found inside F/B Lourdes, the boat
allowed to use as a defense its lack of corporate which has earlier been proven to be an asset of
personality.
the partnership. He in fact questions the
attachment of the nets, because the Writ has
One who assumes an obligation to an ostensible
effectively stopped his use of the fishing
corporation as such, cannot resist performance
vessel.
thereof on the ground that there was in fact no
corporation.
It is difficult to disagree with the RTC and the
CA that Lim, Chua and Yao decided to form a
Thus, even if the ostensible corporate entity is corporation. Although it was never legally formed
proven to be legally nonexistent, a party may be for unknown reasons, this fact alone does not
estopped from denying its corporate existence.
preclude the liabilities of the three as
"The reason behind this doctrine is obvious an contracting parties in representation of it.
unincorporated association has no personality and Clearly, under the law on estoppel, those acting
would be incompetent to act and appropriate for
on behalf of a corporation and those benefited by
itself the power and attributes of a corporation it, knowing it to be without valid existence, are
as provided by law; it cannot create agents or
held liable as general partners.
confer authority on another to act in its behalf;
thus, those who act or purport to act as its
Technically, it is true that petitioner did not
representatives or agents do so without authority directly act on behalf of the corporation.
and at their own risk. And as it is an elementary However, having reaped the benefits of the
principle of law that a person who acts as an
contract entered into by persons with whom he
agent without authority or without a principal is previously had an existing relationship, he is
himself regarded as the principal, possessed of
deemed to be part of said association and is
all the right and subject to all the liabilities covered by the scope of the doctrine of
of a principal, a person acting or purporting to corporation by estoppel. We reiterate the ruling
act on behalf of a corporation which has no valid of the Court in Alonso v. Villamor: 19
existence assumes such privileges and obligations
and becomes personally liable for contracts
A litigation is not a game of technicalities in
entered into or for other acts performed as such which one, more deeply schooled and skilled in
agent. 17
the subtle art of movement and position, entraps
and destroys the other. It is, rather, a contest
The doctrine of corporation by estoppel may apply in which each contending party fully and fairly
to the alleged corporation and to a third party. lays before the court the facts in issue and
In the first instance, an unincorporated
then, brushing aside as wholly trivial and
association, which represented itself to be a
indecisive all imperfections of form and
corporation, will be estopped from denying its
technicalities of procedure, asks that justice be
corporate capacity in a suit against it by a
done upon the merits. Lawsuits, unlike duels, are
third person who relied in good faith on such
not to be won by a rapier's thrust. Technicality,
representation. It cannot allege lack of
when it deserts its proper office as an aid to
personality to be sued to evade its
justice and becomes its great hindrance and chief
responsibility for a contract it entered into and enemy, deserves scant consideration from courts.

There should be no vested rights in

technicalities.

partnership specifically in these instances (1)

where, by any wrongful act or omission of any
partner acting in the ordinary course of the
Third Issue:
business of the partnership or with the authority
of his co-partners, loss or injury is caused to
Validity of Attachment
any person, not being a partner in the
partnership, or any penalty is incurred, the
Finally, petitioner claims that the Writ of
partnership is liable therefor to the same extent
Attachment was improperly issued against the
as the partner so acting or omitting to act; (2)
nets. We agree with the Court of Appeals that
where one partner acting within the scope of his
this issue is now moot and academic. As
apparent authority receives money or property of
previously discussed, F/B Lourdes was an asset of a third person and misapplies it; and (3) where
the partnership and that it was placed in the
the partnership in the course of its business
name of petitioner, only to assure payment of the receives money or property of a third person and
debt he and his partners owed. The nets and the
the money or property so received is misapplied
floats were specifically manufactured and tailor- by any partner while it is in the custody of the
made according to their own design, and were
partnership 3 consistently with the rules on
bought and used in the fishing venture they
the nature of civil liability in delicts and
agreed upon. Hence, the issuance of the Writ to
quasi-delicts.
assure the payment of the price stipulated in the
invoices is proper. Besides, by specific
G.R. No. L-19342
May 25, 1972
agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full
LORENZO T. OA and HEIRS OF JULIA BUALES,
payment thereof.
namely: RODOLFO B. OA, MARIANO B. OA, LUZ B.
OA, VIRGINIA B. OA and LORENZO B. OA, JR.,
WHEREFORE, the Petition is DENIED and the
petitioners,
assailed Decision AFFIRMED. Costs against
vs.
petitioner.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
SO ORDERED.

Orlando Velasco for petitioners.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Office of the Solicitor General Arturo A.

Alafriz, Assistant Solicitor General Felicisimo
R. Rosete, and Special Attorney Purificacion
Ureta for respondent.

Vitug, J., pls. see concurring opinion.

Separate Opinions
VITUG, J., concurring opinion;

BARREDO, J.:p
I share the views expressed in the ponencia of an
esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio
Chua, Peter Yao and petitioner Lim Tong Lim have
incurred the liabilities of general partners. I
merely would wish to elucidate a bit, albeit
briefly, the liability of partners in a general
partnership.

Petition for review of the decision of the Court

of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have
constituted an unregistered partnership and are,
therefore, subject to the payment of the
deficiency corporate income taxes assessed
against them by respondent Commissioner of
Internal Revenue for the years 1955 and 1956 in
When a person by his act or deed represents
the total sum of P21,891.00, plus 5% surcharge
himself as a partner in an existing partnership
and 1% monthly interest from December 15, 1958,
or with one or more persons not actual partners, subject to the provisions of Section 51 (e) (2)
he is deemed an agent of such persons consenting of the Internal Revenue Code, as amended by
to such representation and in the same manner, if Section 8 of Republic Act No. 2343 and the costs
he were a partner, with respect to persons who
of the suit, 1 as well as the resolution of said
rely upon the representation. 1 The association
court denying petitioners' motion for
formed by Chua, Yao and Lim, should be, as it has reconsideration of said decision.
been deemed, a de facto partnership with all the
consequent obligations for the purpose of
The facts are stated in the decision of the Tax
enforcing the rights of third persons. The
Court as follows:
liability of general partners (in a general
partnership as so opposed to a limited
Julia Buales died on March 23, 1944, leaving as
partnership) is laid down in Article 1816 2 which heirs her surviving spouse, Lorenzo T. Oa and
posits that all partners shall be liable pro rata her five children. In 1948, Civil Case No. 4519
beyond the partnership assets for all the
was instituted in the Court of First Instance of
contracts which may have been entered into in its Manila for the settlement of her estate. Later,
name, under its signature, and by a person
Lorenzo T. Oa the surviving spouse was appointed
authorized to act for the partnership. This rule administrator of the estate of said deceased
is to be construed along with other provisions of (Exhibit 3, pp. 34-41, BIR rec.). On April 14,
the Civil Code which postulate that the partners 1949, the administrator submitted the project of
can be held solidarily liable with the
partition, which was approved by the Court on May

16, 1949 (See Exhibit K). Because three of the

heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project
of partition was approved, Lorenzo T. Oa, their
father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of
First Instance of Manila for appointment as
guardian of said minors. On November 14, 1949,
the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3,
BIR rec.).

P87,860.00

The project of partition (Exhibit K; see also pp.

77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels
of land with a total assessed value of
P87,860.00, six houses with a total assessed
value of P17,590.00 and an undetermined amount to
be collected from the War Damage Commission.
Later, they received from said Commission the
amount of P50,000.00, more or less. This amount
was not divided among them but was used in the
rehabilitation of properties owned by them in
common (t.s.n., p. 46). Of the ten parcels of
land aforementioned, two were acquired after the
death of the decedent with money borrowed from
the Philippine Trust Company in the amount of
P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
BIR rec.).

1951

P17,590.00
1950
P24,657.65
128,566.72
96,076.26

51,301.31
120,349.28
110,605.11
1952
67,927.52
87,065.28
152,674.39
1953

The project of partition also shows that the

61,258.27
estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of
84,925.68
P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3
161,463.83
of Exhibit K; or see p. 74, BIR rec.).
1954
Although the project of partition was approved by
the Court on May 16, 1949, no attempt was made to 63,623.37
divide the properties therein listed. Instead,
the properties remained under the management of
99,001.20
Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing 167,962.04
the income derived therefrom and the proceeds
from the sales thereof in real properties and
1955
securities. As a result, petitioners' properties
and investments gradually increased from
100,786.00
P105,450.00 in 1949 to P480,005.20 in 1956 as can
be gleaned from the following year-end balances: 120,249.78
Year

169,262.52

Investment

1956

Land

175,028.68

Building

135,714.68
169,262.52

Account

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40,

50, 102-104)

Account
Account
1949

From said investments and properties petitioners

derived such incomes as profits from installment
sales of subdivided lots, profits from sales of
stocks, dividends, rentals and interests (see p.
3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 3738). The said incomes are recorded in the books
of account kept by Lorenzo T. Oa where the

corresponding shares of the petitioners in the

net income for the year are also known. Every
year, petitioners returned for income tax
purposes their shares in the net income derived
from said properties and securities and/or from
transactions involving them (Exhibit 3, supra;
t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T.
Oa who, as heretofore pointed out, invested them
in real properties and securities. (See Exhibit
3, t.s.n., pp. 50, 102-104).

1958, so that the questioned assessment refers

solely to the income tax proper for the years
1955 and 1956 and the "Compromise for nonfiling," the latter item obviously referring to
the compromise in lieu of the criminal liability
for failure of petitioners to file the corporate
income tax returns for said years. (See Exh. 17,
page 86, BIR records). (Pp. 1-3, Annex C to
Petition)
Petitioners have assigned the following as
alleged errors of the Tax Court:
I.

On the basis of the foregoing facts, respondent

(Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership
and therefore, subject to the corporate income
tax, pursuant to Section 24, in relation to
Section 84(b), of the Tax Code. Accordingly, he
assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively. (See
Exhibit 5, amended by Exhibit 17, pp. 50 and 86,
BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the
ruling of respondent that they have formed an
unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT

THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING
THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME
TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;

The original assessment was as follows:

IV.
1955
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP
Income tax due
TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS
thereon ............................... 8,042.00 FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS
25%
RECEIVED USING THE INHERITED PROPERTIES AS
surcharge ....................................... COLLATERALS;
....... 2,010.50
Compromise for nonV .
filing .......................... 50.00
Total ........................................... ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED
.................... P10,102.50
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN
NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
1956
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM
Net income as per investigation ................ THE PROPERTIES OWNED IN COMMON, FROM THE
P69,245.23
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
Net income as per investigation ................
P40,209.89

Income tax due

thereon ............................... 13,849.00
25%
surcharge .......................................
....... 3,462.25
Compromise for nonfiling .......................... 50.00
Total ...........................................
.................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25%
surcharge was eliminated in line with the ruling
of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6,

In other words, petitioners pose for our

resolution the following questions: (1) Under the
facts found by the Court of Tax Appeals, should
petitioners be considered as co-owners of the
properties inherited by them from the deceased
Julia Buales and the profits derived from
transactions involving the same, or, must they be
deemed to have formed an unregistered partnership
subject to tax under Sections 24 and 84(b) of the
National Internal Revenue Code? (2) Assuming they
have formed an unregistered partnership, should
this not be only in the sense that they invested
as a common fund the profits earned by the
properties owned by them in common and the loans
granted to them upon the security of the said
properties, with the result that as far as their

respective shares in the inheritance are

concerned, the total income thereof should be
considered as that of co-owners and not of the
unregistered partnership? And (3) assuming again
that they are taxable as an unregistered
partnership, should not the various amounts
already paid by them for the same years 1955 and
1956 as individual income taxes on their
respective shares of the profits accruing from
the properties they owned in common be deducted
from the deficiency corporate taxes, herein
involved, assessed against such unregistered
partnership by the respondent Commissioner?

not, contrary to their contention, merely limit

themselves to holding the properties inherited by
them. Indeed, it is admitted that during the
material years herein involved, some of the said
properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru
Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted
that all the profits from these ventures were
divided among petitioners proportionately in
accordance with their respective shares in the
inheritance. In these circumstances, it is Our
considered view that from the moment petitioners
allowed not only the incomes from their
Pondering on these questions, the first thing
respective shares of the inheritance but even the
that has struck the Court is that whereas
inherited properties themselves to be used by
petitioners' predecessor in interest died way
Lorenzo T. Oa as a common fund in undertaking
back on March 23, 1944 and the project of
several transactions or in business, with the
partition of her estate was judicially approved
intention of deriving profit to be shared by them
as early as May 16, 1949, and presumably
proportionally, such act was tantamonut to
petitioners have been holding their respective
actually contributing such incomes to a common
shares in their inheritance since those dates
fund and, in effect, they thereby formed an
admittedly under the administration or management unregistered partnership within the purview of
of the head of the family, the widower and father the above-mentioned provisions of the Tax Code.
Lorenzo T. Oa, the assessment in question refers
to the later years 1955 and 1956. We believe this It is but logical that in cases of inheritance,
point to be important because, apparently, at the there should be a period when the heirs can be
start, or in the years 1944 to 1954, the
considered as co-owners rather than unregistered
respondent Commissioner of Internal Revenue did
co-partners within the contemplation of our
treat petitioners as co-owners, not liable to
corporate tax laws aforementioned. Before the
corporate tax, and it was only from 1955 that he partition and distribution of the estate of the
considered them as having formed an unregistered deceased, all the income thereof does belong
partnership. At least, there is nothing in the
commonly to all the heirs, obviously, without
record indicating that an earlier assessment had them becoming thereby unregistered co-partners,
already been made. Such being the case, and We
but it does not necessarily follow that such
see no reason how it could be otherwise, it is
status as co-owners continues until the
easily understandable why petitioners' position
inheritance is actually and physically
that they are co-owners and not unregistered co- distributed among the heirs, for it is easily
partners, for the purposes of the impugned
conceivable that after knowing their respective
assessment, cannot be upheld. Truth to tell,
shares in the partition, they might decide to
petitioners should find comfort in the fact that continue holding said shares under the common
they were not similarly assessed earlier by the
management of the administrator or executor or of
Bureau of Internal Revenue.
anyone chosen by them and engage in business on
that basis. Withal, if this were to be allowed,
The Tax Court found that instead of actually
it would be the easiest thing for heirs in any
distributing the estate of the deceased among
inheritance to circumvent and render meaningless
themselves pursuant to the project of partition
Sections 24 and 84(b) of the National Internal
approved in 1949, "the properties remained under Revenue Code.
the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them It is true that in Evangelista vs. Collector, 102
and investing the income derived therefrom and
Phil. 140, it was stated, among the reasons for
the proceed from the sales thereof in real
holding the appellants therein to be unregistered
properties and securities," as a result of which co-partners for tax purposes, that their common
said properties and investments steadily
fund "was not something they found already in
increased yearly from P87,860.00 in "land
existence" and that "it was not a property
account" and P17,590.00 in "building account" in inherited by them pro indiviso," but it is
1949 to P175,028.68 in "investment account,"
certainly far fetched to argue therefrom, as
P135.714.68 in "land account" and P169,262.52 in petitioners are doing here, that ergo, in all
"building account" in 1956. And all these became instances where an inheritance is not actually
possible because, admittedly, petitioners never
divided, there can be no unregistered coactually received any share of the income or
partnership. As already indicated, for tax
profits from Lorenzo T. Oa and instead, they
purposes, the co-ownership of inherited
allowed him to continue using said shares as part properties is automatically converted into an
of the common fund for their ventures, even as
unregistered partnership the moment the said
they paid the corresponding income taxes on the
common properties and/or the incomes derived
basis of their respective shares of the profits
therefrom are used as a common fund with intent
of their common business as reported by the said to produce profits for the heirs in proportion to
Lorenzo T. Oa.
their respective shares in the inheritance as
determined in a project partition either duly
It is thus incontrovertible that petitioners did executed in an extrajudicial settlement or

approved by the court in the corresponding

testate or intestate proceeding. The reason for
this is simple. From the moment of such
partition, the heirs are entitled already to
their respective definite shares of the estate
and the incomes thereof, for each of them to
manage and dispose of as exclusively his own
without the intervention of the other heirs, and,
accordingly he becomes liable individually for
all taxes in connection therewith. If after such
partition, he allows his share to be held in
common with his co-heirs under a single
management to be used with the intent of making
profit thereby in proportion to his share, there
can be no doubt that, even if no document or
instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership
is formed. This is exactly what happened to
petitioners in this case.
In this connection, petitioners' reliance on
Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns
does not of itself establish a partnership,
whether or not the persons sharing them have a
joint or common right or interest in any property
from which the returns are derived," and, for
that matter, on any other provision of said code
on partnerships is unavailing. In Evangelista,
supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from
that of unregistered partnerships which are
considered as "corporations" under Sections 24
and 84(b) of the National Internal Revenue Code.
Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed
upon "corporations", which, strictly speaking,
are distinct and different from "partnerships".
When our Internal Revenue Code includes
"partnerships" among the entities subject to the
tax on "corporations", said Code must allude,
therefore, to organizations which are not
necessarily "partnerships", in the technical
sense of the term. Thus, for instance, section 24
of said Code exempts from the aforementioned tax
"duly registered general partnerships," which
constitute precisely one of the most typical
forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said
Code, "the term corporation includes
partnerships, no matter how created or
organized." This qualifying expression clearly
indicates that a joint venture need not be
undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law
on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en
participacion)" and "associations", none of which
has a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a
condition essential to the existence of the
partnerships therein referred to. In fact, as
above stated, "duly registered general copartnerships" which are possessed of the

aforementioned personality have been expressly

excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx

xxx

xxx

Similarly, the American Law

... provides its own concept of a partnership.
Under the term "partnership" it includes not only
a partnership as known in common law but, as
well, a syndicate, group, pool, joint venture, or
other unincorporated organization which carries
on any business, financial operation, or venture,
and which is not, within the meaning of the Code,
a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p. 789;
emphasis ours.)
The term "partnership" includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by means
of which any business, financial operation, or
venture is carried on. ... . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; emphasis
ours.)
For purposes of the tax on corporations, our
National Internal Revenue Code includes these
partnerships with the exception only of duly
registered general copartnerships within the
purview of the term "corporation." It is,
therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income
tax for corporations.
We reiterated this view, thru Mr. Justice
Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24
SCRA 198, wherein the Court ruled against a
theory of co-ownership pursued by appellants
therein.
As regards the second question raised by
petitioners about the segregation, for the
purposes of the corporate taxes in question, of
their inherited properties from those acquired by
them subsequently, We consider as justified the
following ratiocination of the Tax Court in
denying their motion for reconsideration:
In connection with the second ground, it is
alleged that, if there was an unregistered
partnership, the holding should be limited to the
business engaged in apart from the properties
inherited by petitioners. In other words, the
taxable income of the partnership should be
limited to the income derived from the
acquisition and sale of real properties and
corporate securities and should not include the
income derived from the inherited properties. It
is admitted that the inherited properties and the
income derived therefrom were used in the
business of buying and selling other real
properties and corporate securities. Accordingly,
the partnership income must include not only the
income derived from the purchase and sale of
other properties but also the income of the
inherited properties.

Besides, as already observed earlier, the income

derived from inherited properties may be
considered as individual income of the respective
heirs only so long as the inheritance or estate
is not distributed or, at least, partitioned, but
the moment their respective known shares are used
as part of the common assets of the heirs to be
used in making profits, it is but proper that the
income of such shares should be considered as the
part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent
of the law.
Likewise, the third question of petitioners
appears to have been adequately resolved by the
Tax Court in the aforementioned resolution
denying petitioners' motion for reconsideration
of the decision of said court. Pertinently, the
court ruled this wise:
In support of the third ground, counsel for
petitioners alleges:
Even if we were to yield to the decision of this
Honorable Court that the herein petitioners have
formed an unregistered partnership and,
therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual
income tax returns reported their shares of the
profits of the unregistered partnership. We think
it only fair and equitable that the various
amounts paid by the individual petitioners as
income tax on their respective shares of the
unregistered partnership should be deducted from
the deficiency income tax found by this Honorable
Court against the unregistered partnership. (page
7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)

as regards the point under discussion is simply

that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate
taxes in question was not deliberate. Of course,
such taxpayer has the right to be reimbursed what
he has erroneously paid, but the law is very
clear that the claim and action for such
reimbursement are subject to the bar of
prescription. And since the period for the
recovery of the excess income taxes in the case
of herein petitioners has already lapsed, it
would not seem right to virtually disregard
prescription merely upon the ground that the
reason for the delay is precisely because the
taxpayers failed to make the proper return and
payment of the corporate taxes legally due from
them. In principle, it is but proper not to allow
any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in
their conduct vis-a-vis their tax obligation to
the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the
Court of Tax Appeals appealed from is affirm with
costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and
Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the
result.
Castro, J., took no part.
Concepcion, C.J., is on leave.

In other words, it is the position of petitioners

that the taxable income of the partnership must
be reduced by the amounts of income tax paid by
each petitioner on his share of partnership
profits. This is not correct; rather, it should
be the other way around. The partnership profits
distributable to the partners (petitioners
herein) should be reduced by the amounts of
income tax assessed against the partnership.
Consequently, each of the petitioners in his
individual capacity overpaid his income tax for
the years in question, but the income tax due
from the partnership has been correctly assessed.
Since the individual income tax liabilities of
petitioners are not in issue in this proceeding,
it is not proper for the Court to pass upon the
same.

Footnotes

Petitioners insist that it was error for the Tax

Court to so rule that whatever excess they might
have paid as individual income tax cannot be
credited as part payment of the taxes herein in
question. It is argued that to sanction the view
of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse,
considering the time that has lapsed since they
paid their individual income taxes, they may
already be barred by prescription from recovering
their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners

Pelagio R. Lachica for private respondent.

1 In other words, the assessment was affirmed

except for the sum of P100.00 which was the total
of two P50-items purportedly for "Compromise for
non-filing" which the Tax Court held to be
unjustified, since there was no compromise
agreement to speak of.
G.R. No. L-47045

November 22, 1988

NOBIO SARDANE, petitioner,

vs.
THE COURT OF APPEALS and ROMEO J. ACOJEDO,
respondents.
Y.G. Villaruz & Associates for petitioner.

REGALADO, J.:
The extensive discussion and exhaustive
disquisition in the decision 1 of the respondent
Court 2 should have written finis to this case
without further recourse to Us. The assignment of
errors and arguments raised in the respondent
Court by herein private respondent, as the

petitioner therein, having been correctly and

justifiedly sustained by said court without any
reversible error in its conclusions, the present
petition must fail.

(a)
Ordering the defendant to pay unto the
plaintiff the sum of Five Thousand Two Hundred
Seventeen Pesos and Twenty-five centavos
(P5,217.25) plus legal interest to commence from
The assailed decision details the facts and
April 23, 1976 when this case was filed in court;
proceedings which spawned the present controversy and
as follows:
(b)
Ordering the defendant to pay the plaintiff
Petitioner brought an action in the City Court of the sum of P200.00 as attorney's fee and to pay
Dipolog for collection of a sum of P5,217.25
the cost of this proceeding. 3
based on promissory notes executed by the herein
private respondent Nobio Sardane in favor of the Therein defendant Sardane appealed to the Court
herein petitioner. Petitioner bases his right to of First Instance of Zamboanga del Norte which
collect on Exhibits B, C, D, E, F, and G executed reversed the decision of the lower court by
on different dates and signed by private
dismissing the complaint and ordered the
respondent Nobio Sardane. Exhibit B is a printed plaintiff-appellee Acojedo to pay said defendantpromissory note involving Pl,117.25 and dated May appellant P500.00 each for actual damages, moral
13, 1972. Exhibit C is likewise a printed
damages, exemplary damages and attorney's fees,
promissory note and denotes on its face that the as well as the costs of suit. Plaintiff-appellee
sum loaned was Pl,400.00. Exhibit D is also a
then sought the review of said decision by
printed promissory note dated May 31, 1977
petition to the respondent Court.
involving an amount of P100.00. Exhibit E is what
is commonly known to the layman as 'vale' which
The assignment of errors in said petition for
reads: 'Good for: two hundred pesos (Sgd) Nobio
review can be capsulized into two decisive
Sardane'. Exhibit F is stated in the following
issues, firstly, whether the oral testimony for
tenor: 'Received from Mr. Romeo Acojedo the sum
the therein private respondent Sardane that a
Pesos: Two Thousand Two Hundred (P2,200.00) ONLY, partnership existed between him and therein
to be paid on or before December 25, 1975. (Sgd) petitioner Acojedo are admissible to vary the
Nobio Sardane.' Exhibit G and H are both vales'
meaning of the abovementioned promissory notes;
involving the same amount of one hundred pesos,
and, secondly, whether because of the failure of
and dated August 25, 1972 and September 12, 1972 therein petitioner to cross-examine therein
respectively.
private respondent on his sur-rebuttal testimony,
there was a waiver of the presumption accorded in
It has been established in the trial court that
favor of said petitioner by Section 8, Rule 8 of
on many occasions, the petitioner demanded the
the Rules of Court.
payment of the total amount of P5,217.25. The
failure of the private respondent to pay the said On the first issue, the then Court of First
amount prompted the petitioner to seek the
Instance held that "the pleadings of the parties
services of lawyer who made a letter (Exhibit 1) herein put in issue the imperfection or ambiguity
formally demanding the return of the sum loaned. of the documents in question", hence "the
Because of the failure of the private respondent appellant can avail of the parol evidence rule to
to heed the demands extrajudicially made by the
prove his side of the case, that is, the said
petitioner, the latter was constrained to bring
amount taken by him from appellee is or was not
an action for collection of sum of money.
his personal debt to appellee, but expenses of
the partnership between him and appellee."
During the scheduled day for trial, private
respondent failed to appear and to file an
Consequently, said trial court concluded that the
answer. On motion by the petitioner, the City
promissory notes involved were merely receipts
Court of Dipolog issued an order dated May 18,
for the contributions to said partnership and,
1976 declaring the private respondent in default therefore, upheld the claim that there was
and allowed the petitioner to present his
ambiguity in the promissory notes, hence parol
evidence ex-parte. Based on petitioner's
evidence was allowable to vary or contradict the
evidence, the City Court of Dipolog rendered
terms of the represented loan contract.
judgment by default in favor of the petitioner.
The parol evidence rule in Rule 130 provides:
Private respondent filed a motion to lift the
order of default which was granted by the City
Sec. 7. Evidence of written agreements.When the
Court in an order dated May 24, 1976, taking into terms of an agreement have been reduced to
consideration that the answer was filed within
writing, it is to be considered as containing all
two hours after the hearing of the evidence
such terms, and, therefore, there can be, between
presented ex-parte by the petitioner.
the parties and their successors in interest, no
evidence of the terms of the agreement other than
After the trial on the merits, the City Court of the contents of the writing except in the
Dipolog rendered its decision on September 14,
following cases:
1976, the dispositive portion of which reads:
(a)
Where a mistake or imperfection of the
IN VIEW OF THE FOREGOING, judgment is hereby
writing or its failure to express the the true
rendered in favor of the plaintiff and against
intent and agreement of the parties, or the
the defendant as follows:
validity of the agreement is put in issue by the

pleadings;

share of the profits of a business is prima facie

evidence that he is a partner in the business, no
(b)
When there is an intrinsic ambiguity in the such inference shall be drawn if such profits
writing.
were received in payment as wages of an employee.
Furthermore, herein petitioner had no voice in
As correctly pointed out by the respondent Court the management of the affairs of the basnig.
the exceptions to the rule do not apply in this
Under similar facts, this Court in the early case
case as there is no ambiguity in the writings in of Fortis vs. Gutierrez Hermanos, 5 in denying
question, thus:
the claim of the plaintiff therein that he was a
partner in the business of the defendant,
In the case at bar, Exhibits B, C, and D are
declared:
printed promissory notes containing a promise to
pay a sum certain in money, payable on demand and This contention cannot be sustained. It was a
the promise to bear the costs of litigation in
mere contract of employment. The plaintiff had no
the event of the private respondent's failure to voice nor vote in the management of the affairs
pay the amount loaned when demanded
of the company. The fact that the compensation
extrajudicially. Likewise, the vales denote that received by him was to be determined with
the private respondent is obliged to return the
reference to the profits made by the defendant in
sum loaned to him by the petitioner. On their
their business did not in any sense make him a
face, nothing appears to be vague or ambigous,
partner therein. ...
for the terms of the promissory notes clearly
show that it was incumbent upon the private
The same rule was reiterated in Bastida vs. Menzi
respondent to pay the amount involved in the
& Co., Inc., et al. 6 which involved the same
promissory notes if and when the petitioner
factual and legal milieu.
demands the same. It was clearly the intent of
the parties to enter into a contract of loan for There are other considerations noted by
how could an educated man like the private
respondent Court which negate herein petitioner's
respondent be deceived to sign a promissory note pretension that he was a partner and not a mere
yet intending to make such a writing to be mere
employee indebted to the present private
receipts of the petitioner's supposed
respondent. Thus, in an action for damages filed
contribution to the alleged partnership existing by herein private respondent against the North
between the parties?
Zamboanga Timber Co., Inc. arising from the
operations of the business, herein petitioner did
It has been established in the trial court that, not ask to be joined as a party plaintiff. Also,
the private respondent has been engaged in
although he contends that herein private
business for quite a long period of time--as
respondent is the treasurer of the alleged
owner of the Sardane Trucking Service, entering
partnership, yet it is the latter who is
into contracts with the government for the
demanding an accounting. The advertence of the
construction of wharfs and seawall; and a member Court of First Instance to the fact that the
of the City Council of Dapitan (TSN, July 20,
casco bears the name of herein petitioner
1976, pp. 57-58).<re||an1w> It indeed puzzles disregards the finding of the respondent Court
us how the private respondent could have been
that it was just a concession since it was he who
misled into signing a document containing terms
obtained the engine used in the Sardaco from the
which he did not mean them to be. ...
Department of Local Government and Community
Development. Further, the use by the parties of
xxx
xxx
xxx
the pronoun "our" in referring to "our basnig,
our catch", "our deposit", or "our boseros" was
The private respondent admitted during the cross- merely indicative of the camaraderie and not
examination made by petitioner's counsel that he evidentiary of a partnership, between them.
was the one who was responsible for the printing
of Exhibits B, C, and D (TSN, July 28, 1976, p.
The foregoing factual findings, which belie the
64). How could he purportedly rely on such a
further claim that the aforesaid promissory notes
flimsy pretext that the promissory notes were
do not express the true intent and agreement of
receipts of the petitioner's contribution? 4
the parties, are binding on Us since there is no
showing that they fall within the exceptions to
The Court of Appeals held, and We agree, that
the rule limiting the scope of appellate review
even if evidence aliunde other than the
herein to questions of law.
promissory notes may be admitted to alter the
meaning conveyed thereby, still the evidence is
On the second issue, the pertinent rule on
insufficient to prove that a partnership existed actionable documents in Rule 8, for ready
between the private parties hereto.
reference, reads:
As manager of the basnig Sarcado naturally some
degree of control over the operations and
maintenance thereof had to be exercised by herein
petitioner. The fact that he had received 50% of
the net profits does not conclusively establish
that he was a partner of the private respondent
herein. Article 1769(4) of the Civil Code is
explicit that while the receipt by a person of a

Sec. 8.
How to contest genuineness of such
documents.When an action or defense is founded
upon a written instrument, copied in or attached
to the corresponding pleading as provided in the
preceding section, the genuineness and due
execution of the instrument shall be deemed
admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he

claims to be the facts; but this provision does

not apply when the adverse party does not appear
to be a party to the instrument or when
compliance with an order for the inspection of
the original instrument is refused.
The record shows that herein petitioner did not
deny under oath in his answer the authenticity
and due execution of the promissory notes which
had been duly pleaded and attached to the
complaint, thereby admitting their genuineness
and due execution. Even in the trial court, he
did not at all question the fact that he signed
said promissory notes and that the same were
genuine. Instead, he presented parol evidence to
vary the import of the promissory notes by
alleging that they were mere receipts of his
contribution to the alleged partnership.
His arguments on this score reflect a
misapprehension of the rule on parol evidence as
distinguished from the rule on actionable
documents. As the respondent Court correctly
explained to herein petitioner, what he presented
in the trial Court was testimonial evidence that
the promissory notes were receipts of his
supposed contributions to the alleged partnership
which testimony, in the light of Section 7, Rule
130, could not be admitted to vary or alter the
explicit meaning conveyed by said promissory
notes. On the other hand, the presumed
genuineness and due execution of said promissory
notes were not affected, pursuant to the
provisions of Section 8, Rule 8, since such
aspects were not at all questioned but, on the
contrary, were admitted by herein petitioner.

promissory notes.
On the foregoing premises and considerations, the
respondent Court correctly reversed and set aside
the appealed decision of the Court of First
Instance of Zamboanga del Norte and affirmed in
full the decision of the City Court of Dipolog
City in Civil Case No. A-1838, dated September
14, 1976.
Belatedly, in his motion for reconsideration of
said decision of the respondent Court, herein
petitioner, as the private respondent therein,
raised a third unresolved issue that the petition
for review therein should have been dismissed for
lack of jurisdiction since the lower Court's
decision did not affirm in full the judgment of
the City Court of Dipolog, and which he claimed
was a sine qua non for such a petition under the
law then in force. He raises the same point in
his present appeal and We will waive the
procedural technicalities in order to put this
issue at rest.
Parenthetically, in that same motion for
reconsideration he had sought affirmative relief
from the respondent Court praying that it sustain
the decision of the trial Court, thereby invoking
and submitting to its jurisdiction which he would
now assail. Furthermore, the objection that he
raises is actually not one of jurisdiction but of
procedure. 9

At any rate, it will be noted that petitioner

anchors his said objection on the provisions of
Section 29, Republic Act 296 as amended by
Republic Act 5433 effective September 9, 1968.
Petitioner's invocation of the doctrines in Yu
Subsequently, the procedure for appeal to the
Chuck, et al. vs. Kong Li Po, 7 which was
Court of Appeals from decisions of the then
reiterated in Central Surety & Insurance Co. vs. courts of first instance in the exercise of their
C. N. Hodges, et al. 8 does not sustain his
appellate jurisdiction over cases originating
thesis that the herein private respondent had
from the municipal courts was provided for by
"waived the mantle of protection given him by
Republic Act 6031, amending Section 45 of the
Rule 8, Sec. 8". It is true that such implied
Judiciary Act effective August 4, 1969. The
admission of genuineness and due execution may be requirement for affirmance in full of the
waived by a party but only if he acts in a manner inferior court's decision was not adopted or
indicative of either an express or tacit waiver
reproduced in Republic Act 6031. Also, since
thereof. Petitioner, however, either overlooked
Republic Act 6031 failed to provide for the
or ignored the fact that, as held in Yu Chuck,
procedure or mode of appeal in the cases therein
and the same is true in other cases of Identical contemplated, the Court of Appeals en banc
factual settings, such a finding of waiver is
provided thereof in its Resolution of August 12,
proper where a case has been tried in complete
1971, by requiring a petition for review but
disregard of the rule and the plaintiff having
which also did not require for its availability
pleaded a document by copy, presents oral
that the judgment of the court of first instance
evidence to prove the due execution of the
had affirmed in full that of the lower court.
document and no objections are made to the
Said mode of appeal and the procedural
defendant's evidence in refutation. This
requirements thereof governed the appeal taken in
situation does not obtain in the present case
this case from the aforesaid Court of First
hence said doctrine is obviously inapplicable.
Instance to the Court of Appeals in 1977. 10
Herein petitioner's plaint on this issue is,
Neither did the failure of herein private
therefore, devoid of merit.
respondent to cross-examine herein petitioner on
the latter's sur-rebuttal testimony constitute a WHEREFORE, the judgment of the respondent Court
waiver of the aforesaid implied admission. As
of Appeals is AFFIRMED, with costs against herein
found by the respondent Court, said sur-rebuttal petitioner.
testimony consisted solely of the denial of the
testimony of herein private respondent and no new SO ORDERED.
or additional matter was introduced in that surrebuttal testimony to exonerate herein petitioner Melencio-Herrera (Chairperson), Paras, Padilla
from his obligations under the aforesaid
and Sarmiento, JJ., concur.

P109,620.70
Expenses:
G.R. No. 31057

September 7, 1929

Premiums to members.......................

ADRIANO ARBES, ET AL., plaintiffs-appellees,

68,146.25
vs.
VICENTE POLISTICO, ET AL., defendants-appellants. Loans on real-estate.......................
Marcelino Lontok and Manuel dela Rosa for
appellants.
Sumulong & Lavides for appellees.

9,827.00

VILLAMOR, J.:

4,258.55

This is an action to bring about liquidation of

the funds and property of the association called
"Turnuhan Polistico & Co." The plaintiffs were
members or shareholders, and the defendants were
designated as president-treasurer, directors and
secretary of said association.

Salaries....................................

Loans on promissory notes..............

1,095.00
Miscellaneous...............................
1,686.10

It is well to remember that this case is now

brought before the consideration of this court
for the second time. The first one was when the
same plaintiffs appeared from the order of the
court below sustaining the defendant's demurrer,
and requiring the former to amend their complaint
within a period, so as to include all the members
of "Turnuhan Polistico & Co.," either as
plaintiffs or as a defendants. This court held
then that in an action against the officers of a
voluntary association to wind up its affairs and
enforce an accounting for money and property in
their possessions, it is not necessary that all
members of the association be made parties to the
action. (Borlasa vs. Polistico, 47 Phil., 345.)
The case having been remanded to the court of
origin, both parties amend, respectively, their
complaint and their answer, and by agreement of
the parties, the court appointed Amadeo R.
Quintos, of the Insular Auditor's Office,
commissioner to examine all the books, documents,
and accounts of "Turnuhan Polistico & Co.," and
to receive whatever evidence the parties might
desire to present.
The commissioner rendered his report, which is
attached to the record, with the following
resume:
Income:
Member's shares............................
97,263.70
Credits paid................................
6,196.55
Interest received...........................
4,569.45
Miscellaneous...............................
1,891.00

85,012.90
Cash on
hand........................................
24,607.80
The defendants objected to the commissioner's
report, but the trial court, having examined the
reasons for the objection, found the same
sufficiently explained in the report and the
evidence, and accepting it, rendered judgment,
holding that the association "Turnuhan Polistico
& Co." is unlawful, and sentencing the defendants
jointly and severally to return the amount of
P24,607.80, as well as the documents showing the
uncollected credits of the association, to the
plaintiffs in this case, and to the rest of the
members of the said association represented by
said plaintiffs, with costs against the
defendants.
The defendants assigned several errors as grounds
for their appeal, but we believe they can all be
reduced to two points, to wit: (1) That not all
persons having an interest in this association
are included as plaintiffs or defendants; (2)
that the objection to the commissioner's report
should have been admitted by the court below.
As to the first point, the decision on the case
of Borlasa vs. Polistico, supra, must be
followed.
With regard to the second point, despite the
praiseworthy efforts of the attorney of the
defendants, we are of opinion that, the trial
court having examined all the evidence touching
the grounds for the objection and having found
that they had been explained away in the
commissioner's report, the conclusion reached by
the court below, accepting and adopting the
findings of fact contained in said report, and
especially those referring to the disposition of
the association's money, should not be disturbed.

In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco

(5 Phil., 516), it was held that the findings of
facts made by a referee appointed under the
provisions of section 135 of the Code of Civil
Procedure stand upon the same basis, when
approved by the Court, as findings made by the
judge himself. And in Kriedt vs. E. C. McCullogh
& Co.(37 Phil., 474), the court held: "Under
section 140 of the Code of Civil Procedure it is
made the duty of the court to render judgment in
accordance with the report of the referee unless
the court shall unless for cause shown set aside
the report or recommit it to the referee. This
provision places upon the litigant parties of the
duty of discovering and exhibiting to the court
any error that may be contained therein." The
appellants stated the grounds for their
objection. The trial examined the evidence and
the commissioner's report, and accepted the
findings of fact made in the report. We find no
convincing arguments on the appellant's brief to
justify a reversal of the trial court's
conclusion admitting the commissioner's findings.

when the dissolution of the unlawful partnership

is decreed, the profits cannot inure to the
benefit of the partners, but must be given to
some charitable institution.
We deem in pertinent to quote Manresa's
commentaries on article 1666 at length, as a
clear explanation of the scope and spirit of the
provision of the Civil Code which we are
concerned. Commenting on said article Manresa,
among other things says:
When the subscriptions of the members have been
paid to the management of the partnership, and
employed by the latter in transactions consistent
with the purposes of the partnership may the
former demand the return of the reimbursement
thereof from the manager or administrator
withholding them?

Apropos of this, it is asserted: If the

partnership has no valid existence, if it is
considered juridically non-existent, the contract
entered into can have no legal effect; and in
There is no question that "Turnuhan Polistico &
that case, how can it give rise to an action in
Co." is an unlawful partnership (U.S. vs. Baguio, favor of the partners to judicially demand from
39 Phil., 962), but the appellants allege that
the manager or the administrator of the
because it is so, some charitable institution to partnership capital, each one's contribution?
whom the partnership funds may be ordered to be
turned over, should be included, as a party
The authors discuss this point at great length,
defendant. The appellants refer to article 1666
but Ricci decides the matter quite clearly,
of the Civil Code, which provides:
dispelling all doubts thereon. He holds that the
partner who limits himself to demanding only the
A partnership must have a lawful object, and must amount contributed by him need not resort to the
be established for the common benefit of the
partnership contract on which to base his action.
partners.
And he adds in explanation that the partner makes
his contribution, which passes to the managing
When the dissolution of an unlawful partnership
partner for the purpose of carrying on the
is decreed, the profits shall be given to
business or industry which is the object of the
charitable institutions of the domicile of the
partnership; or in other words, to breathe the
partnership, or, in default of such, to those of breath of life into a partnership contract with
the province.
an objection forbidden by law. And as said
contrast does not exist in the eyes of the law,
Appellant's contention on this point is
the purpose from which the contribution was made
untenable. According to said article, no
has not come into existence, and the
charitable institution is a necessary party in
administrator of the partnership holding said
the present case of determination of the rights
contribution retains what belongs to others,
of the parties. The action which may arise from
without any consideration; for which reason he is
said article, in the case of unlawful
not bound to return it and he who has paid in his
partnership, is that for the recovery of the
share is entitled to recover it.
amounts paid by the member from those in charge
of the administration of said partnership, and it But this is not the case with regard to profits
is not necessary for the said parties to base
earned in the course of the partnership, because
their action to the existence of the partnership, they do not constitute or represent the partner's
but on the fact that of having contributed some
contribution but are the result of the industry,
money to the partnership capital. And hence, the business or speculation which is the object of
charitable institution of the domicile of the
the partnership, and therefor, in order to demand
partnership, and in the default thereof, those of the proportional part of the said profits, the
the province are not necessary parties in this
partner would have to base his action on the
case. The article cited above permits no action
contract which is null and void, since this
for the purpose of obtaining the earnings made by partition or distribution of the profits is one
the unlawful partnership, during its existence as of the juridical effects thereof. Wherefore
result of the business in which it was engaged,
considering this contract as non-existent, by
because for the purpose, as Manresa remarks, the reason of its illicit object, it cannot give rise
partner will have to base his action upon the
to the necessary action, which must be the basis
partnership contract, which is to annul and
of the judicial complaint. Furthermore, it would
without legal existence by reason of its unlawful be immoral and unjust for the law to permit a
object; and it is self evident that what does not profit from an industry prohibited by it.
exist cannot be a cause of action. Hence,
paragraph 2 of the same article provides that
Hence the distinction made in the second

paragraph of this article of this Code, providing

that the profits obtained by unlawful means shall
not enrich the partners, but shall upon the
dissolution of the partnership, be given to the
charitable institutions of the domicile of the
partnership, or, in default of such, to those of
the province.
This is a new rule, unprecedented by our law,
introduced to supply an obvious deficiency of the
former law, which did not describe the purpose to
which those profits denied the partners were to
be applied, nor state what to be done with them.

vs. Lilibeth Sunga Chan and Cecilia Sunga" and of

the Resolution dated May 23, 2000 denying the
motion for reconsideration of herein petitioners
Lilibeth Sunga and Cecilia Sunga (hereafter
collectively referred to as petitioners).
The pertinent facts of this case are as follows:

On June 22, 1992, Lamberto T. Chua (hereafter

respondent) filed a complaint against Lilibeth
Sunga Chan (hereafter petitioner Lilibeth) and
Cecilia Sunga (hereafter petitioner Cecilia),
daughter and wife, respectively of the deceased
Jacinto L. Sunga (hereafter Jacinto), for
The profits are so applied, and not the
"Winding Up of Partnership Affairs, Accounting,
contributions, because this would be an excessive Appraisal and Recovery of Shares and Damages with
and unjust sanction for, as we have seen, there
Writ of Preliminary Attachment" with the Regional
is no reason, in such a case, for depriving the
Trial Court, Branch 11, Sindangan, Zamboanga del
partner of the portion of the capital that he
Norte.
contributed, the circumstances of the two cases
being entirely different.
Respondent alleged that in 1977, he verbally
entered into a partnership with Jacinto in the
Our Code does not state whether, upon the
distribution of Shellane Liquefied Petroleum Gas
dissolution of the unlawful partnership, the
(LPG) in Manila. For business convenience,
amounts contributed are to be returned by the
respondent and Jacinto allegedly agreed to
partners, because it only deals with the
register the business name of their partnership,
disposition of the profits; but the fact that
SHELLITE GAS APPLIANCE CENTER (hereafter
said contributions are not included in the
Shellite), under the name of Jacinto as a sole
disposal prescribed profits, shows that in
proprietorship. Respondent allegedly delivered
consequences of said exclusion, the general law
his initial capital contribution of P100,000.00
must be followed, and hence the partners should
to Jacinto while the latter in turn produced
reimburse the amount of their respective
P100,000.00 as his counterpart contribution, with
contributions. Any other solution is immoral, and the intention that the profits would be equally
the law will not consent to the latter remaining divided between them. The partnership allegedly
in the possession of the manager or administrator had Jacinto as manager, assisted by Josephine Sy
who has refused to return them, by denying to the (hereafter Josephine), a sister of the wife
partners the action to demand them. (Manresa,
respondent, Erlinda Sy. As compensation, Jacinto
Commentaries on the Spanish Civil Code, vol. XI, would receive a manager's fee or remuneration of
pp. 262-264)
10% of the gross profit and Josephine would
receive 10% of the net profits, in addition to
The judgment appealed from, being in accordance
her wages and other remuneration from the
with law, should be, as it is hereby, affirmed
business.
with costs against the appellants; provided,
however, the defendants shall pay the legal
Allegedly, from the time that Shellite opened for
interest on the sum of P24,607.80 from the date
business on July 8, 1977, its business operation
of the decision of the court, and provided,
went quite and was profitable. Respondent claimed
further, that the defendants shall deposit this
that he could attest to success of their business
sum of money and other documents evidencing
because of the volume of orders and deliveries of
uncollected credits in the office of the clerk of filled Shellane cylinder tanks supplied by
the trial court, in order that said court may
Pilipinas Shell Petroleum Corporation. While
distribute them among the members of said
Jacinto furnished respondent with the merchandise
association, upon being duly identified in the
inventories, balance sheets and net worth of
manner that it may deem proper. So ordered.
Shellite from 1977 to 1989, respondent however
suspected that the amount indicated in these
Avancea, C.J., Johnson, Street, Johns,
documents were understated and undervalued by
Romualdez, and Villa-Real, JJ., concur
Jacinto and Josephine for their own selfish
reasons and for tax avoidance.
G.R. No. 143340
August 15, 2001
Upon Jacinto's death in the later part of 1989,
LILIBETH SUNGA-CHAN and CECILIA SUNGA,
his surviving wife, petitioner Cecilia and
petitioners,
particularly his daughter, petitioner Lilibeth,
vs.
took over the operations, control, custody,
LAMBERTO T. CHUA, respondent.
disposition and management of Shellite without
respondent's consent. Despite respondent's
GONZAGA-REYES, J.:
repeated demands upon petitioners for accounting,
inventory, appraisal, winding up and restitution
Before us is a petition for review on certiorari of his net shares in the partnership, petitioners
under Rule 45 of the Rules of Court of the
failed to comply. Petitioner Lilibeth allegedly
Decision1 of the Court of Appeals dated January
continued the operations of Shellite, converting
31, 2000 in the case entitled "Lamberto T. Chua
to her own use and advantage its properties.

On March 31, 1991, respondent claimed that after

petitioner Lilibeth ran out the alibis and
reasons to evade respondent's demands, she
disbursed out of the partnership funds the amount
of P200,000.00 and partially paid the same to
respondent. Petitioner Lilibeth allegedly
informed respondent that the P200,000.00
represented partial payment of the latter's share
in the partnership, with a promise that the
former would make the complete inventory and
winding up of the properties of the business
establishment. Despite such commitment,
petitioners allegedly failed to comply with their
duty to account, and continued to benefit from
the assets and income of Shellite to the damage
and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion
to Dismiss on the ground that the Securities and
Exchange Commission (SEC) in Manila, not the
Regional Trial Court in Zamboanga del Norte had
jurisdiction over the action. Respondent opposed
the motion to dismiss.

petition for review on certiorari filed by

petitioner, "as petitioners failed to show that a
reversible error was committed by the appellate
court."2
On February 20, 1995, entry of judgment was made
by the Clerk of Court and the case was remanded
to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated
the pre-trial conference and set the hearing of
the case of January 17, 1996. Respondent
presented his evidence while petitioners were
considered to have waived their right to present
evidence for their failure to attend the
scheduled date for reception of evidence despite
notice.
On October 7, 1997, the trial court rendered its
Decision ruling for respondent. The dispositive
of the Decision reads:
"WHEREFORE, judgment is hereby rendered in favor
of the plaintiff and against the defendants, as
follows:

On January 12, 1993, the trial court finding the

complaint sufficient in from and substance denied (1) DIRECTING them to render an accounting in
the motion to dismiss.
acceptable form under accounting procedures and
standards of the properties, assets, income and
On January 30, 1993, petitioners filed their
profits of the Shellite Gas Appliance Center
Answer with Compulsory Counter-claims, contending Since the time of death of Jacinto L. Sunga, from
that they are not liable for partnership shares, whom they continued the business operations
unreceived income/profits, interests, damages and including all businesses derived from Shellite
attorney's fees, that respondent does not have a Gas Appliance Center, submit an inventory, and
cause of action against them, and that the trial appraisal of all these properties, assets,
court has no jurisdiction over the nature of the income, profits etc. to the Court and to
action, the SEC being the agency that has
plaintiff for approval or disapproval;
original and exclusive jurisdiction over the
case. As counterclaim, petitioner sought
(2) ORDERING them to return and restitute to the
attorney's fees and expenses of litigation.
partnership any and all properties, assets,
income and profits they misapplied and converted
On August 2, 1993, petitioner filed a second
to their own use and advantage the legally
Motion to Dismiss this time on the ground that
pertain to the plaintiff and account for the
the claim for winding up of partnership affairs, properties mentioned in pars. A and B on pages 4accounting and recovery of shares in partnership 5 of this petition as basis;
affairs, accounting and recovery of shares in
partnership assets/properties should be dismissed (3) DIRECTING them to restitute and pay to the
and prosecuted against the estate of deceased
plaintiff shares and interest of the plaintiff
Jacinto in a probate or intestate proceeding.
in the partnership of the listed properties,
assets and good will (sic) in schedules A, B and
On August 16, 1993, the trial denied the second
C, on pages 4-5 of the petition;
motion to dismiss for lack of merit.
(4) ORDERING them to pay the plaintiff earned but
On November 26, 1993, petitioners filed their
unreceived income and profits from the
Petition for Certiorari, Prohibition and Mandamus partnership from 1988 to May 30, 1992, when the
with the Court of Appeals docketed as CA-G.R. SP plaintiff learned of the closure of the store the
No. 32499 questioning the denial of the motion to sum of P35,000.00 per month, with legal rate of
dismiss.
interest until fully paid;
On November 29, 1993, petitioners filed with the
trial court a Motion to Suspend Pre-trial
Conference.

(5) ORDERING them to wind up the affairs of the

partnership and terminate its business activities
pursuant to law, after delivering to the
plaintiff all the interest, shares,
On December 13, 1993, the trial court granted the participation and equity in the partnership, or
motion to suspend pre-trial conference.
the value thereof in money or money's worth, if
the properties are not physically divisible;
On November 15, 1994, the Court of Appeals denied
the petition for lack of merit.
(6) FINDING them especially Lilibeth Sunga-Chan
guilty of breach of trust and in bad faith and
On January 16, 1995, this Court denied the
hold them liable to the plaintiff the sum of

P50,000.00 as moral and exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum
of P25,000.00 as attorney's (sic) and P25,000.00
as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED."3
On October 28, 1997, petitioners filed a Notice
of Appeal with the trial court, appealing the
case to the Court of Appeals.

of unsound mind, cannot testify as to any matter

of fact occurring before the death of such
deceased person or before such person became of
unsound mind."
Petitioners thus implore this Court to rule that
the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove
certain claims against a deceased person
(Jacinto), now represented by petitioners.
We are not persuaded.

A partnership may be constituted in any form,

except where immovable property of real rights
are contributed thereto, in which case a public
instrument shall necessary.6 Hence, based on the
intention of the parties, as gathered from the
"WHEREFORE, the instant appeal is dismissed. The facts and ascertained from their language and
appealed decision is AFFIRMED in all respects."4 conduct, a verbal contract of partnership may
arise.7 The essential profits that must be proven
On May 23, 2000, the Court of Appeals denied the to that a partnership was agreed upon are (1)
motion for reconsideration filed by petitioner.
mutual contribution to a common stock, and (2) a
joint interest in the profits.8 Understandably
Hence, this petition wherein petitioner relies
so, in view of the absence of the written
upon following grounds:
contract of partnership between respondent and
Jacinto, respondent resorted to the introduction
"1. The Court of Appeals erred in making a legal of documentary and testimonial evidence to prove
conclusion that there existed a partnership
said partnership. The crucial issue to settle
between respondent Lamberto T. Chua and the late then is to whether or not the "Dead Man's
Jacinto L. Sunga upon the latter'' invitation and Statute" applies to this case so as to render
offer and that upon his death the partnership
inadmissible respondent's testimony and that of
assets and business were taken over by
his witness, Josephine.
petitioners.
The "Dead Man's Statute" provides that if one
2. The Court of Appeals erred in making the legal party to the alleged transaction is precluded
conclusion that laches and/or prescription did
from testifying by death, insanity, or other
not apply in the instant case.
mental disabilities, the surviving party is not
entitled to the undue advantage of giving his own
3. The Court of Appeals erred in making the legal uncontradicted and unexplained account of the
conclusion that there was competent and credible transaction.9 But before this rule can be
evidence to warrant the finding of a partnership, successfully invoked to bar the introduction of
and assuming arguendo that indeed there was a
testimonial evidence, it is necessary that:
partnership, the finding of highly exaggerated
amounts or values in the partnership assets and
"1. The witness is a party or assignor of a party
profits."5
to case or persons in whose behalf a case in
prosecuted.
Petitioners question the correctness of the
finding of the trial court and the Court of
2. The action is against an executor or
Appeals that a partnership existed between
administrator or other representative of a
respondent and Jacinto from 1977 until Jacinto's deceased person or a person of unsound mind;
death. In the absence of any written document to
show such partnership between respondent and
3. The subject-matter of the action is a claim or
Jacinto, petitioners argues that these courts
demand against the estate of such deceased person
were proscribes from hearing the testimonies of
or against person of unsound mind;
respondent and his witness, Josephine, to prove
the alleged partnership three years after
4. His testimony refers to any matter of fact of
Jacinto's death. To support this argument,
which occurred before the death of such deceased
petitioners invoke the "Dead Man's Statute' or
person or before such person became of unsound
"Survivorship Rule" under Section 23, Rule 130 of mind."10
the Rules of Court that provides:
Two reasons forestall the application of the
"SEC. 23. Disqualification by reason of death or "Dead Man's Statute" to this case.
insanity of adverse party. Parties or assignors
of parties to a case, or persons in whose behalf First, petitioners filed a compulsory
a case is prosecuted, against an executor or
counterclaim11 against respondents in their
administrator or other representative of a
answer before the trial court, and with the
deceased person, or against a person of unsound
filing of their counterclaim, petitioners
mind, upon a claim or demand against the estate
themselves effectively removed this case from the
of such deceased person, or against such person
ambit of the "Dead Man's Statute".12 Well
On January 31, 2000, the Court of Appeals
dismissed the appeal. The dispositive portion of
the Decision reads:

entrenched is the rule that when it is the

executor or administrator or representatives of
the estates that sets up the counterclaim, the
plaintiff, herein respondent, may testify to
occurrences before the death of the deceased to
defeat the counterclaim.13 Moreover, as defendant
in the counterclaim, respondent is not
disqualified from testifying as to matters of
facts occurring before the death of the deceased,
said action not having been brought against but
by the estate or representatives of the
deceased.14
Second, the testimony of Josephine is not covered
by the "Dead Man's Statute" for the simple reason
that she is not "a party or assignor of a party
to a case or persons in whose behalf a case is
prosecuted." Records show that respondent offered
the testimony of Josephine to establish the
existence of the partnership between respondent
and Jacinto. Petitioners' insistence that
Josephine is the alter ego of respondent does not
make her an assignor because the term "assignor"
of a party means "assignor of a cause of action
which has arisen, and not the assignor of a right
assigned before any cause of action has
arisen."15 Plainly then, Josephine is merely a
witness of respondent, the latter being the party
plaintiff.
We are not convinced by petitioners' allegation
that Josephine's testimony lacks probative value
because she was allegedly coerced coerced by
respondent, her brother-in-law, to testify in his
favor, Josephine merely declared in court that
she was requested by respondent to testify and
that if she were not requested to do so she would
not have testified. We fail to see how we can
conclude from this candid admission that
Josephine's testimony is involuntary when she did
not in any way categorically say that she was
forced to be a witness of respondent.
Also, the fact that Josephine is the sister of
the wife of respondent does not diminish the
value of her testimony since relationship per se,
without more, does not affect the credibility of
witnesses.16
Petitioners' reliance alone on the "Dead Man's
Statute" to defeat respondent's claim cannot
prevail over the factual findings of the trial
court and the Court of Appeals that a partnership
was established between respondent and Jacinto.
Based not only on the testimonial evidence, but
the documentary evidence as well, the trial court
and the Court of Appeals considered the evidence
for respondent as sufficient to prove the
formation of partnership, albeit an informal one.
Notably, petitioners did not present any evidence
in their favor during trial. By the weight of
judicial precedents, a factual matter like the
finding of the existence of a partnership between
respondent and Jacinto cannot be inquired into by
this Court on review.17 This Court can no longer
be tasked to go over the proofs presented by the
parties and analyze, assess and weigh them to
ascertain if the trial court and the appellate
court were correct in according superior credit

to this or that piece of evidence of one party or

the other.18 It must be also pointed out that
petitioners failed to attend the presentation of
evidence of respondent. Petitioners cannot now
turn to this Court to question the admissibility
and authenticity of the documentary evidence of
respondent when petitioners failed to object to
the admissibility of the evidence at the time
that such evidence was offered.19
With regard to petitioners' insistence that
laches and/or prescription should have
extinguished respondent's claim, we agree with
the trial court and the Court of Appeals that the
action for accounting filed by respondents three
(3) years after Jacinto's death was well within
the prescribed period. The Civil Code provides
that an action to enforce an oral contract
prescribes in six (6) years20 while the right to
demand an accounting for a partner's interest as
against the person continuing the business
accrues at the date of dissolution, in the
absence of any contrary agreement.21 Considering
that the death of a partner results in the
dissolution of the partnership22, in this case,
it was Jacinto's death that respondent as the
surviving partner had the right to an account of
his interest as against petitioners. It bears
stressing that while Jacinto's death dissolved
the partnership, the dissolution did not
immediately terminate the partnership. The Civil
Code23 expressly provides that upon dissolution,
the partnership continues and its legal
personality is retained until the complete
winding up of its business, culminating in its
termination.24
In a desperate bid to cast doubt on the validity
of the oral partnership between respondent and
Jacinto, petitioners maintain that said
partnership that had initial capital of
P200,000.00 should have been registered with the
Securities and Exchange Commission (SEC) since
registration is mandated by the Civil Code, True,
Article 1772 of the Civil Code requires that
partnerships with a capital of P3,000.00 or more
must register with the SEC, however, this
registration requirement is not mandatory.
Article 1768 of the Civil Code25 explicitly
provides that the partnership retains its
juridical personality even if it fails to
register. The failure to register the contract of
partnership does not invalidate the same as among
the partners, so long as the contract has the
essential requisites, because the main purpose of
registration is to give notice to third parties,
and it can be assumed that the members themselves
knew of the contents of their contract.26 In the
case at bar, non-compliance with this directory
provision of the law will not invalidate the
partnership considering that the totality of the
evidence proves that respondent and Jacinto
indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition
is DENIED and the appealed decision is AFFIRMED.
SO ORDERED.
G.R. No. 134559

December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO

TORRES; and EMETERIA BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.

PANGANIBAN, J.:

local newspaper. He also caused the construction

of roads, curbs and gutters. Likewise, he entered
into a contract with an engineering firm for the
building of sixty low-cost housing units and
actually even set up a model house on one of the
subdivision lots. He did all of these for a total
expense of P85,000.
Respondent claimed that the subdivision project
failed, however, because petitioners and their
relatives had separately caused the annotations
of adverse claims on the title to the land, which
eventually scared away prospective buyers.
Despite his requests, petitioners refused to
cause the clearing of the claims, thereby forcing
him to give up on the project. 5

Courts may not extricate parties from the

necessary consequences of their acts. That the
terms of a contract turn out to be financially
disadvantageous to them will not relieve them of
their obligations therein. The lack of an
inventory of real property will not ipso facto
release the contracting partners from their
respective obligations to each other arising from Subsequently, petitioners filed a criminal case
acts executed in accordance with their agreement. for estafa against respondent and his wife, who
were however acquitted. Thereafter, they filed
The Case
the present civil case which, upon respondent's
motion, was later dismissed by the trial court in
The Petition for Review on Certiorari before us
an Order dated September 6, 1982. On appeal,
assails the March 5, 1998 Decision 1 of the Court however, the appellate court remanded the case
of Appeals 2 (CA) in CA-GR CV No. 42378 and its
for further proceedings. Thereafter, the RTC
June 25, 1998 Resolution denying reconsideration. issued its assailed Decision, which, as earlier
The assailed Decision affirmed the ruling of the stated, was affirmed by the CA.
Regional Trial Court (RTC) of Cebu City in Civil
Case No. R-21208, which disposed as follows:
Hence, this Petition. 6
WHEREFORE, for all the foregoing considerations,
the Court, finding for the defendant and against
the plaintiffs, orders the dismissal of the
plaintiffs complaint. The counterclaims of the
defendant are likewise ordered dismissed. No
pronouncement as to costs. 3

Ruling of the Court of Appeals

In affirming the trial court, the Court of

Appeals held that petitioners and respondent had
formed a partnership for the development of the
subdivision. Thus, they must bear the loss
suffered by the partnership in the same
The Facts
proportion as their share in the profits
stipulated in the contract. Disagreeing with the
Sisters Antonia Torres and Emeteria Baring,
trial court's pronouncement that losses as well
herein petitioners, entered into a "joint venture as profits in a joint venture should be
agreement" with Respondent Manuel Torres for the distributed equally, 7 the CA invoked Article
development of a parcel of land into a
1797 of the Civil Code which provides:
subdivision. Pursuant to the contract, they
executed a Deed of Sale covering the said parcel Art. 1797 The losses and profits shall be
of land in favor of respondent, who then had it
distributed in conformity with the agreement. If
registered in his name. By mortgaging the
only the share of each partner in the profits has
property, respondent obtained from Equitable Bank been agreed upon, the share of each in the losses
a loan of P40,000 which, under the Joint Venture shall be in the same proportion.
Agreement, was to be used for the development of
the subdivision. 4 All three of them also agreed The CA elucidated further:
to share the proceeds from the sale of the
subdivided lots.
In the absence of stipulation, the share of each
partner in the profits and losses shall be in
The project did not push through, and the land
proportion to what he may have contributed, but
was subsequently foreclosed by the bank.
the industrial partner shall not be liable for
the losses. As for the profits, the industrial
According to petitioners, the project failed
partner shall receive such share as may be just
because of "respondent's lack of funds or means
and equitable under the circumstances. If besides
and skills." They add that respondent used the
his services he has contributed capital, he shall
loan not for the development of the subdivision, also receive a share in the profits in proportion
but in furtherance of his own company, Universal to his capital.
Umbrella Company.
The Issue
On the other hand, respondent alleged that he
used the loan to implement the Agreement. With
Petitioners impute to the Court of Appeals the
the said amount, he was able to effect the survey following error:
and the subdivision of the lots. He secured the
Lapu Lapu City Council's approval of the
. . . [The] Court of Appeals erred in concluding
subdivision project which he advertised in a
that the transaction

. . . between the petitioners and respondent was

that of a joint venture/partnership, ignoring
outright the provision of Article 1769, and other
related provisions of the Civil Code of the
Philippines. 8
The Court's Ruling

SECOND: That the SECOND PARTY, had received from

the FIRST PARTY, the necessary amount of TWENTY
THOUSAND (P20,000.00) pesos, Philippine currency,
for their personal obligations and this
particular amount will serve as an advance
payment from the FIRST PARTY for the property
mentioned to be sub-divided and to be deducted
from the sales.

The Petition is bereft of merit.

THIRD: That the FIRST PARTY, will not collect
from the SECOND PARTY, the interest and the
principal amount involving the amount of TWENTY
Existence of a Partnership
THOUSAND (P20,000.00) Pesos, Philippine Currency,
until the sub-division project is terminated and
Petitioners deny having formed a partnership with ready for sale to any interested parties, and the
respondent. They contend that the Joint Venture
amount of TWENTY THOUSAND (P20,000.00) pesos,
Agreement and the earlier Deed of Sale, both of
Philippine currency, will be deducted
which were the bases of the appellate court's
accordingly.
finding of a partnership, were void.
FOURTH: That all general expense[s] and all
In the same breath, however, they assert that
cost[s] involved in the sub-division project
under those very same contracts, respondent is
should be paid by the FIRST PARTY, exclusively
liable for his failure to implement the project. and all the expenses will not be deducted from
Because the agreement entitled them to receive 60 the sales after the development of the subpercent of the proceeds from the sale of the
division project.
subdivision lots, they pray that respondent pay
them damages equivalent to 60 percent of the
FIFTH: That the sales of the sub-divided lots
value of the property. 9
will be divided into SIXTY PERCENTUM 60% for the
SECOND PARTY and FORTY PERCENTUM 40% for the
The pertinent portions of the Joint Venture
FIRST PARTY, and additional profits or whatever
Agreement read as follows:
income deriving from the sales will be divided
equally according to the . . . percentage [agreed
KNOW ALL MEN BY THESE PRESENTS:
upon] by both parties.
Main Issue:

This AGREEMENT, is made and entered into at Cebu

City, Philippines, this 5th day of March, 1969,
by and between MR. MANUEL R. TORRES, . . . the
FIRST PARTY, likewise, MRS. ANTONIA B. TORRES,
and MISS EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:

SIXTH: That the intended sub-division project of

the property involved will start the work and all
improvements upon the adjacent lots will be
negotiated in both parties['] favor and all sales
shall [be] decided by both parties.

SEVENTH: That the SECOND PARTIES, should be given

an option to get back the property mentioned
That, whereas, the SECOND PARTY, voluntarily
provided the amount of TWENTY THOUSAND
offered the FIRST PARTY, this property located at (P20,000.00) Pesos, Philippine Currency, borrowed
Lapu-Lapu City, Island of Mactan, under Lot No.
by the SECOND PARTY, will be paid in full to the
1368 covering TCT No. T-0184 with a total area of FIRST PARTY, including all necessary improvements
17,009 square meters, to be sub-divided by the
spent by the FIRST PARTY, and-the FIRST PARTY
FIRST PARTY;
will be given a grace period to turnover the
property mentioned above.
Whereas, the FIRST PARTY had given the SECOND
PARTY, the sum of: TWENTY THOUSAND (P20,000.00)
That this AGREEMENT shall be binding and
Pesos, Philippine Currency upon the execution of obligatory to the parties who executed same
this contract for the property entrusted by the
freely and voluntarily for the uses and purposes
SECOND PARTY, for sub-division projects and
therein stated. 10
development purposes;
A reading of the terms embodied in the Agreement
NOW THEREFORE, for and in consideration of the
indubitably shows the existence of a partnership
above covenants and promises herein contained the pursuant to Article 1767 of the Civil Code, which
respective parties hereto do hereby stipulate and provides:
agree as follows:
Art. 1767.
By the contract of partnership two
ONE: That the SECOND PARTY signed an absolute
or more persons bind themselves to contribute
Deed of Sale . . . dated March 5, 1969, in the
money, property, or industry to a common fund,
amount of TWENTY FIVE THOUSAND FIVE HUNDRED
with the intention of dividing the profits among
THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine
themselves.
Currency, for 1,700 square meters at ONE [PESO] &
FIFTY CTVS. (P1.50) Philippine Currency, in favor Under the above-quoted Agreement, petitioners
of the FIRST PARTY, but the SECOND PARTY did not would contribute property to the partnership in
actually receive the payment.
the form of land which was to be developed into a
subdivision; while respondent would give, in

addition to his industry, the amount needed for

general expenses and other costs. Furthermore,
the income from the said project would be divided
according to the stipulated percentage. Clearly,
the contract manifested the intention of the
parties to form a partnership. 11
It should be stressed that the parties
implemented the contract. Thus, petitioners
transferred the title to the land to facilitate
its use in the name of the respondent. On the
other hand, respondent caused the subject land to
be mortgaged, the proceeds of which were used for
the survey and the subdivision of the land. As
noted earlier, he developed the roads, the curbs
and the gutters of the subdivision and entered
into a contract to construct low-cost housing
units on the property.
Respondent's actions clearly belie petitioners'
contention that he made no contribution to the
partnership. Under Article 1767 of the Civil
Code, a partner may contribute not only money or
property, but also industry.
Petitioners Bound by
Terms of Contract
Under Article 1315 of the Civil Code, contracts
bind the parties not only to what has been
expressly stipulated, but also to all necessary
consequences thereof, as follows:
Art. 1315.
Contracts are perfected by mere
consent, and from that moment the parties are
bound not only to the fulfillment of what has
been expressly stipulated but also to all the
consequences which, according to their nature,
may be in keeping with good faith, usage and law.

They contend that since the parties did not make,

sign or attach to the public instrument an
inventory of the real property contributed, the
partnership is void.
We clarify. First, Article 1773 was intended
primarily to protect third persons. Thus, the
eminent Arturo M. Tolentino states that under the
aforecited provision which is a complement of
Article 1771, 12 "The execution of a public
instrument would be useless if there is no
inventory of the property contributed, because
without its designation and description, they
cannot be subject to inscription in the Registry
of Property, and their contribution cannot
prejudice third persons. This will result in
fraud to those who contract with the partnership
in the belief [in] the efficacy of the guaranty
in which the immovables may consist. Thus, the
contract is declared void by the law when no such
inventory is made." The case at bar does not
involve third parties who may be prejudiced.
Second, petitioners themselves invoke the
allegedly void contract as basis for their claim
that respondent should pay them 60 percent of the
value of the property. 13 They cannot in one
breath deny the contract and in another recognize
it, depending on what momentarily suits their
purpose. Parties cannot adopt inconsistent
positions in regard to a contract and courts will
not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership
will not prevent courts from considering the
Joint Venture Agreement an ordinary contract from
which the parties' rights and obligations to each
other may be inferred and enforced.
Partnership Agreement Not the Result

It is undisputed that petitioners are educated

and are thus presumed to have understood the
terms of the contract they voluntarily signed. If
it was not in consonance with their expectations,
they should have objected to it and insisted on
the provisions they wanted.
Courts are not authorized to extricate parties
from the necessary consequences of their acts,
and the fact that the contractual stipulations
may turn out to be financially disadvantageous
will not relieve parties thereto of their
obligations. They cannot now disavow the
relationship formed from such agreement due to
their supposed misunderstanding of its terms.
Alleged Nullity of the
Partnership Agreement

of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture
Agreement is void under Article 1422 14 of the
Civil Code, because it is the direct result of an
earlier illegal contract, which was for the sale
of the land without valid consideration.
This argument is puerile. The Joint Venture
Agreement clearly states that the consideration
for the sale was the expectation of profits from
the subdivision project. Its first stipulation
states that petitioners did not actually receive
payment for the parcel of land sold to
respondent. Consideration, more properly
denominated as cause, can take different forms,
such as the prestation or promise of a thing or
service by another. 15

Petitioners argue that the Joint Venture

In this case, the cause of the contract of sale
Agreement is void under Article 1773 of the Civil consisted not in the stated peso value of the
Code, which provides:
land, but in the expectation of profits from the
subdivision project, for which the land was
Art. 1773.
A contract of partnership is void,
intended to be used. As explained by the trial
whenever immovable property is contributed
court, "the land was in effect given to the
thereto, if an inventory of said property is not partnership as [petitioner's] participation
made, signed by the parties, and attached to the therein. . . . There was therefore a
public instrument.
consideration for the sale, the [petitioners]

acting in the expectation that, should the

venture come into fruition, they [would] get
sixty percent of the net profits."
Liability of the Parties

limited partner Spirig got married and,

thereafter, on 18 December 1948, limited partner
Carlson sold his share in the partnership to
Suter and his wife. The sale was duly recorded
with the Securities and Exchange Commission on 20
December 1948.

Claiming that rerpondent was solely responsible

for the failure of the subdivision project,
petitioners maintain that he should be made to
pay damages equivalent to 60 percent of the value
of the property, which was their share in the
profits under the Joint Venture Agreement.

The limited partnership had been filing its

income tax returns as a corporation, without
objection by the herein petitioner, Commissioner
of Internal Revenue, until in 1959 when the
latter, in an assessment, consolidated the income
of the firm and the individual incomes of the
We are not persuaded. True, the Court of Appeals partners-spouses Suter and Spirig resulting in a
held that petitioners' acts were not the cause of determination of a deficiency income tax against
the failure of the project. 16 But it also ruled respondent Suter in the amount of P2,678.06 for
that neither was respondent responsible therefor. 1954 and P4,567.00 for 1955.
17 In imputing the blame solely to him,
petitioners failed to give any reason why we
Respondent Suter protested the assessment, and
should disregard the factual findings of the
requested its cancellation and withdrawal, as not
appellate court relieving him of fault. Verily,
in accordance with law, but his request was
factual issues cannot be resolved in a petition
denied. Unable to secure a reconsideration, he
for review under Rule 45, as in this case.
appealed to the Court of Tax Appeals, which
Petitioners have not alleged, not to say shown,
court, after trial, rendered a decision, on 11
that their Petition constitutes one of the
November 1965, reversing that of the Commissioner
exceptions to this doctrine. 18 Accordingly, we
of Internal Revenue.
find no reversible error in the CA's ruling that
petitioners are not entitled to damages.
The present case is a petition for review, filed
by the Commissioner of Internal Revenue, of the
WHEREFORE, the Perition is hereby DENIED and the tax court's aforesaid decision. It raises these
challenged Decision AFFIRMED. Costs against
issues:
petitioners.
(a) Whether or not the corporate personality of
G.R. No. L-25532
February 28, 1969
the William J. Suter "Morcoin" Co., Ltd. should
be disregarded for income tax purposes,
COMMISSIONER OF INTERNAL REVENUE, petitioner,
considering that respondent William J. Suter and
vs.
his wife, Julia Spirig Suter actually formed a
WILLIAM J. SUTER and THE COURT OF TAX APPEALS,
single taxable unit; and
respondents.
(b) Whether or not the partnership was dissolved
Office of the Solicitor General Antonio P.
after the marriage of the partners, respondent
Barredo, Assistant Solicitor General Felicisimo
William J. Suter and Julia Spirig Suter and the
R. Rosete and Special Attorneys B. Gatdula, Jr.
subsequent sale to them by the remaining partner,
and T. Temprosa Jr. for petitioner.
Gustav Carlson, of his participation of P2,000.00
A. S. Monzon, Gutierrez, Farrales and Ong for
in the partnership for a nominal amount of P1.00.
respondents.
The theory of the petitioner, Commissioner of
REYES, J.B.L., J.:
Internal Revenue, is that the marriage of Suter
and Spirig and their subsequent acquisition of
A limited partnership, named "William J. Suter
the interests of remaining partner Carlson in the
'Morcoin' Co., Ltd.," was formed on 30 September partnership dissolved the limited partnership,
1947 by herein respondent William J. Suter as the and if they did not, the fiction of juridical
general partner, and Julia Spirig and Gustav
personality of the partnership should be
Carlson, as the limited partners. The partners
disregarded for income tax purposes because the
contributed, respectively, P20,000.00, P18,000.00 spouses have exclusive ownership and control of
and P2,000.00 to the partnership. On 1 October
the business; consequently the income tax return
1947, the limited partnership was registered with of respondent Suter for the years in question
the Securities and Exchange Commission. The firm should have included his and his wife's
engaged, among other activities, in the
individual incomes and that of the limited
importation, marketing, distribution and
partnership, in accordance with Section 45 (d) of
operation of automatic phonographs, radios,
the National Internal Revenue Code, which
television sets and amusement machines, their
provides as follows:
parts and accessories. It had an office and held
itself out as a limited partnership, handling and (d) Husband and wife. In the case of married
carrying merchandise, using invoices, bills and
persons, whether citizens, residents or nonletterheads bearing its trade-name, maintaining
residents, only one consolidated return for the
its own books of accounts and bank accounts, and taxable year shall be filed by either spouse to
had a quota allocation with the Central Bank.
cover the income of both spouses; ....
In 1948, however, general partner Suter and

In refutation of the foregoing, respondent Suter

maintains, as the Court of Tax Appeals held, that

his marriage with limited partner Spirig and
their acquisition of Carlson's interests in the
partnership in 1948 is not a ground for
dissolution of the partnership, either in the
Code of Commerce or in the New Civil Code, and
that since its juridical personality had not been
affected and since, as a limited partnership, as
contra distinguished from a duly registered
general partnership, it is taxable on its income
similarly with corporations, Suter was not bound
to include in his individual return the income of
the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William
J. Suter "Morcoin" Co., Ltd., has been dissolved
by operation of law because of the marriage of
the only general partner, William J. Suter to the
originally limited partner, Julia Spirig one year
after the partnership was organized is rested by
the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence on
Commercial Laws of the Philippines, Vol. 1, 4th
Ed., page 58, that reads as follows:
A husband and a wife may not enter into a
contract of general copartnership, because under
the Civil Code, which applies in the absence of
express provision in the Code of Commerce,
persons prohibited from making donations to each
other are prohibited from entering into universal
partnerships. (2 Echaverri 196) It follows that
the marriage of partners necessarily brings about
the dissolution of a pre-existing partnership. (1
Guy de Montella 58)
The petitioner-appellant has evidently failed to
observe the fact that William J. Suter "Morcoin"
Co., Ltd. was not a universal partnership, but a
particular one. As appears from Articles 1674 and
1675 of the Spanish Civil Code, of 1889 (which
was the law in force when the subject firm was
organized in 1947), a universal partnership
requires either that the object of the
association be all the present property of the
partners, as contributed by them to the common
fund, or else "all that the partners may acquire
by their industry or work during the existence of
the partnership". William J. Suter "Morcoin" Co.,
Ltd. was not such a universal partnership, since
the contributions of the partners were fixed sums
of money, P20,000.00 by William Suter and
P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that
William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter
by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme
Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1,
says with regard to the prohibition contained in
the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar
entre si el contrato de sociedad universal, pero
o podran constituir sociedad particular? Aunque
el punto ha sido muy debatido, nos inclinamos a

la tesis permisiva de los contratos de sociedad

particular entre esposos, ya que ningun precepto
de nuestro Codigo los prohibe, y hay que estar a
la norma general segun la que toda persona es
capaz para contratar mientras no sea declarado
incapaz por la ley. La jurisprudencia de la
Direccion de los Registros fue favorable a esta
misma tesis en su resolution de 3 de febrero de
1936, mas parece cambiar de rumbo en la de 9 de
marzo de 1943.
Nor could the subsequent marriage of the partners
operate to dissolve it, such marriage not being
one of the causes provided for that purpose
either by the Spanish Civil Code or the Code of
Commerce.
The appellant's view, that by the marriage of
both partners the company became a single
proprietorship, is equally erroneous. The capital
contributions of partners William J. Suter and
Julia Spirig were separately owned and
contributed by them before their marriage; and
after they were joined in wedlock, such
contributions remained their respective separate
property under the Spanish Civil Code (Article
1396):
The following shall be the exclusive property of
each spouse:
(a) That which is brought to the marriage as his
or her own; ....
Thus, the individual interest of each consort in
William J. Suter "Morcoin" Co., Ltd. did not
become common property of both after their
marriage in 1948.
It being a basic tenet of the Spanish and
Philippine law that the partnership has a
juridical personality of its own, distinct and
separate from that of its partners (unlike
American and English law that does not recognize
such separate juridical personality), the
bypassing of the existence of the limited
partnership as a taxpayer can only be done by
ignoring or disregarding clear statutory mandates
and basic principles of our law. The limited
partnership's separate individuality makes it
impossible to equate its income with that of the
component members. True, section 24 of the
Internal Revenue Code merges registered general
co-partnerships (compaias colectivas) with the
personality of the individual partners for income
tax purposes. But this rule is exceptional in its
disregard of a cardinal tenet of our partnership
laws, and can not be extended by mere implication
to limited partnerships.
The rulings cited by the petitioner (Collector of
Internal Revenue vs. University of the Visayas,
L-13554, Resolution of 30 October 1964, and
Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as
authority for disregarding the fiction of legal
personality of the corporations involved therein
are not applicable to the present case. In the
cited cases, the corporations were already
subject to tax when the fiction of their
corporate personality was pierced; in the present

case, to do so would exempt the limited

partnership from income taxation but would throw
the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the
cases cited, merely served as business conduits
or alter egos of the stockholders, a factor that
justified a disregard of their corporate
personalities for tax purposes. This is not true
in the present case. Here, the limited
partnership is not a mere business conduit of the
partner-spouses; it was organized for legitimate
business purposes; it conducted its own dealings
with its customers prior to appellee's marriage,
and had been filing its own income tax returns as
such independent entity. The change in its
membership, brought about by the marriage of the
partners and their subsequent acquisition of all
interest therein, is no ground for withdrawing
the partnership from the coverage of Section 24
of the tax code, requiring it to pay income tax.
As far as the records show, the partners did not
enter into matrimony and thereafter buy the
interests of the remaining partner with the
premeditated scheme or design to use the
partnership as a business conduit to dodge the
tax laws. Regularity, not otherwise, is presumed.

vis-a-vis the joint income of husband and wife)

may be the same for a given taxable year, their
consequences would be different, as their
contributions in the business partnership are not
the same.

As the limited partnership under consideration is

taxable on its income, to require that income to
be included in the individual tax return of
respondent Suter is to overstretch the letter and
intent of the law. In fact, it would even
conflict with what it specifically provides in
its Section 24: for the appellant Commissioner's
stand results in equal treatment, tax wise, of a
general copartnership (compaia colectiva) and a
limited partnership, when the code plainly
differentiates the two. Thus, the code taxes the
latter on its income, but not the former, because
it is in the case of compaias colectivas that
the members, and not the firm, are taxable in
their individual capacities for any dividend or
share of the profit derived from the duly
registered general partnership (Section 26,
N.I.R.C.; Araas, Anno. & Juris. on the N.I.R.C.,
As Amended, Vol. 1, pp. 88-89).lawphi1.nt

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P.

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

The difference in tax rates between the income of

the limited partnership being consolidated with,
and when split from the income of the spouses, is
not a justification for requiring consolidation;
the revenue code, as it presently stands, does
not authorize it, and even bars it by requiring
the limited partnership to pay tax on its own
income.
FOR THE FOREGOING REASONS, the decision under
review is hereby affirmed. No costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar,
Sanchez, Castro, Fernando, Capistrano and
Teehankee, JJ., concur.
Barredo, J., took no part.
Footnotes
G.R. No. 75875

G.R. No. 75951

December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO

R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE
RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN
GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY
and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76

But it is argued that the income of the limited

partnership is actually or constructively the
income of the spouses and forms part of the
conjugal partnership of gains. This is not wholly
correct. As pointed out in Agapito vs. Molo 50
Phil. 779, and People's Bank vs. Register of
Deeds of Manila, 60 Phil. 167, the fruits of the
wife's parapherna become conjugal only when no
longer needed to defray the expenses for the
administration and preservation of the
paraphernal capital of the wife. Then again, the
appellant's argument erroneously confines itself
to the question of the legal personality of the
limited partnership, which is not essential to
the income taxability of the partnership since
the law taxes the income of even joint accounts
that have no personality of their own. 1
Appellant is, likewise, mistaken in that it
assumes that the conjugal partnership of gains is
a taxable unit, which it is not. What is taxable
is the "income of both spouses" (Section 45 [d]
in their individual capacities. Though the amount
of income (income of the conjugal partnership

December 15, 1989

December 15, 1989

LUCIANO E. SALAZAR, petitioner,

vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO
V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS,
respondents.
Belo, Abiera & Associates for petitioners in
75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano
E. Salazar.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of
the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside
the earlier decision dated June 5, 1986, of the

then Intermediate Appellate Court and directed

that in all subsequent elections for directors of
Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in
ASI's choice of its three (3) nominees; that, on
the other hand, the Filipino stockholders can
nominate only six (6) candidates and in the event
they cannot agree on the six (6) nominees, they
shall vote only among themselves to determine who
the six (6) nominees will be, with cumulative
voting to be allowed but without interference
from ASI.

number of corporate acts and the right to

designate certain officers, such as a member of
the Executive Committee whose vote was required
for important corporate transactions.
Later, the 30% capital stock of ASI was increased
to 40%. The corporation was also registered with
the Board of Investments for availment of
incentives with the condition that at least 60%
of the capital stock of the corporation shall be
owned by Philippine nationals.

The joint enterprise thus entered into by the

Filipino investors and the American corporation
prospered. Unfortunately, with the business
The antecedent facts can be summarized as
successes, there came a deterioration of the
follows:
initially harmonious relations between the two
groups. According to the Filipino group, a basic
In 1961, Saniwares, a domestic corporation was
disagreement was due to their desire to expand
incorporated for the primary purpose of
the export operations of the company to which ASI
manufacturing and marketing sanitary wares. One
objected as it apparently had other subsidiaries
of the incorporators, Mr. Baldwin Young went
of joint joint venture groups in the countries
abroad to look for foreign partners, European or where Philippine exports were contemplated. On
American who could help in its expansion plans.
March 8, 1983, the annual stockholders' meeting
On August 15, 1962, ASI, a foreign corporation
was held. The meeting was presided by Baldwin
domiciled in Delaware, United States entered into Young. The minutes were taken by the Secretary,
an Agreement with Saniwares and some Filipino
Avelino Cruz. After disposing of the preliminary
investors whereby ASI and the Filipino investors items in the agenda, the stockholders then
agreed to participate in the ownership of an
proceeded to the election of the members of the
enterprise which would engage primarily in the
board of directors. The ASI group nominated three
business of manufacturing in the Philippines and persons namely; Wolfgang Aurbach, John Griffin
selling here and abroad vitreous china and
and David P. Whittingham. The Philippine
sanitary wares. The parties agreed that the
investors nominated six, namely; Ernesto
business operations in the Philippines shall be
Lagdameo, Sr., Raul A. Boncan, Ernesto R.
carried on by an incorporated enterprise and that Lagdameo, Jr., George F. Lee, and Baldwin Young.
the name of the corporation shall initially be
Mr. Eduardo R, Ceniza then nominated Mr. Luciano
"Sanitary Wares Manufacturing Corporation."
E. Salazar, who in turn nominated Mr. Charles
Chamsay. The chairman, Baldwin Young ruled the
The Agreement has the following provisions
last two nominations out of order on the basis of
relevant to the issues in these cases on the
section 5 (a) of the Agreement, the consistent
nomination and election of the directors of the
practice of the parties during the past annual
corporation:
stockholders' meetings to nominate only nine
persons as nominees for the nine-member board of
3.
Articles of Incorporation
directors, and the legal advice of Saniwares'
legal counsel. The following events then,
(a)
The Articles of Incorporation of the
transpired:
Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as
... There were protests against the action of the
permitted under Philippine law, shall
Chairman and heated arguments ensued. An appeal
specifically provide for
was made by the ASI representative to the body of
stockholders present that a vote be taken on the
(1)
Cumulative voting for directors:
ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no
xxx
xxx
xxx
vote on the ruling was taken. The Chairman then
instructed the Corporate Secretary to cast all
5.
Management
the votes present and represented by proxy
equally for the 6 nominees of the Philippine
(a)
The management of the Corporation shall be Investors and the 3 nominees of ASI, thus
vested in a Board of Directors, which shall
effectively excluding the 2 additional persons
consist of nine individuals. As long as American- nominated, namely, Luciano E. Salazar and Charles
Standard shall own at least 30% of the
Chamsay. The ASI representative, Mr. Jaqua
outstanding stock of the Corporation, three of
protested the decision of the Chairman and
the nine directors shall be designated by
announced that all votes accruing to ASI shares,
American-Standard, and the other six shall be
a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP
designated by the other stockholders of the
No. 05617) were being cumulatively voted for the
Corporation. (pp. 51 & 53, Rollo of 75875)
three ASI nominees and Charles Chamsay, and
instructed the Secretary to so vote. Luciano E.
At the request of ASI, the agreement contained
Salazar and other proxy holders announced that
provisions designed to protect it as a minority
all the votes owned by and or represented by them
group, including the grant of veto powers over a 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 Griffin and David
Whittingham and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr.,
Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The
Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., 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 Griffin, David Whittingham and
Charles Chamsay. Luciano E. Salazar voted for
himself, thus the said five directors were
certified 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)

Salazar and Chamsay. The ASI Group and Salazar

appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.

These incidents triggered off the filing of

separate petitions by the parties with the
Securities and Exchange Commission (SEC). The
first petition filed was for preliminary
injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R.
Lagdameo, Jr., Enrique Lagdameo and George F. Lee
against Luciano 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 Griffin, 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.

11.1.

The SEC decision led to the filing of two

separate appeals with the Intermediate Appellate
Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as ACG.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 filed by the
appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned
amended decision. Petitioners Wolfgang Aurbach,
John Griffin, David P. Whittingham and Charles
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. 7597576 assails the amended decision on the following
grounds:

ThatAmendedDecisionwouldsanctiontheCA'sdisregard
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 deprivation of the property rights
of stockholders without due process of law in
order that a favored group of stockholders may be
illegally benefitted 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:

The two petitions were consolidated and tried

jointly by a hearing officer who rendered a
I
decision upholding the election of the Lagdameo
Group and dismissing the quo warranto petition of 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

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:

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE

THAT PRIVATE PETITIONERS HEREIN WERE THE DULY
ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo75951)

(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.

The issues raised in the petitions are

interrelated, hence, they are discussed jointly.

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

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.

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
The rule is that whether the parties to a
disclaimer is directed at third parties and is
particular contract have thereby established
not inconsistent with, and does not preclude, the
among themselves a joint venture or some other
existence of two distinct groups of stockholders
relation depends upon their actual intention
in Saniwares one of which (the Philippine
which is determined in accordance with the rules Investors) shall constitute the majority, and the
governing the interpretation and construction of other ASI shall constitute the minority
contracts. (Terminal Shares, Inc. v. Chicago, B. stockholder. In any event, the evident intention
and Q.R. Co. (DC MO) 65 F Supp 678; Universal
of the Philippine Investors and ASI in entering
Sales Corp. v. California Press Mfg. Co. 20 Cal. into the Agreement is to enter into ajoint
2nd 751, 128 P 2nd 668)
venture enterprise, and if some words in the
Agreement appear to be contrary to the evident
The ASI Group and petitioner Salazar (G.R. Nos.
intention of the parties, the latter shall
75975-76) contend that the actual intention of
prevail over the former (Art. 1370, New Civil
the parties should be viewed strictly on the
Code). The various stipulations of a contract
"Agreement" dated August 15,1962 wherein it is
shall be interpreted together attributing to the
clearly stated that the parties' intention was to doubtful ones that sense which may result from
form a corporation and not a joint venture.
all of them taken jointly (Art. 1374, New Civil
Code). Moreover, in order to judge the intention
They specifically mention number 16 under
of the contracting parties, their contemporaneous
Miscellaneous Provisions which states:
and subsequent acts shall be principally
considered. (Art. 1371, New Civil Code). (Part I,
xxx
xxx
xxx
Original Records, SEC Case No. 2417)
c)
nothing herein contained shall be construed It has been ruled:
to constitute any of the parties hereto partners
or joint venturers in respect of any transaction In an action at law, where there is evidence
hereunder. (At P. 66, Rollo-GR No. 75875)
tending to prove that the parties joined their
efforts in furtherance of an enterprise for their
They object to the admission of other evidence
joint profit, the question whether they intended
which tends to show that the parties' agreement
by their agreement to create a joint adventure,
was to establish a joint venture presented by the or to assume some other relation is a question of
Lagdameo and Young Group on the ground that it
fact for the jury. (Binder v. Kessler v 200 App.
contravenes the parol evidence rule under section Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex.
7, Rule 130 of the Revised Rules of Court.
Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423,
According to them, the Lagdameo and Young Group
200 P 96 33 C.J. p. 871)
never pleaded in their pleading that the
"Agreement" failed to express the true intent of In the instant cases, our examination of
the parties.
important provisions of the Agreement as well as
the testimonial evidence presented by the
The parol evidence Rule under Rule 130 provides: Lagdameo and Young Group shows that the parties
agreed to establish a joint venture and not a
Evidence of written agreements-When the terms of corporation. The history of the organization of
an agreement have been reduced to writing, it is 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:

number of directors in the board.

Moreover, ASI in its communications referred to

the enterprise as joint venture. Baldwin Young
According to the unrebutted testimony of Mr.
also testified that Section 16(c) of the
Baldwin Young, he negotiated the Agreement with
Agreement that "Nothing herein contained shall be
ASI in behalf of the Philippine nationals. He
construed to constitute any of the parties hereto
testified that ASI agreed to accept the role of
partners or joint venturers in respect of any
minority vis-a-vis the Philippine National group transaction hereunder" was merely to obviate the
of investors, on the condition that the Agreement possibility of the enterprise being treated as
should contain provisions to protect ASI as the
partnership for tax purposes and liabilities to
minority.
third parties.
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)].

Quite often, Filipino entrepreneurs in their

desire to develop the industrial and
manufacturing capacities of a local firm are
constrained to seek the technology and marketing
assistance of huge multinational corporations of
the developed world. Arrangements are formalized
where a foreign group becomes a minority owner of
a firm in exchange for its manufacturing
expertise, use of its brand names, and other such
assistance. However, there is always a danger
The Agreement also requires a 75% super-majority from such arrangements. The foreign group may,
vote for the amendment of the articles and byfrom the start, intend to establish its own sole
laws of Saniwares [Sec. 3 (a) (iv) and (b)
or monopolistic operations and merely uses the
(iii)]. ASI is also given the right to designate joint venture arrangement to gain a foothold or
the president and plant manager [Sec. 5 (6)]. The test the Philippine waters, so to speak. Or the
Agreement further provides that the sales policy covetousness may come later. As the Philippine
of Saniwares shall be that which is normally
firm enlarges its operations and becomes
followed by ASI [Sec. 13 (a)] and that Saniwares profitable, the foreign group undermines the
should not export "Standard" products otherwise
local majority ownership and actively tries to
than through ASI's Export Marketing Services
completely or predominantly take over the entire
[Sec. 13 (6)]. Under the Agreement, ASI agreed to company. This undermining of joint ventures is
provide technology and know-how to Saniwares and not consistent with fair dealing to say the
the latter paid royalties for the same. (At p.
least. To the extent that such subversive actions
2).
can be lawfully prevented, the courts should
extend protection especially in industries where
xxx
xxx
xxx
constitutional and legal requirements reserve
controlling ownership to Filipino citizens.
It is pertinent to note that the provisions of
the Agreement requiring a 7 out of 9 votes of the The Lagdameo Group stated in their appellees'
board of directors for certain actions, in effect brief in the Court of Appeal
gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, In fact, the Philippine Corporation Code itself
the grant to ASI of the right to designate
recognizes the right of stockholders to enter
certain officers of the corporation; the superinto agreements regarding the exercise of their
majority voting requirements for amendments of
voting rights.
the articles and by-laws; and most significantly
to the issues of tms case, the provision that ASI Sec. 100. Agreements by stockholders.shall designate 3 out of the 9 directors and the
other stockholders shall designate the other 6,
xxx
xxx
xxx
clearly indicate that there are two distinct
groups in Saniwares, namely ASI, which owns 40%
2.
An agreement between two or more
of the capital stock and the Philippine National stockholders, if in writing and signed by the
stockholders who own the balance of 60%, and that parties thereto, may provide that in exercising
2) ASI is given certain protections as the
any voting rights, the shares held by them shall
minority stockholder.
be voted as therein provided, or as they may
agree, or as determined in accordance with a
Premises considered, we believe that under the
procedure agreed upon by them.
Agreement there are two groups of stockholders
who established a corporation with provisions for Appellants contend that the above provision is
a special contractual relationship between the
included in the Corporation Code's chapter on
parties, i.e., ASI and the other stockholders.
close corporations and Saniwares cannot be a
(pp. 4-5)
close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders
Section 5 (a) of the agreement uses the word
at the time of the disputed stockholders meeting,
"designated" and not "nominated" or "elected" in these 95 stockholders are not separate from each
the selection of the nine directors on a six to
other but are divisible into groups representing
three ratio. Each group is assured of a fixed
a single Identifiable interest. For example, ASI,

its nominees and lawyers count for 13 of the 95

stockholders. The YoungYutivo family count for
another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9
stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business
or interest group are considered as one (which,
it is respectfully submitted, they should be for
purposes of determining how closely held
Saniwares is there were as of 8 March 1983,
practically only 17 stockholders of Saniwares.
(Please refer to discussion in pp. 5 to 6 of
appellees' Rejoinder Memorandum dated 11 December
1984 and Annex "A" thereof).

SEC Hearing Officer, P. 16)

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

Paragraph 2 refers to pooling and voting

agreements in particular. Does this provision
necessarily imply that these agreements can be
valid only in close corporations as defined by
the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify
as a close corporation under section 96, can some
Secondly, even assuming that Saniwares is
of them enter into an agreement to vote as a unit
technically not a close corporation because it
in the election of directors? It is submitted
has more than 20 stockholders, the undeniable
that there is no reason for denying stockholders
fact is that it is a close-held corporation.
of corporations other than close ones the right
Surely, appellants cannot honestly claim that
to enter into not voting or pooling agreements to
Saniwares is a public issue or a widely held
protect their interests, as long as they do not
corporation.
intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of
In the United States, many courts have taken a
course, voting or pooling agreements are perhaps
realistic approach to joint venture corporations more useful and more often resorted to in close
and have not rigidly applied principles of
corporations. But they may also be found
corporation law designed primarily for public
necessary even in widely held corporations.
issue corporations. These courts have indicated
Moreover, since the Code limits the legal meaning
that express arrangements between corporate joint of close corporations to those which comply with
ventures should be construed with less emphasis
the requisites laid down by section 96, it is
on the ordinary rules of law usually applied to
entirely possible that a corporation which is in
corporate entities and with more consideration
fact a close corporation will not come within the
given to the nature of the agreement between the definition. In such case, its stockholders should
joint venturers (Please see Wabash Ry v. American not be precluded from entering into contracts
Refrigerator Transit Co., 7 F 2d 335; Chicago, M like voting agreements if these are otherwise
& St. P. Ry v. Des Moines Union Ry; 254 Ass'n.
valid. (Campos & Lopez-Campos, op cit, p. 405)
247 US. 490'; Seaboard Airline Ry v. Atlantic
Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771;
In short, even assuming that sec. 5(a) of the
Deboy v. Harris, 207 Md., 212,113 A 2d 903;
Agreement relating to the designation or
Hathway v. Porter Royalty Pool, Inc., 296 Mich.
nomination of directors restricts the right of
90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 the Agreement's signatories to vote for
U.S. 262; "The Legal Status of Joint Venture
directors, such contractual provision, as
Corporations", 11 Vand Law Rev. p. 680,1958).
correctly held by the SEC, is valid and binding
These American cases dealt with legal questions
upon the signatories thereto, which include
as to the extent to which the requirements
appellants. (Rollo No. 75951, pp. 90-94)
arising from the corporate form of joint venture
corporations should control, and the courts ruled In regard to the question as to whether or not
that substantial justice lay with those litigants the ASI group may vote their additional equity
who relied on the joint venture agreement rather during elections of Saniwares' board of
than the litigants who relied on the orthodox
directors, the Court of Appeals correctly stated:
principles of corporation law.
As in other joint venture companies, the extent
As correctly held by the SEC Hearing Officer:
of ASI's participation in the management of the
corporation is spelled out in the Agreement.
It is said that participants in a joint venture, Section 5(a) hereof says that three of the nine
in organizing the joint venture deviate from the directors shall be designated by ASI and the
traditional pattern of corporation management. A remaining six by the other stockholders, i.e.,
noted authority has pointed out that just as in
the Filipino stockholders. This allocation of
close corporations, shareholders' agreements in
board seats is obviously in consonance with the
joint venture corporations often contain
minority position of ASI.
provisions which do one or more of the following:
(1) require greater than majority vote for
Having entered into a well-defined contractual
shareholder and director action; (2) give certain relationship, it is imperative that the parties
shareholders or groups of shareholders power to
should honor and adhere to their respective
select a specified number of directors; (3) give rights and obligations thereunder. Appellants
to the shareholders control over the selection
seem to contend that any allocation of board
and retention of employees; and (4) set up a
seats, even in joint venture corporations, are
procedure for the settlement of disputes by
null and void to the extent that such may
arbitration (See I O' Neal, Close Corporations,
interfere with the stockholder's rights to
1971 ed., Section 1.06a, pp. 15-16) (Decision of cumulative voting as provided in Section 24 of

the Corporation Code. This Court should not be

prepared to hold that any agreement which
curtails in any way cumulative voting should be
struck down, even if such agreement has been
freely entered into by experienced businessmen
and do not prejudice those who are not parties
thereto. It may well be that it would be more
cogent to hold, as the Securities and Exchange
Commission has held in the decision appealed
from, that cumulative voting rights may be
voluntarily waived by stockholders who enter into
special relationships with each other to pursue
and implement specific purposes, as in joint
venture relationships between foreign and local
stockholders, so long as such agreements do not
adversely affect third parties.
In any event, it is believed that we are not here
called upon to make a general rule on this
question. Rather, all that needs to be done is to
give life and effect to the particular
contractual rights and obligations which the
parties have assumed for themselves.
On the one hand, the clearly established minority
position of ASI and the contractual allocation of
board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we
opted to uphold the second over the first. Upon
further reflection, we feel that the proper and
just solution to give due consideration to both
factors suggests itself quite clearly. This Court
should recognize and uphold the division of the
stockholders into two groups, and at the same
time uphold the right of the stockholders within
each group to cumulative voting in the process of
determining who the group's nominees would be. In
practical terms, as suggested by appellant
Luciano E. Salazar himself, this means that if
the Filipino stockholders cannot agree who their
six nominees will be, a vote would have to be
taken among the Filipino stockholders only.
During this voting, each Filipino stockholder can
cumulate his votes. ASI, however, should not be
allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is
allowed to designate under the Agreement, and may
even be able to get a majority of the board
seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the
allocation of the board seats and the
stockholder's right to cumulative voting.
Moreover, this ruling will also give due
consideration to the issue raised by the
appellees on possible violation or circumvention
of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of
the Constitution and the laws if ASI is allowed
to nominate more than three directors. (Rollo75875, pp. 38-39)

Section 24 of the Corporation Code which gives

the stockholders of a corporation the right to
cumulate their votes in electing directors.
Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily
mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the election of aliens
as members of the board of directors or governing
body of corporations or associations engaging in
partially nationalized activities shall be
allowed in proportion to their allowable
participation or share in the capital of such
entities. (amendments introduced by Presidential
Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the
context of Section 24 of the Corporation Code.
The point of query, however, is whether or not
that provision is applicable to a joint venture
with clearly defined agreements:
The legal concept of ajoint venture is of common
law origin. It has no precise legal definition
but it has been generally understood to mean an
organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is in
fact hardly distinguishable from the partnership,
since their elements are similar community of
interest in the business, sharing of profits and
losses, and a mutual right of control. Blackner
v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau
v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P.
2d. 242 [1955]). The main distinction cited by
most opinions in common law jurisdictions is that
the partnership contemplates a general business
with some degree of continuity, while the joint
venture is formed for the execution of a single
transaction, and is thus of a temporary nature.
(Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500
[1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d.
74 [1947]; Gates v. Megargel 266 Fed. 811
[1920]). This observation is not entirely
accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or
universal, and a particular partnership may have
for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that
under Philippine law, a joint venture is a form
of partnership and should thus be governed by the
law of partnerships. The Supreme Court has
however recognized a distinction between these
two business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint
venture with others. (At p. 12, Tuazon v.
Bolanos, 95 Phil. 906 [1954]) (Campos and LopezCampos 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).

The ASI Group and petitioner Salazar, now

reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to 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.

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.

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.

With these findings, we the decisions of the SEC

Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young,
Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee as the duly elected
directors of Saniwares at the March 8,1983 annual
stockholders' meeting.

On the other hand, the Lagdameo and Young Group

(petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the
This is the proper interpretation of the
board of directors of the enterprise as ruled by
Agreement of the parties as regards the election the appellate court and submits that the six (6)
of members of the board of directors.
directors allotted the Filipino stockholders
should be selected by consensus pursuant to
To allow the ASI Group to vote their additional
section 5 (a) of the Agreement which uses the
equity to help elect even a Filipino director who word "designate" meaning "nominate, delegate or
would be beholden to them would obliterate their appoint."
minority status as agreed upon by the parties. As
aptly stated by the appellate court:
They also stress the possibility that the ASI
Group might take control of the enterprise if the
... ASI, however, should not be allowed to
Filipino stockholders are allowed to select their
interfere in the voting within the Filipino
nominees separately and not as a common slot
group. Otherwise, ASI would be able to designate determined by the majority of their group.
more than the three directors it is allowed to
designate under the Agreement, and may even be
Section 5 (a) of the Agreement which uses the
able to get a majority of the board seats, a
word designates in the allocation of board
result which is clearly contrary to the
directors should not be interpreted in isolation.
contractual intent of the parties.
This should be construed in relation to section 3
(a) (1) of the Agreement. As we stated earlier,
Such a ruling will give effect to both the
section 3(a) (1) relates to the manner of voting
allocation of the board seats and the
for these nominees which is cumulative voting
stockholder's right to cumulative voting.
while section 5(a) relates to the manner of
Moreover, this ruling will also give due
nominating the members of the board of directors.
consideration to the issue raised by the
The petitioners in G.R. No. 75951 agreed to this
appellees on possible violation or circumvention procedure, hence, they cannot now impugn its
of the Anti-Dummy Law (Com. Act No. 108, as
legality.
amended) and the nationalization requirements of
the Constitution and the laws if ASI is allowed
The insinuation that the ASI Group may be able to
to nominate more than three directors. (At p. 39, control the enterprise under the cumulative
Rollo, 75875)
voting procedure cannot, however, be ignored. The
validity of the cumulative voting procedure is
Equally important as the consideration of the
dependent on the directors thus elected being
contractual intent of the parties is the
genuine members of the Filipino group, not voters
consideration as regards the possible domination whose interest is to increase the ASI share in
by the foreign investors of the enterprise in
the management of Saniwares. The joint venture
violation of the nationalization requirements
character of the enterprise must always be taken
enshrined in the Constitution and circumvention
into account, so long as the company exists under
of the Anti-Dummy Act. In this regard, petitioner its original agreement. Cumulative voting may not
Salazar's position is that the Anti-Dummy Act
be used as a device to enable ASI to achieve
allows the ASI group to elect board directors in stealthily or indirectly what they cannot
proportion to their share in the capital of the
accomplish openly. There are substantial
entity. It is to be noted, however, that the same safeguards in the Agreement which are intended to
law also limits the election of aliens as members preserve the majority status of the Filipino
of the board of directors in proportion to their investors as well as to maintain the minority
allowance participation of said entity. In the
status of the foreign investors group as earlier
instant case, the foreign Group ASI was limited
discussed. They should be maintained.
to designate three directors. This is the
allowable participation of the ASI Group. Hence, WHEREFORE, the petitions in G.R. Nos. 75975-76
in future dealings, this limitation of six to
and G.R. No. 75875 are DISMISSED and the petition
three board seats should always be maintained as in G.R. No. 75951 is partly GRANTED. The amended
long as the joint venture agreement exists
decision of the Court of Appeals is MODIFIED in
considering that in limiting 3 board seats in the that Messrs. Wolfgang Aurbach John Griffin, David

Whittingham Emesto V. Lagdameo, Baldwin Young,

Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee are declared as the
duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting. In all other
respects, the questioned decision is AFFIRMED.
Costs against the petitioners in G.R. Nos. 7597576 and G.R. No. 75875.

up and liquidation thereof, and the equal

division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City,
Branch 7 rendered judgment6 on April 12, 1995, to
wit:
WHEREFORE, in view of all the foregoing, judgment
is hereby rendered:

SO ORDERED.
G.R. No. 126881

October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY,
represented by its President TAN ENG LAY,
respondents.
DE LEON, JR., J.:
In this petition for review on certiorari,
petitioners pray for the reversal of the
Decision1 dated March 13, 1996 of the former
Fifth Division2 of the Court of Appeals in CAG.R. CV No. 47937, the dispositive portion of
which states:

a) Declaring that Benguet Lumber is a joint

venture which is akin to a particular
partnership;
b) Declaring that the deceased Tan Eng Kee and
Tan Eng Lay are joint adventurers and/or partners
in a business venture and/or particular
partnership called Benguet Lumber and as such
should share in the profits and/or losses of the
business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber
are the same assets turned over to Benguet Lumber
Co. Inc. and as such the heirs or legal
representatives of the deceased Tan Eng Kee have
a legal right to share in said assets;

d) Declaring that all the rights and obligations

THE FOREGOING CONSIDERED, the appealed decision
of Tan Eng Kee as joint adventurer and/or as
is hereby set aside, and the complaint dismissed. partner in a particular partnership have
descended to the plaintiffs who are his legal
The facts are:
heirs.
Following the death of Tan Eng Kee on September
13, 1984, Matilde Abubo, the common-law spouse of
the decedent, joined by their children Teresita,
Nena, Clarita, Carlos, Corazon and Elpidio,
collectively known as herein petitioners HEIRS OF
TAN ENG KEE, filed suit against the decedent's
brother TAN ENG LAY on February 19, 1990. The
complaint,3 docketed as Civil Case No. 1983-R in
the Regional Trial Court of Baguio City was for
accounting, liquidation and winding up of the
alleged partnership formed after World War II
between Tan Eng Kee and Tan Eng Lay. On March 18,
1991, the petitioners filed an amended complaint4
impleading private respondent herein BENGUET
LUMBER COMPANY, as represented by Tan Eng Lay.
The amended complaint was admitted by the trial
court in its Order dated May 3, 1991.5
The amended complaint principally alleged that
after the second World War, Tan Eng Kee and Tan
Eng Lay, pooling their resources and industry
together, entered into a partnership engaged in
the business of selling lumber and hardware and
construction supplies. They named their
enterprise "Benguet Lumber" which they jointly
managed until Tan Eng Kee's death. Petitioners
herein averred that the business prospered due to
the hard work and thrift of the alleged partners.
However, they claimed that in 1981, Tan Eng Lay
and his children caused the conversion of the
partnership "Benguet Lumber" into a corporation
called "Benguet Lumber Company." The
incorporation was purportedly a ruse to deprive
Tan Eng Kee and his heirs of their rightful
participation in the profits of the business.
Petitioners prayed for accounting of the
partnership assets, and the dissolution, winding

e) Ordering the defendant Tan Eng Lay and/or the

President and/or General Manager of Benguet
Lumber Company Inc. to render an accounting of
all the assets of Benguet Lumber Company, Inc. so
the plaintiffs know their proper share in the
business;
f) Ordering the appointment of a receiver to
preserve and/or administer the assets of Benguet
Lumber Company, Inc. until such time that said
corporation is finally liquidated are directed to
submit the name of any person they want to be
appointed as receiver failing in which this Court
will appoint the Branch Clerk of Court or another
one who is qualified to act as such.
g) Denying the award of damages to the plaintiffs
for lack of proof except the expenses in filing
the instant case.
h) Dismissing the counter-claim of the defendant
for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court
of Appeals which, on March 13, 1996, rendered the
assailed decision reversing the judgment of the
trial court. Petitioners' motion for
reconsideration7 was denied by the Court of
Appeals in a Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners
filed Criminal Case No. 78856 against Tan Eng Lay
and Wilborn Tan for the use of allegedly

falsified documents in a judicial proceeding.

Petitioners complained that Exhibits "4" to "4-U"
offered by the defendants before the trial court,
consisting of payrolls indicating that Tan Eng
Kee was a mere employee of Benguet Lumber, were
fake, based on the discrepancy in the signatures
of Tan Eng Kee. They also filed Criminal Cases
Nos. 78857-78870 against Gloria, Julia, Juliano,
Willie, Wilfredo, Jean, Mary and Willy, all
surnamed Tan, for alleged falsification of
commercial documents by a private individual. On
March 20, 1999, the Municipal Trial Court of
Baguio City, Branch 1, wherein the charges were
filed, rendered judgment9 dismissing the cases
for insufficiency of evidence.
In their assignment of errors, petitioners claim
that:

THAT THERE WAS NO PARTNERSHIP JUST BECAUSE THE

CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND
VERONICA CHOI, TOGETHER WITH THEIR WITNESS
BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW
WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS
BENGUET LUMBER WAS STARTED AS A PARTNERSHIP (PAGE
16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE
TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE
THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER
IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE
EXECUTION OF A PUBLIC INSTRUMENT CREATING A
PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH
PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES
(PAGE 17, DECISION).

I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE
TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE:
(A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO
FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE
WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS
NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E)
THERE WAS NO TIME FIXED FOR THE DURATION OF THE
PARTNERSHIP (PAGE 13, DECISION).
II

As a premise, we reiterate the oft-repeated rule

that findings of facts of the Court of Appeals
will not be disturbed on appeal if such are
supported by the evidence.10 Our jurisdiction, it
must be emphasized, does not include review of
factual issues. Thus:
Filing of petition with Supreme Court. A party
desiring to appeal by certiorari from a judgment
or final order or resolution of the Court of
Appeals, the Sandiganbayan, the Regional Trial
Court or other courts whenever authorized by law,
may file with the Supreme Court a verified
petition for review on certiorari. The petition
shall raise only questions of law which must be
distinctly set forth.11 [emphasis supplied]

THE HONORABLE COURT OF APPEALS ERRED IN RELYING

SOLELY ON THE SELF-SERVING TESTIMONY OF
RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A
SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY
AN EMPLOYEE THEREOF.
Admitted exceptions have been recognized, though,
and when present, may compel us to analyze the
III
evidentiary basis on which the lower court
rendered judgment. Review of factual issues is
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
therefore warranted:
THAT THE FOLLOWING FACTS WHICH WERE DULY
SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT
(1) when the factual findings of the Court of
SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST
Appeals and the trial court are contradictory;
BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY
RECORDED BEFORE THE SECURITIES AND EXCHANGE
(2) when the findings are grounded entirely on
COMMISSION:
speculation, surmises, or conjectures;
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG
LAY WERE ALL LIVING AT THE BENGUET LUMBER
COMPOUND;

(3) when the inference made by the Court of

Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE
COMMANDING THE EMPLOYEES OF BENGUET LUMBER;

(4) when there is grave abuse of discretion in

the appreciation of facts;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE
SUPERVISING THE EMPLOYEES THEREIN;

(5) when the appellate court, in making its

findings, goes beyond the issues of the case, and
such findings are contrary to the admissions of
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES both appellant and appellee;
DETERMINING THE PRICES OF STOCKS TO BE SOLD TO
THE PUBLIC; AND
(6) when the judgment of the Court of Appeals is
premised on a misapprehension of facts;
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES
MAKING ORDERS TO THE SUPPLIERS (PAGE 18,
(7) when the Court of Appeals fails to notice
DECISION).
certain relevant facts which, if properly
considered, will justify a different conclusion;
IV
(8) when the findings of fact are themselves
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
conflicting;

Also, the exhibits support the establishment of

only a proprietorship. The certification dated
March 4, 1971, Exhibit "2", mentioned codefendant Lay as the only registered owner of the
Benguet Lumber and Hardware. His application for
(10) when the findings of fact of the Court of
registration, effective 1954, in fact mentioned
Appeals are premised on the absence of evidence
that his business started in 1945 until 1985
but such findings are contradicted by the
(thereafter, the incorporation). The deceased,
evidence on record.12
Kee, on the other hand, was merely an employee of
the Benguet Lumber Company, on the basis of his
In reversing the trial court, the Court of
SSS coverage effective 1958, Exhibit "3". In the
Appeals ruled, to wit:
Payrolls, Exhibits "4" to "4-U", inclusive, for
the years 1982 to 1983, Kee was similarly listed
We note that the Court a quo over extended the
only as an employee; precisely, he was on the
issue because while the plaintiffs mentioned only payroll listing. In the Termination Notice,
the existence of a partnership, the Court in turn Exhibit "5", Lay was mentioned also as the
went beyond that by justifying the existence of a proprietor.
joint venture.
xxx
xxx
xxx
When mention is made of a joint venture, it would
presuppose parity of standing between the
We would like to refer to Arts. 771 and 772, NCC,
parties, equal proprietary interest and the
that a partner [sic] may be constituted in any
exercise by the parties equally of the conduct of form, but when an immovable is constituted, the
the business, thus:
execution of a public instrument becomes
necessary. This is equally true if the
xxx
xxx
xxx
capitalization exceeds P3,000.00, in which case a
public instrument is also necessary, and which is
We have the admission that the father of the
to be recorded with the Securities and Exchange
plaintiffs was not a partner of the Benguet
Commission. In this case at bar, we can easily
Lumber before the war. The appellees however
assume that the business establishment, which
argued that (Rollo, p. 104; Brief, p. 6) this is from the language of the appellees, prospered
because during the war, the entire stocks of the (pars. 5 & 9, Complaint), definitely exceeded
pre-war Benguet Lumber were confiscated if not
P3,000.00, in addition to the accumulation of
burned by the Japanese. After the war, because of real properties and to the fact that it is now a
the absence of capital to start a lumber and
compound. The execution of a public instrument,
hardware business, Lay and Kee pooled the
on the other hand, was never established by the
proceeds of their individual businesses earned
appellees.
from buying and selling military supplies, so
that the common fund would be enough to form a
And then in 1981, the business was incorporated
partnership, both in the lumber and hardware
and the incorporators were only Lay and the
business. That Lay and Kee actually established
members of his family. There is no proof either
the Benguet Lumber in Baguio City, was even
that the capital assets of the partnership,
testified to by witnesses. Because of the pooling assuming them to be in existence, were
of resources, the post-war Benguet Lumber was
maliciously assigned or transferred by Lay,
eventually established. That the father of the
supposedly to the corporation and since then have
plaintiffs and Lay were partners, is obvious from been treated as a part of the latter's capital
the fact that: (1) they conducted the affairs of assets, contrary to the allegations in pars. 6, 7
the business during Kee's lifetime, jointly, (2) and 8 of the complaint.
they were the ones giving orders to the
employees, (3) they were the ones preparing
These are not evidences supporting the existence
orders from the suppliers, (4) their families
of a partnership:
stayed together at the Benguet Lumber compound,
and (5) all their children were employed in the
1) That Kee was living in a bunk house just
business in different capacities.
across the lumber store, and then in a room in
the bunk house in Trinidad, but within the
xxx
xxx
xxx
compound of the lumber establishment, as
testified to by Tandoc; 2) that both Lay and Kee
It is obvious that there was no partnership
were seated on a table and were "commanding
whatsoever. Except for a firm name, there was no people" as testified to by the son, Elpidio Tan;
firm account, no firm letterheads submitted as
3) that both were supervising the laborers, as
evidence, no certificate of partnership, no
testified to by Victoria Choi; and 4) that
agreement as to profits and losses, and no time
Dionisio Peralta was supposedly being told by Kee
fixed for the duration of the partnership. There that the proceeds of the 80 pieces of the G.I.
was even no attempt to submit an accounting
sheets were added to the business.
corresponding to the period after the war until
Kee's death in 1984. It had no business book, no Partnership presupposes the following elements
written account nor any memorandum for that
[citation omitted]: 1) a contract, either oral or
matter and no license mentioning the existence of written. However, if it involves real property or
a partnership [citation omitted].
where the capital is P3,000.00 or more, the
execution of a contract is necessary; 2) the
(9) when the findings of fact are conclusions
without citation of the specific evidence on
which they are based; and

capacity of the parties to execute the contract;

3) money property or industry contribution; 4)
community of funds and interest, mentioning
equality of the partners or one having a
proportionate share in the benefits; and 5)
intention to divide the profits, being the true
test of the partnership. The intention to join in
the business venture for the purpose of obtaining
profits thereafter to be divided, must be
established. We cannot see these elements from
the testimonial evidence of the appellees.

(b) Usually, but not necessarily a joint

adventure is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful
termination may continue for a number of years; a
partnership generally relates to a continuing
business of various transactions of a certain
kind.21

A joint venture "presupposes generally a parity

of standing between the joint co-ventures or
partners, in which each party has an equal
As can be seen, the appellate court disputed and proprietary interest in the capital or property
differed from the trial court which had adjudged contributed, and where each party exercises equal
that TAN ENG KEE and TAN ENG LAY had allegedly
rights in the conduct of the business."22
entered into a joint venture. In this connection, Nonetheless, in Aurbach, et. al. v. Sanitary
we have held that whether a partnership exists is Wares Manufacturing Corporation, et. al.,23 we
a factual matter; consequently, since the appeal expressed the view that a joint venture may be
is brought to us under Rule 45, we cannot
likened to a particular partnership, thus:
entertain inquiries relative to the correctness
of the assessment of the evidence by the court a The legal concept of a joint venture is of common
quo.13 Inasmuch as the Court of Appeals and the
law origin. It has no precise legal definition,
trial court had reached conflicting conclusions, but it has been generally understood to mean an
perforce we must examine the record to determine organization formed for some temporary purpose.
if the reversal was justified.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is
hardly distinguishable from the partnership,
The primordial issue here is whether Tan Eng Kee since their elements are similar community of
and Tan Eng Lay were partners in Benguet Lumber. interest in the business, sharing of profits and
A contract of partnership is defined by law as
losses, and a mutual right of control. (Blackner
one where:
v. McDermott, 176 F. 2d. 498, [1949]; Carboneau
v. Peterson, 95 P.2d., 1043 [1939]; Buckley v.
. . . two or more persons bind themselves to
Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d.
contribute money, property, or industry to a
242 [1955]). The main distinction cited by most
common fund, with the intention of dividing the
opinions in common law jurisdiction is that the
profits among themselves.
partnership contemplates a general business with
some degree of continuity, while the joint
Two or more persons may also form a partnership
venture is formed for the execution of a single
for the exercise of a profession.14
transaction, and is thus of a temporary nature.
(Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500
Thus, in order to constitute a partnership, it
[1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d.
must be established that (1) two or more persons 74 [1947]; Gates v. Megargel 266 Fed. 811
bound themselves to contribute money, property,
[1920]). This observation is not entirely
or industry to a common fund, and (2) they intend accurate in this jurisdiction, since under the
to divide the profits among themselves.15 The
Civil Code, a partnership may be particular or
agreement need not be formally reduced into
universal, and a particular partnership may have
writing, since statute allows the oral
for its object a specific undertaking. (Art.
constitution of a partnership, save in two
1783, Civil Code). It would seem therefore that
instances: (1) when immovable property or real
under Philippine law, a joint venture is a form
rights are contributed,16 and (2) when the
of partnership and should thus be governed by the
partnership has a capital of three thousand pesos law of partnerships. The Supreme Court has
or more.17 In both cases, a public instrument is however recognized a distinction between these
required.18 An inventory to be signed by the
two business forms, and has held that although a
parties and attached to the public instrument is corporation cannot enter into a partnership
also indispensable to the validity of the
contract, it may however engage in a joint
partnership whenever immovable property is
venture with others. (At p. 12, Tuazon v.
contributed to the partnership.19
Bolaos, 95 Phil. 906 [1954]) (Campos and LopezCampos Comments, Notes and Selected Cases,
The trial court determined that Tan Eng Kee and
Corporation Code 1981).
Tan Eng Lay had entered into a joint venture,
which it said is akin to a particular
Undoubtedly, the best evidence would have been
partnership.20 A particular partnership is
the contract of partnership itself, or the
distinguished from a joint adventure, to wit:
articles of partnership but there is none. The
alleged partnership, though, was never formally
(a) A joint adventure (an American concept
organized. In addition, petitioners point out
similar to our joint accounts) is a sort of
that the New Civil Code was not yet in effect
informal partnership, with no firm name and no
when the partnership was allegedly formed
legal personality. In a joint account, the
sometime in 1945, although the contrary may well
participating merchants can transact business
be argued that nothing prevented the parties from
under their own name, and can be individually
complying with the provisions of the New Civil
liable therefor.
Code when it took effect on August 30, 1950. But

all that is in the past. The net effect, however,

is that we are asked to determine whether a
partnership existed based purely on
circumstantial evidence. A review of the record
persuades us that the Court of Appeals correctly
reversed the decision of the trial court. The
evidence presented by petitioners falls short of
the quantum of proof required to establish a
partnership.

progressing, whether the expenses were

legitimate, whether the earnings were correct,
etc. She was absolutely silent with respect to
any of the acts that a partner should have done;
all that she did was to receive her share of
P3,000.00 a month, which cannot be interpreted in
any manner than a payment for the use of the
premises which she had leased from the owners.
Clearly, plaintiff had always acted in accordance
with the original letter of defendant of June 17,
Unfortunately for petitioners, Tan Eng Kee has
1945 (Exh. "A"), which shows that both parties
passed away. Only he, aside from Tan Eng Lay,
considered this offer as the real contract
could have expounded on the precise nature of the between them.33 [emphasis supplied]
business relationship between them. In the
absence of evidence, we cannot accept as an
A demand for periodic accounting is evidence of a
established fact that Tan Eng Kee allegedly
partnership.34 During his lifetime, Tan Eng Kee
contributed his resources to a common fund for
appeared never to have made any such demand for
the purpose of establishing a partnership. The
accounting from his brother, Tang Eng Lay.
testimonies to that effect of petitioners'
witnesses is directly controverted by Tan Eng
This brings us to the matter of Exhibits "4" to
Lay. It should be noted that it is not with the
"4-U" for private respondents, consisting of
number of witnesses wherein preponderance lies;24 payrolls purporting to show that Tan Eng Kee was
the quality of their testimonies is to be
an ordinary employee of Benguet Lumber, as it was
considered. None of petitioners' witnesses could then called. The authenticity of these documents
suitably account for the beginnings of Benguet
was questioned by petitioners, to the extent that
Lumber Company, except perhaps for Dionisio
they filed criminal charges against Tan Eng Lay
Peralta whose deceased wife was related to
and his wife and children. As aforesaid, the
Matilde Abubo.25 He stated that when he met Tan
criminal cases were dismissed for insufficiency
Eng Kee after the liberation, the latter asked
of evidence. Exhibits "4" to "4-U" in fact shows
the former to accompany him to get 80 pieces of
that Tan Eng Kee received sums as wages of an
G.I. sheets supposedly owned by both brothers.26 employee. In connection therewith, Article 1769
Tan Eng Lay, however, denied knowledge of this
of the Civil Code provides:
meeting or of the conversation between Peralta
and his brother.27 Tan Eng Lay consistently
In determining whether a partnership exists,
testified that he had his business and his
these rules shall apply:
brother had his, that it was only later on that
his said brother, Tan Eng Kee, came to work for
(1) Except as provided by Article 1825, persons
him. Be that as it may, co-ownership or cowho are not partners as to each other are not
possession (specifically here, of the G.I.
partners as to third persons;
sheets) is not an indicium of the existence of a
partnership.28
(2) Co-ownership or co-possession does not of
itself establish a partnership, whether such coBesides, it is indeed odd, if not unnatural, that owners or co-possessors do or do not share any
despite the forty years the partnership was
profits made by the use of the property;
allegedly in existence, Tan Eng Kee never asked
for an accounting. The essence of a partnership
(3) The sharing of gross returns does not of
is that the partners share in the profits and
itself establish a partnership, whether or not
losses.29 Each has the right to demand an
the persons sharing them have a joint or common
accounting as long as the partnership exists.30
right or interest in any property which the
We have allowed a scenario wherein "[i]f
returns are derived;
excellent relations exist among the partners at
the start of the business and all the partners
(4) The receipt by a person of a share of the
are more interested in seeing the firm grow
profits of a business is a prima facie evidence
rather than get immediate returns, a deferment of that he is a partner in the business, but no such
sharing in the profits is perfectly plausible."31 inference shall be drawn if such profits were
But in the situation in the case at bar, the
received in payment:
deferment, if any, had gone on too long to be
plausible. A person is presumed to take ordinary (a) As a debt by installment or otherwise;
care of his concerns.32 As we explained in
another case:
(b) As wages of an employee or rent to a
landlord;
In the first place, plaintiff did not furnish the
supposed P20,000.00 capital. In the second place, (c) As an annuity to a widow or representative of
she did not furnish any help or intervention in
a deceased partner;
the management of the theatre. In the third
place, it does not appear that she has even
(d) As interest on a loan, though the amount of
demanded from defendant any accounting of the
payment vary with the profits of the business;
expenses and earnings of the business. Were she
really a partner, her first concern should have
(e) As the consideration for the sale of a
been to find out how the business was
goodwill of a business or other property by

installments or otherwise.
In the light of the aforequoted legal provision,
we conclude that Tan Eng Kee was only an
employee, not a partner. Even if the payrolls as
evidence were discarded, petitioners would still
be back to square one, so to speak, since they
did not present and offer evidence that would
show that Tan Eng Kee received amounts of money
allegedly representing his share in the profits
of the enterprise. Petitioners failed to show how
much their father, Tan Eng Kee, received, if any,
as his share in the profits of Benguet Lumber
Company for any particular period. Hence, they
failed to prove that Tan Eng Kee and Tan Eng Lay
intended to divide the profits of the business
between themselves, which is one of the essential
features of a partnership.

adequately prove the existence of a partnership

relation between them. Even highly confidential
employees and the owners of a company sometimes
argue with respect to certain matters which, in
no way indicates that they are partners as to
each other.35

In the instant case, we find private respondent's

arguments to be well-taken. Where circumstances
taken singly may be inadequate to prove the
intent to form a partnership, nevertheless, the
collective effect of these circumstances may be
such as to support a finding of the existence of
the parties' intent.36 Yet, in the case at bench,
even the aforesaid circumstances when taken
together are not persuasive indicia of a
partnership. They only tend to show that Tan Eng
Kee was involved in the operations of Benguet
Lumber, but in what capacity is unclear. We
Nevertheless, petitioners would still want us to cannot discount the likelihood that as a member
infer or believe the alleged existence of a
of the family, he occupied a niche above the
partnership from this set of circumstances: that rank-and-file employees. He would have enjoyed
Tan Eng Lay and Tan Eng Kee were commanding the
liberties otherwise unavailable were he not kin,
employees; that both were supervising the
such as his residence in the Benguet Lumber
employees; that both were the ones who determined Company compound. He would have moral, if not
the price at which the stocks were to be sold;
actual, superiority over his fellow employees,
and that both placed orders to the suppliers of
thereby entitling him to exercise powers of
the Benguet Lumber Company. They also point out
supervision. It may even be that among his duties
that the families of the brothers Tan Eng Kee and is to place orders with suppliers. Again, the
Tan Eng Lay lived at the Benguet Lumber Company
circumstances proffered by petitioners do not
compound, a privilege not extended to its
provide a logical nexus to the conclusion
ordinary employees.
desired; these are not inconsistent with the
powers and duties of a manager, even in a
However, private respondent counters that:
business organized and run as informally as
Benguet Lumber Company.
Petitioners seem to have missed the point in
asserting that the above enumerated powers and
There being no partnership, it follows that there
privileges granted in favor of Tan Eng Kee, were is no dissolution, winding up or liquidation to
indicative of his being a partner in Benguet
speak of. Hence, the petition must fail.
Lumber for the following reasons:
WHEREFORE, the petition is hereby denied, and the
(i) even a mere supervisor in a company, factory appealed decision of the Court of Appeals is
or store gives orders and directions to his
hereby AFFIRMED in toto. No pronouncement as to
subordinates. So long, therefore, that an
costs.
employee's position is higher in rank, it is not
unusual that he orders around those lower in
SO ORDERED.
rank.
(ii) even a messenger or other trusted employee,
over whom confidence is reposed by the owner, can
order materials from suppliers for and in behalf
of Benguet Lumber. Furthermore, even a partner
does not necessarily have to perform this
particular task. It is, thus, not an indication
that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his
family, lived in the lumber compound and this
privilege was not accorded to other employees,
the undisputed fact remains that Tan Eng Kee is
the brother of Tan Eng Lay. Naturally, close
personal relations existed between them. Whatever
privileges Tan Eng Lay gave his brother, and
which were not given the other employees, only
proves the kindness and generosity of Tan Eng Lay
towards a blood relative.
(iv) and even if it is assumed that Tan Eng Kee
was quarreling with Tan Eng Lay in connection
with the pricing of stocks, this does not