Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-14606 April 28, 1960
LAGUNA TRANSPORTATION CO., INC., petitioner-appellant,
vs.
SOCIAL SECURITY SYSTEM, respondent-appellee.
Yatco & Yatco for appellant.
Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee.
BARRERA, J .:
On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance
of Laguna petition praying that an order be issued by the court declaring that it is not bound to
register as a member of respondent Social Security System and, therefore, not obliged to pay to the
latter the contributions required under the Social Security Act.
1
To this petition, respondent filed its
answer on February 11, 1958 praying for its dismissal due to petitioner's failure to exhaust
administrative remedies, and for a declaration that petitioner is covered by said Act, since the latter's
business has been in operation for at least 2 years prior to September 1, 1957.
On February 11, 1958, respondent filed a motion for preliminary hearing on its defense that
petitioner failed to exhaust administrative remedies. When the case was called for preliminary
hearing, it was postponed by agreement of the parties. Subsequently, it was set for trial. On the date
of the trial, the parties agreed to present, in lieu of any other evidence, a stipulation of facts, which
they did on May 27, 1958, as follows:
1. That petitioner is a domestic corporation duly organized and existing under the laws of the
Philippines, with principal place of business at Bian, Laguna;
2. That respondent is an agency created under Republic Act No. 1161, as amended by
Republic Act No. 1792, with the principal place of business at the new GSIS Bldg., corner
Arroceros and Concepcion Streets, Manila, where it may be served with summons;
3. That respondent has served notice upon the petitioner requiring it to register as member of
the System and to remit the premiums due from all the employees of the petitioner and the
contribution of the latter to the System beginning the month of September, 1957;
4. That sometime in 1949, the Bian Transportation Co., a corporation duly registered with
the Securities and Exchange Commission, sold part of the lines and equipment it operates to
Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador Vera Cruz;
5. That after the sale, the said vendees formed an unregistered partnership under the name
of Laguna Transportation Company which continued to operate the lines and equipment
bought from the Bian Transportation Company, in addition to new lines which it was able to
secure from the Public Service Commission;
6. That the original partners forming the Laguna Transportation Company, with the addition
of two new members, organized a corporation known as the Laguna Transportation
Company, Inc., which was registered with the Securities and Exchange Commission on June
20, 1956, and which corporation is the plaintiff now in this case;
7. That the incorporators of the Laguna Transportation Company, Inc., and their
corresponding shares are as follows:
Name No. of
Shares
Amount
Subscribed
Amount
Paid
Dominador Cruz 333 shares P33,300.00 P9,160.81
Maura Mendoza 333 shares 33,300.00 9,160.81
Gonzalo Mercado 66 shares 6,600.00 1,822.49
Artemio Mercado 94 shares 9,400.00 2,565.90
Florentino Mata 110 shares 11,000.00 3,021.54
Sabina Borja 64 shares 6,400.00 1,750.00

1,000 shares P100,000.00 P27,481.55
8. That the corporation continued the same transportation business of the unregistered
partnership;
9. That the plaintiff filed on August 30, 1957 an Employee's Data Record . . . and a
supplemental Information Sheet . . .;
10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the
System on the ground that it started operation only on June 20, 1956, when it was registered
with the Securities and Exchange Commission but on November 11, 1957, the Social
Security System notified plaintiff that it was covered;
11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security
System contesting the claim of the System that plaintiff was covered, . . .
12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the
respondent System for and in behalf of the Acting Administrator, informed plaintiff that
plaintiff's business has been in actual operation for at least two years, . . .
On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision
the dispositive part of which reads:
Wherefore, the Court is of the opinion and so declares that the petitioner was an employer
engaged in business as common carrier which had been in operation for at least two years
prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by
virtue thereof, it was subject to compulsory coverage under said law. . . .
From this decision, petitioner appealed directly to us, raising purely questions of law.
Petitioner claims that the lower court erred in holding that it is an employer engaged in business as a
common carrier which had been in operation for at least 2 years prior to the enactment of the Social
Security Act and, therefore, subject to compulsory coverage thereunder.
Section 9 of the Social Security Act, in part, provides:
SEC. 9 Compulsory Coverage. Coverage in the System shall be compulsory upon all
employees between the ages of sixteen and sixty years, inclusive, if they have been for at
least six months in the service of an employer who is a member of the System. Provided,
That the Commission may not compel any employer to become a member of the System
unless he shall have been in operation for at least two years . . . . (Italics supplied.).
It is not disputed that the Laguna Transportation Company, an unregistered partnership composed
of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the
operation of its business as a common carrier on April 1, 1949. These 4 original partners, with 2
others (Maura Mendoza and Sabina Borja) later converted the partnership into a corporate entity, by
registering its articles of incorporation with the Securities and Exchange Commission on June 20,
1956. The firm name "Laguna Transportation Company" was not altered, except with the addition of
the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation
continued the same transportation business of the unregistered partnership, using the same lines
and equipment. There was, in effect, only a change in the form of the organization of the entity
engaged in the business of transportation of passengers. Hence, said entity as an employer
engaged in business, was already in operation for at least 3 years prior to the enactment of the
Social Security Act on June 18, 1954 and for at least two years prior to the passage of the
amendatory act on June 21, 1957. Petitioner argues that, since it was registered as a corporation
with the Securities and Exchange Commission only on June 20, 1956, it must be considered to have
been in operation only on said date. While it is true that a corporation once formed is conferred a
juridical personality separate and district from the persons composing it, it is but a legal fiction
introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be
extended to a point beyond its reasons and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.)
If any general rule can be laid down, in the present state of authority, it is that a corporation
will be looked upon as a legal entity as a general rule, and until sufficient reason to the
contrary appears; but, when the motion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. (1 Fletcher Cyclopedia Corporations [Perm. Ed.] 135-136; U.S.
Milwaukee Refrigeration Transit Co., 142 Fed. 247, cited in Koppel Philippines, Inc. vs.
Yatco, 43 Off. Gaz., 4604.)
To adopt petitioner's argument would defeat, rather than promote, the ends for which the Social
Security Act was enacted. An employer could easily circumvent the statute by simply changing his
form of organization every other year, and then claim exemption from contribution to the System as
required, on the theory that, as a new entity, it has not been in operation for a period of at least 2
years. the door to fraudulent circumvention of the statute would, thereby, be opened.
Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its
operation commenced on April 1, 1949 while it was a partnership and continued by the corporation
upon its formation on June 20, 1956. Unlike in the conveyance made by the Bian Transportation
Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and Dominador
Vera Cruz, no mention whatsoever is made either in the pleadings or in the stipulation of facts that
the lines and equipment of the unregistered partnership had been sold and transferred to the
corporation, petitioner herein. This omission, to our mind, clearly indicates that there was, in fact, no
transfer of interest, but a mere change in the form of the organization of the employer engaged in the
transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule,
courts will look to the substance and not to the form.(Colonial Trust Co. vs. Montolo Eric Works, 172
Fed. 310; Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et
al., 44 Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.)
Finally, the weight of authority supports the view that where a corporation was formed by, and
consisted of members of a partnership whose business and property was conveyed and transferred
to the corporation for the purpose of continuing its business, in payment for which corporate capital
stock was issued, such corporation is presumed to have assumed partnership debts, and is prima
facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting &
Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 83 June 19, N.Y. Supp. 692.) The
reason for the rule is that the members of the partnership may be said to have simply put on a new
coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8
Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.)
Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with
costs against petitioner-appellant. So ordered.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-59956 October 31, 1984
ISABELO MORAN, JR., petitioner,
vs.
THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

GUTIERREZ, JR., J .:+.wph!1
This is a petition for review on certiorari of the decision of the respondent Court of Appeals which
ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate that: t . hqw
xxx xxx xxx
... on February 22, 1971 Pecson and Moran entered into an agreement whereby both
would contribute P15,000 each for the purpose of printing 95,000 posters (featuring
the delegates to the 1971 Constitutional Convention), with Moran actually
supervising the work; that Pecson would receive a commission of P l,000 a month
starting on April 15, 1971 up to December 15, 1971; that on December 15, 1971, a
liquidation of the accounts in the distribution and printing of the 95,000 posters would
be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that
only a few posters were printed; that on or about May 28, 1971, Moran executed in
favor of Pecson a promissory note in the amount of P20,000 payable in two equal
installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on
or before June 30, 1971), the whole sum becoming due upon default in the payment
of the first installment on the date due, complete with the costs of collection.
Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery
of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged
partnership agreement, the return of his contribution of P10,000.00, payment of his share in the
profits that the partnership would have earned, and, payment of unpaid commission; (2) on the
alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages
and attorney's fees.
After the trial, the Court of First Instance held that: t. hqw
From the evidence presented it is clear in the mind of the court that by virtue of the
partnership agreement entered into by the parties-plaintiff and defendant the plaintiff
did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the
Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the
defendant was able to print 2,000 copies only authorized of which, however, were
sold at P5.00 each. Nothing more was done after this and it can be said that the
venture did not really get off the ground. On the other hand, the plaintiff failed to give
his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract
which right is implied in reciprocal obligations under Article 1385 of the Civil Code
whereunder 'rescission creates the obligation to return the things which were the
object of the contract ...
WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C.
Moran, Jr. to return to plaintiff Mariano E. Pecson the sum of P17,000.00, with
interest at the legal rate from the filing of the complaint on June 19, 1972, and the
costs of the suit.
For insufficiency of evidence, the counterclaim is hereby dismissed.
From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise
rendered a decision against the petitioner. The dispositive portion of the decision reads: t. hqw
PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a
new one is hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to
pay plaintiff- appellant Mariano E. Pecson:
(a) Forty-seven thousand five hundred (P47,500) (the amount that could have
accrued to Pecson under their agreement);
(b) Eight thousand (P8,000), (the commission for eight months);
(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's
Project);
(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the
time payment is made)
The petitioner contends that the respondent Court of Appeals decided questions of substance in a
way not in accord with law and with Supreme Court decisions when it committed the following errors:
I
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM.
II
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S
INVESTMENT.
III
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER
ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF
P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE.
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY
RECEIVED BY PECSON FROM MORAN.
V
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE
PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES.
The first question raised in this petition refers to the award of P47,500.00 as the private respondent's
share in the unrealized profits of the partnership. The petitioner contends that the award is highly
speculative. The petitioner maintains that the respondent court did not take into account the great
risks involved in the business undertaking.
We agree with the petitioner that the award of speculative damages has no basis in fact and law.
There is no dispute over the nature of the agreement between the petitioner and the private
respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by
the petitioner to enter into a partnership with him under the following terms and conditions: t. hqw
1. That the partnership will print colored posters of the delegates to the Constitutional
Convention;
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;
3. That they will print Ninety Five Thousand (95,000) copies of the said posters;
4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a
month starting April 15, 1971 up to December 15, 1971;
5. That upon the termination of the partnership on December 15, 1971, a liquidation
of the account pertaining to the distribution and printing of the said 95,000 posters
shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.
The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786,
Civil Code) and for interests and damages from the time he should have complied with his obligation
(Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil
Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the
appellee because the appellant therein was remiss in his obligations as a partner and as prime
contractor of the construction projects in question. This case was decided on a particular set of facts.
We awarded compensatory damages in the Uy case because there was a finding that the
constructing business is a profitable one and that the UP construction company derived some profits
from its contractors in the construction of roads and bridges despite its deficient capital." Besides,
there was evidence to show that the partnership made some profits during the periods from July 2,
1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two
government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no
evidence whatsoever that the partnership between the petitioner and the private respondent would
have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no
basis for the award of speculative damages in favor of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much
more than what was expected of him. In this case, however, there was mutual breach. Private
respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only
P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further
failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only
2,000 copies.
Article 1797 of the Civil Code provides: t.hqw
The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners that
they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100%
profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a
guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing
P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is
obvious. We have to take various factors into account. The failure of the Commission on Elections to
proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt that it would be a losing venture to go on
with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture
have to be considered.
It does not follow however that the private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The
latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each.
The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the
gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount
to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the
private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000
copies, the remaining P6,000.00 should therefore be returned to the private respondent.
Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's
supposed commission has no justifiable basis in law.
Again, we agree with the petitioner.
The partnership agreement stipulated that the petitioner would give the private respondent a monthly
commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the commission. The payment of the
commission could only have been predicated on relatively extravagant profits. The parties could not
have intended the giving of a commission inspite of loss or failure of the venture. Since the venture
was a failure, the private respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in
holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of
investment in a magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice
of the Veterans" magazine venture, the respondent court ruled that: t. hqw
xxx xxx xxx
... Moran admittedly signed the promissory note of P20,000 in favor of Pecson.
Moran does not question the due execution of said note. Must Moran therefore pay
the amount of P20,000? The evidence indicates that the P20,000 was assigned by
Moran to cover the following: t.hqw
(a) P 7,000 the amount of the PNB check given by
Pecson to Moran representing Pecson's investment in
Moran's other project (the publication and printing of
the 'Voice of the Veterans');
(b) P10,000 to cover the return of Pecson's
contribution in the project of the Posters;
(c) P3,000 representing Pecson's commission for
three months (April, May, June, 1971).
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the
Veterans' project, for this project never left the ground) ...
As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be
reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the
record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332).
However, this rule admits of certain exceptions. Thus, inCarolina Industries Inc. v. CMS Stock
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify
the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd
and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both the appellant and the appellee.
In this case, there is misapprehension of facts. The evidence of the private respondent himself
shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private respondent expected to receive.
The records show the following exhibits- t. hqw
E Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor
of defendant. Defendant admitted the authenticity of this check and of his receipt of
the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for
the purpose of showing plaintiff's capital investment in the printing of the "Voice of
the Veterans" for which he was promised a fixed profit of P8,000. This investment of
P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory
note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp.
20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment thereby proportionately reducing the
promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised
profit), defendant signed and executed the promissory note for P7,000 marked
Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000 partial payment
of the promised profit. The P3,000 balance of the promised profit was made part
consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is,
therefore, being presented to show the consideration for the P20,000 promissory
note.
F Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of
defendant. The authenticity of the check and his receipt of the proceeds thereof were
admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part
consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29,
1972), and it is being presented to show the consideration for the P20,000 note and
the existence and validity of the obligation.
xxx xxx xxx
L-Book entitled "Voice of the Veterans" which is being offered for the purpose of
showing the subject matter of the other partnership agreement and in which plaintiff
invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000
made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P).
As explained in connection with Exhibit E. the P3,000 balance of the promised profit
was later made part consideration of the P20,000 promissory note.
M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit
E. This document is being offered for the purpose of further showing the transaction
as explained in connection with Exhibits E and L.
N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his
capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P).
This is also defendant's Exhibit 4. This document is being offered in support of
plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction
mentioned therein.
xxx xxx xxx
P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being
offered for the purpose of showing the transaction as explained in connection with
Exhibits E, L, M, and N above.
Explaining the above-quoted exhibits, respondent Pecson testified that: t. hqw
Q During the pre-trial of this case, Mr. Pecson, the defendant
presented a promissory note in the amount of P14,000.00 which has
been marked as Exhibit 2. Do you know this promissory note?
A Yes, sir.
Q What is this promissory note, in connection with your transaction
with the defendant?
A This promissory note is for the printing of the "Voice of the
Veterans".
Q What is this "Voice of the Veterans", Mr. Pecson?
A It is a book.t. hqw
(T.S.N., p. 19, Nov. 29, 1972)
Q And what does the amount of P14,000.00 indicated in the
promissory note, Exhibit 2, represent?
A It represents the P6,000.00 cash which I gave to Mr. Moran, as
evidenced by the Philippine National Bank Manager's check and the
P8,000.00 profit assured me by Mr. Moran which I will derive from the
printing of this "Voice of the Veterans" book.
Q You said that the P6,000.00 of this P14,000.00 is covered by, a
Manager's check. I show you Exhibit E, is this the Manager's check
that mentioned?
A Yes, sir.
Q What happened to this promissory note of P14,000.00 which you
said represented P6,000.00 of your investment and P8,000.00
promised profits?
A Latter, Mr. Moran returned to me P3,000.00 which represented
one-half (1/2) of the P6,000.00 capital I gave to him.
Q As a consequence of the return by Mr. Moran of one-half (1/2) of
the P6,000.00 capital you gave to him, what happened to the
promised profit of P8,000.00?
A It was reduced to one-half (1/2) which is P4,000.00.
Q Was there any document executed by Mr. Moran in connection
with the Balance of P3,000.00 of your capital investment and the
P4,000.00 promised profits?
A Yes, sir, he executed a promissory note.
Q I show you a promissory note in the amount of P7,000.00 dated
March 30, 1971 which for purposes of Identification I request the
same to be marked as Exhibit M. . .
Court t. hqw
Mark it as Exhibit M.
Q (continuing) is this the promissory note which you said was
executed by Mr. Moran in connection with your transaction regarding
the printing of the "Voice of the Veterans"?
A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).
Q What happened to this promissory note executed by Mr. Moran,
Mr. Pecson?
A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by
the promissory note.
Q Was there a receipt issued by you covering this payment of
P4,000.00 in favor of Mr. Moran?
A Yes, sir.
(T.S.N., p. 23, Nov. 29, 1972).
Q You stated that Mr. Moran paid the amount of P4,000.00 on
account of the P7,000.00 covered by the promissory note, Exhibit M.
What does this P4,000.00 covered by Exhibit N represent?
A This P4,000.00 represents the P3,000.00 which he has returned of
my P6,000.00 capital investment and the P1,000.00 represents
partial payment of the P4,000.00 profit that was promised to me by
Mr. Moran.
Q And what happened to the balance of P3,000.00 under the
promissory note, Exhibit M?
A The balance of P3,000.00 and the rest of the profit was applied as
part of the consideration of the promissory note of P20,000.00.
(T.S.N., pp. 23-24, Nov. 29, 1972).
The respondent court erred when it concluded that the project never left the ground because the
project did take place. Only it failed. It was the private respondent himself who presented a copy of
the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error
to state that the project never took place and on this basis decree the return of the private
respondent's investment.
As already mentioned, there are risks in any business venture and the failure of the undertaking
cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best
business judgment, which seems to be true in this case. In view of the foregoing, there is no reason
to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no
valid basis for the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now
Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the
petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND
(P6,000.00) PESOS representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing
one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000)
copies of the posters, with interests at the legal rate on both amounts from the date the complaint
was filed until full payment is made.
SO ORDERED.1wph1. t

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55397 February 29, 1988
TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY
CORPORATION, respondents.

GANCAYCO, J .:
This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission
in IC Case #367
1
dismissing the complaint
2
for recovery of the alleged unpaid balance of the proceeds
of the Fire Insurance Policies issued by herein respondent insurance company in favor of petitioner-
intervenor.
The facts of the case as found by respondent Insurance Commission are as follows:
Complainants acquired from a certain Rolando Gonzales a parcel of land and a
building located at San Rafael Village, Davao City. Complainants assumed the
mortgage of the building in favor of S.S.S., which building was insured with
respondent S.S.S. Accredited Group of Insurers for P25,000.00.
On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in
the amount of P100,000.00. To secure the payment of the loan, a mortgage was
executed over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit
"1" and "1-A"). On April 25, 1975, Arsenio Chua, representative of Thai Tong
Chuache & Co. insured the latter's interest with Travellers Multi-Indemnity
Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the
contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").
On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500
(Exhibit "A"), covering the building for P50,000.00 with respondent Zenith Insurance
Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B")
was procured from respondent Philippine British Assurance Company, covering the
same building for P50,000.00 and the contents thereof for P70,000.00.
On July 31, 1975, the building and the contents were totally razed by fire.
Adjustment Standard Corporation submitted a report as follow
xxx xxx xxx
... Thus the apportioned share of each company is as follows:
P
o
l
i
c
y

N
o
.
.
Co
mp
an
y
Ris
k
In
su
re
s
Pay
s
M
I
R
O
Ze
nit
h
Bui
ldin
g
P5
0,
00
0
P17
,61
0.9
3
F
-
0
2
5
0
0
Ins
ur
an
ce

Co
rp.

F
-
8
4
5
9
0
Ph
il.
Ho
us
eh
old
70
,0
00
24,
655
.31
Bri
tis
h

As
sc
o.
Co
.

Inc
.
FF
F &
F5
50
,0
00
39,
186
.10
P
o
l
i
c
y

N
o
.
Co
mp
an
y
Ris
k
In
su
re
s
Pay
s
F
I
C
-
SS
SA
ccr
e

1
5
3
8
1
dit
ed
Gr
ou
p

of
Ins
ur
ers
Bui
ldin
g
P2
5,
00
0
P8,
805
.47
Tot
als
P1
95
,0
00
P90
,25
7.8
1
We are showing hereunder another apportionment of the loss which includes the
Travellers Multi-Indemnity policy for reference purposes.
P
o
l
i
c
y

N
o
.
Co
m
pa
ny
Ris
k
Inj
ur
es
Pay
s
M
I
R
O
/
Ze
nit
h

F
-
0
2
5
0
0
Ins
ur
an
ce

Co
rp.
Bui
ldin
g
P5
0,
00
0
P11
,87
7.1
4
F
-
8
4
5
9
0
Ph
il.

Bri
tis
h

As
sc
o.
Co
.
I-
Bui
ldin
g
70
,0
00
16,
628
.00
II-
Bu
ildi
ng

FF
F &
PE
50
,0
00
24,
918
.79
P
V
C
-
1
5
1
8
1
SS
S
Ac
cre
dit
ed

Gr
ou
p
of

Ins
ur
er
s
Bui
ldin
g
25
,0
00
5,9
38.
50
F
-
5
9
9

Ins
ur
er
s
I-
Ref
30
,0
00
14,
467
.31
D
V
M
ulti
II-
Bui
ldin
g
70
,0
00
16,
628
.00
Tot
als
P2
95
.0
00
P90
,25
7.8
1
Based on the computation of the loss, including the Travellers Multi- Indemnity,
respondents, Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group
of Insurers, paid their corresponding shares of the loss. Complainants were paid the
following: P41,546.79 by Philippine British Assurance Co., P11,877.14 by Zenith
Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par.
6. Amended Complaint). Demand was made from respondent Travellers Multi-
Indemnity for its share in the loss but the same was refused. Hence, complainants
demanded from the other three (3) respondents the balance of each share in the loss
based on the computation of the Adjustment Standards Report excluding Travellers
Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith Insurance:
P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused,
hence, this action.
In their answers, Philippine British Assurance and Zenith Insurance Corporation
admitted the material allegations in the complaint, but denied liability on the ground
that the claim of the complainants had already been waived, extinguished or paid.
Both companies set up counterclaim in the total amount of P 91,546.79.
Instead of filing an answer, SSS Accredited Group of Insurers informed the
Commission in its letter of July 22, 1977 that the herein claim of complainants for the
balance had been paid in the amount of P 5,938.57 in full, based on the Adjustment
Standards Corporation Report of September 22, 1975.
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and
alleged as its special and affirmative defenses the following, to wit: that Fire
Policy No. 599 DV, covering the furniture and building of complainants was secured
by a certain Arsenio Chua, mortgage creditor, for the purpose of protecting his
mortgage credit against the complainants; that the said policy was issued in the
name of Azucena Palomo, only to indicate that she owns the insured premises; that
the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest
may appear to indicate that insured was Arsenio Chua and the complainants; that the
premium due on said fire policy was paid by Arsenio Chua; that respondent
Travellers is not liable to pay complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming
the proceeds of the fire Insurance Policy No. F-559 DV, issued by respondent
Travellers Multi-Indemnity.
Travellers Insurance, in answer to the complaint in intervention, alleged that the
Intervenor is not entitled to indemnity under its Fire Insurance Policy for lack of
insurable interest before the loss of the insured premises and that the complainants,
spouses Pedro and Azucena Palomo, had already paid in full their mortgage
indebtedness to the intervenor.
3

As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on
the ground that the insurance policy subject of the complaint was taken out by Tai Tong Chuache &
Company, petitioner herein, for its own interest only as mortgagee of the insured property and thus
complainant as mortgagors of the insured property have no right of action against herein
respondent. It likewise dismissed petitioner's complaint in intervention in the following words:
We move on the issue of liability of respondent Travellers Multi-Indemnity to the
Intervenor-mortgagee. The complainant testified that she was still indebted to
Intervenor in the amount of P100,000.00. Such allegation has not however, been
sufficiently proven by documentary evidence. The certification (Exhibit 'E-e') issued
by the Court of First Instance of Davao, Branch 11, indicate that the complainant was
Antonio Lopez Chua and not Tai Tong Chuache & Company.
4

From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it
was likewise denied hence, the present petition.
It is the contention of the petitioner that respondent Insurance Commission decided an issue not
raised in the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one
entitled to the insurance proceeds and not Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed
from considering the manner it was written.
5
As correctly pointed out by respondent insurance
commission in their comment, the decision did not pronounce that it was Arsenio Lopez Chua who has
insurable interest over the insured property. Perusal of the decision reveals however that it readily
absolved respondent insurance company from liability on the basis of the commissioner's conclusion that
at the time of the occurrence of the peril insured against petitioner as mortgagee had no more insurable
interest over the insured property. It was based on the inference that the credit secured by the mortgaged
property was already paid by the Palomos before the said property was gutted down by fire. The
foregoing conclusion was arrived at on the basis of the certification issued by the then Court of First
Instance of Davao, Branch II that in a certain civil action against the Palomos, Antonio Lopez Chua
stands as the complainant and not petitioner Tai Tong Chuache & Company.
We find the petition to be impressed with merit. It is a well known postulate that the case of a party is
constituted by his own affirmative allegations. Under Section 1, Rule 131
6
each party must prove his
own affirmative allegations by the amount of evidence required by law which in civil cases as in the
present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the
affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by
law to obtain favorable judgment.
7
Thus, petitioner who is claiming a right over the insurance must prove
its case. Likewise, respondent insurance company to avoid liability under the policy by setting up an
affirmative defense of lack of insurable interest on the part of the petitioner must prove its own affirmative
allegations.
It will be recalled that respondent insurance company did not assail the validity of the insurance
policy taken out by petitioner over the mortgaged property. Neither did it deny that the said property
was totally razed by fire within the period covered by the insurance. Respondent, as mentioned
earlier advanced an affirmative defense of lack of insurable interest on the part of the petitioner that
before the occurrence of the peril insured against the Palomos had already paid their credit due the
petitioner. Respondent having admitted the material allegations in the complaint, has the burden of
proof to show that petitioner has no insurable interest over the insured property at the time the
contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted,
exerted no effort to present any evidence to substantiate its claim, while petitioner did. For said
respondent's failure, the decision must be adverse to it.
However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance
company from liability on the basis of the certification issued by the then Court of First Instance of
Davao, Branch II, that in a certain civil action against the Palomos, Arsenio Lopez Chua stands as
the complainant and not Tai Tong Chuache. From said evidence respondent commission inferred
that the credit extended by herein petitioner to the Palomos secured by the insured property must
have been paid. Such is a glaring error which this Court cannot sanction. Respondent Commission's
findings are based upon a mere inference.
The record of the case shows that the petitioner to support its claim for the insurance proceeds
offered as evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It
has been held in a long line of cases that when the creditor is in possession of the document of
credit, he need not prove non-payment for it is presumed.
8
The validity of the insurance policy taken b
petitioner was not assailed by private respondent. Moreover, petitioner's claim that the loan extended to
the Palomos has not yet been paid was corroborated by Azucena Palomo who testified that they are still
indebted to herein petitioner.
9

Public respondent argues however, that if the civil case really stemmed from the loan granted to
Azucena Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its
representative in its own behalf. From the above premise respondent concluded that the obligation
secured by the insured property must have been paid.
The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2
10
respondent pointed out
that the action must be brought in the name of the real party in interest. We agree. However, it should be
borne in mind that petitioner being a partnership may sue and be sued in its name or by its duly
authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not
questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the
partnership was corroborated by respondent insurance company.
11
Thus Chua as the managing partner
of the partnership may execute all acts of administration
12
including the right to sue debtors of the
partnership in case of their failure to pay their obligations when it became due and demandable. Or at the
very least, Chua being a partner of petitioner Tai Tong Chuache & Company is an agent of the
partnership. Being an agent, it is understood that he acted for and in behalf of the firm.
13
Public
respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as personal creditor of
spouses Palomo has no basis.
The respondent insurance company having issued a policy in favor of herein petitioner which policy
was of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its
failure to prove the allegation of lack of insurable interest on the part of the petitioner, respondent
insurance company is and must be held liable.
IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER
judgment is rendered order private respondent Travellers Multi-Indemnity Corporation to pay
petitioner the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs
against said private respondent.
SO ORDERED.

G.R. No. L-21906 December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J .:
This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of May
21, 1956, all of the Court of First Instance of Davao, in civil case 629. The basic action is for specific
performance, and damages resulting from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then Sitio of
Malalag (now the Municipality of Malalag), Municipality of Padada, Davao. No action was taken
thereon by the authorities concerned. During the Japanese occupation, he filed another fishpond
application for the same area, but because of the conditions then prevailing, it was not acted upon
either. On December 12, 1945 he filed a third fishpond application for the same area, which, after a
survey, was found to contain 178.76 hectares. Upon investigation conducted by a representative of
the Bureau of Forestry, it was discovered that the area applied for was still needed for firewood
production. Hence on May 13, 1946 this third application was disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration. While
this motion was pending resolution, he was advised by the district forester of Davao City that no
further action would be taken on his motion, unless he filed a new application for the area
concerned. So he filed on May 27, 1947 his fishpond application 1717.
Meanwhile, several applications were submitted by other persons for portions of the area covered by
Casteel's application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of land
found inside the area applied for by Casteel; he was later granted fishpond permit F-289-C covering
9.3 hectares certified as available for fishpond purposes by the Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land
applied for by Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26, 1946,
was given due course on December 9, 1947 with the issuance to him of fishpond permit F-539-C to
develop 30 hectares of land comprising a portion of the area applied for by Casteel, upon
certification of the Bureau of Forestry that the area was likewise available for fishpond purposes. On
November 17, 1948 Felipe Deluao filed his own fishpond application for the area covered by
Casteel's application.
Because of the threat poised upon his position by the above applicants who entered upon and
spread themselves within the area, Casteel realized the urgent necessity of expanding his
occupation thereof by constructing dikes and cultivating marketable fishes, in order to prevent old
and new squatters from usurping the land. But lacking financial resources at that time, he sought
financial aid from his uncle Felipe Deluao who then extended loans totalling more or less P27,000
with which to finance the needed improvements on the fishpond. Hence, a wide productive fishpond
was built.
Moreover, upon learning that portions of the area applied for by him were already occupied by rival
applicants, Casteel immediately filed the corresponding protests. Consequently, two administrative
cases ensued involving the area in question, to wit: DANR Case 353, entitled "Fp. Ap. No. 661 (now
Fp. A. No. 1717), Nicanor Casteel, applicant-appellant versus Fp. A. No. 763, Victorio D. Carpio,
applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp. A. No. 1717), Nicanor
Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio Aradillos, Fp. Permit No. 539-C,
Alejandro Cacam, Permittees-Respondents."
However, despite the finding made in the investigation of the above administrative cases that
Casteel had already introduced improvements on portions of the area applied for by him in the form
of dikes, fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's
application on October 25, 1949, required him to remove all the improvements which he had
introduced on the land, and ordered that the land be leased through public auction. Failing to secure
a favorable resolution of his motion for reconsideration of the Director's order, Casteel appealed to
the Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in our
discussion of the appellant's third assignment of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and
Nicanor Casteel as party of the second part, executed a contract denominated a "contract of
service" the salient provisions of which are as follows:
That the Party of the First Part in consideration of the mutual covenants and agreements
made herein to the Party of the Second Part, hereby enter into a contract of service, whereby
the Party of the First Part hires and employs the Party of the Second Part on the following
terms and conditions, to wit:
That the Party of the First Part will finance as she has hereby financed the sum of TWENTY
SEVEN THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the Second
Part who renders only his services for the construction and improvements of a fishpond at
Barrio Malalag, Municipality of Padada, Province of Davao, Philippines;
That the Party of the Second Part will be the Manager and sole buyer of all the produce of
the fish that will be produced from said fishpond;
That the Party of the First Part will be the administrator of the same she having financed the
construction and improvement of said fishpond;
That this contract was the result of a verbal agreement entered into between the Parties
sometime in the month of November, 1947, with all the above-mentioned conditions
enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao executed a special power
of attorney in favor of Jesus Donesa, extending to the latter the authority "To represent me in the
administration of the fishpond at Malalag, Municipality of Padada, Province of Davao, Philippines,
which has been applied for fishpond permit by Nicanor Casteel, but rejected by the Bureau of
Fisheries, and to supervise, demand, receive, and collect the value of the fish that is being
periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on
November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the
two administrative cases (DANR Cases 353 and 353-B) and asked for reinvestigation of the
application of Nicanor Casteel over the subject fishpond. However, by letter dated March 15, 1950
sent to the Secretary of Commerce and Agriculture and Natural Resources (now Secretary of
Agriculture and Natural Resources), Deluao withdrew his petition for reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in
DANR Case 353, the dispositive portion of which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor
Casteel should be, as hereby it is, reinstated and given due course for the area indicated in
the sketch drawn at the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio
shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353-B, the dispositive portion
stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No.
F-539-C of Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor
Casteel is required to pay the improvements introduced thereon by said permittees in
accordance with the terms and dispositions contained elsewhere in this decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering the
fishpond, and ejected the latter's representative (encargado), Jesus Donesa, from the premises.
Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao and
Nicanor Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the Court of
First Instance of Davao for specific performance and damages against Nicanor Casteel and Juan
Depra (who, they alleged, instigated Casteel to violate his contract), praying inter alia, (a) that
Casteel be ordered to respect and abide by the terms and conditions of said contract and that
Inocencia Deluao be allowed to continue administering the said fishpond and collecting the proceeds
from the sale of the fishes caught from time to time; and (b) that the defendants be ordered to pay
jointly and severally to plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary injunction,
praying among other things, that during the pendency of the case and upon their filling the requisite
bond as may be fixed by the court, a preliminary injunction be issued to restrain Casteel from doing
the acts complained of, and that after trial the said injunction be made permanent. The lower court
on April 26, 1951 granted the motion, and, two days later, it issued a preliminary mandatory
injunction addressed to Casteel, the dispositive portion of which reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado
y todos usu abogados, agentes, mandatarios y demas personas que obren en su ayuda,
desista de impedir a la demandante Inocencia R. Deluao que continue administrando
personalmente la pesqueria objeto de esta causa y que la misma continue recibiendo los
productos de la venta de los pescados provenientes de dicha pesqueria, y que, asimismo,
se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza al encargado
de los demandantes llamado Jesus Donesa de la pesqueria objeto de la demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that he
was the owner, lawful applicant and occupant of the fishpond in question. This motion, opposed by
the plaintiffs on June 15, 1951, was denied by the lower court in its order of June 26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8, 1952,
denying the material averments of the plaintiffs' complaint. A reply to the defendants' amended
answer was filed by the plaintiffs on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June 4,
1951 the plaintiffs opposed his motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the plaintiffs'
complaint failed to state a claim upon which relief may be granted. The motion, opposed by the
plaintiffs on October 12, 1951, was denied for lack of merit by the lower court in its order of October
22, 1951. The defendants' motion for reconsideration filed on October 31, 1951 suffered the same
fate when it was likewise denied by the lower court in its order of November 12, 1951.
After the issues were joined, the case was set for trial. Then came a series of postponements. The
lower court (Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21, 1956 an
order in open court, reading as follows: .
Upon petition of plaintiffs, without any objection on the part of defendants, the hearing of this
case is hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.
This case was filed on April 3, 1951 and under any circumstance this Court will not entertain
any other transfer of hearing of this case and if the parties will not be ready on that day set
for hearing, the court will take the necessary steps for the final determination of this case.
(emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956, issued
by the office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of First
Instance of Davao, setting the hearing of the case for May 2 and 3, 1956 before Judge Amador
Gomez of Branch II. The defendants, thru counsel, on April 26, 1956 filed a motion for
postponement. Acting on this motion, the lower court (Branch II, presided by Judge Gomez) issued
an order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956. The
motion is filed by the counsel for the defendants and has the conformity of the counsel for
the plaintiffs.
An examination of the records of this case shows that this case was initiated as early as April
1951 and that the same has been under advisement of the Honorable Enrique A. Fernandez,
Presiding Judge of Branch No. I, since September 24, 1953, and that various incidents have
already been considered and resolved by Judge Fernandez on various occasions. The last
order issued by Judge Fernandez on this case was issued on March 21, 1956, wherein he
definitely states that the Court will not entertain any further postponement of the hearing of
this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and
termination of any incident referring to this case should be referred back to Branch I, so that
the same may be disposed of therein. (emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge
Fernandez presiding), when informed about the defendants' motion for postponement filed on April
26, 1956, issued an order reiterating its previous order handed down in open court on March 21,
1956 and directing the plaintiffs to introduce their evidence ex parte, there being no appearance on
the part of the defendants or their counsel. On the basis of the plaintiffs' evidence, a decision was
rendered on May 4, 1956 the dispositive portion of which reads as follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del
demandado Nicanor Casteel:
(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;
(b) Ordena al demandado entregue la demandante la posesion y administracion de la mitad
() del "fishpond" en cuestion con todas las mejoras existentes dentro de la misma;
(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente en
concepto de danos a contar de la fecha de la expiracion de los 30 dias de la promulgacion
de esta decision hasta que entregue la posesion y administracion de la porcion del
"fishpond" en conflicto;
(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los
pescado beneficiados, mas los intereses legales de la fecha de la incoacion de la demanda
de autos hasta el completo pago de la obligacion principal;
(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos
incurridos por aquella durante la pendencia de esta causa;
(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la suma de
P2,000.00;
(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto en
cuanto se refiere al demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia, lack
of knowledge of the order of the court a quo setting the case for trial. The petition, however, was
denied by the lower court in its order of May 21, 1956, the pertinent portion of which reads as
follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of this case
has been transferred or not, but to inquire from the presiding Judge, particularly because his
motion asking the transfer of this case was not set for hearing and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which reads as
follows:
Upon petition of the plaintiff without any objection on the part of the defendants, the
hearing of this case is hereby transferred to May 2 and 3, 1956, at 8:30 o'clock in the
morning.
This case was filed on April 3, 1951, and under any circumstance this Court will not
entertain any other transfer of the hearing of this case, and if the parties will not be
ready on the day set for hearing, the Court will take necessary steps for the final
disposition of this case.
In view of the order above-quoted, the Court will not accede to any transfer of this case and
the duty of Atty. Ruiz is no other than to be present in the Sala of this Court and to call the
attention of the same to the existence of his motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well taken,
the same is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the case to
us for final determination on the ground that it involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion when it ordered reception of
the appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus
depriving the appellant of his day in court and of his property without due process of law;
(2) Whether the lower court committed grave abuse of discretion when it denied the verified
petition for relief from judgment filed by the appellant on May 11, 1956 in accordance with
Rule 38, Rules of Court; and
(3) Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary
injunction against defendant-appellant, and in not dismissing appellees' complaint.
1. The first and second issues must be resolved against the appellant.
The record indisputably shows that in the order given in open court on March 21, 1956, the lower
court set the case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and empathically
stated that, since the case had been pending since April 3, 1951, it would not entertain any further
motion for transfer of the scheduled hearing.
An order given in open court is presumed received by the parties on the very date and time of
promulgation,
1
and amounts to a legal notification for all legal purposes.
2
The order of March 21,
1956, given in open court, was a valid notice to the parties, and the notice of hearing dated April 21,
1956 or one month thereafter, was a superfluity. Moreover, as between the order of March 21, 1956,
duly promulgated by the lower court, thru Judge Fernandez, and the notice of hearing signed by a
"special deputy clerk of court" setting the hearing in another branch of the same court, the former's
order was the one legally binding. This is because the incidents of postponements and adjournments
are controlled by the court and not by the clerk of court, pursuant to section 4, Rule 31 (now sec. 3,
Rule 22) of the Rules of Court.
Much less had the clerk of court the authority to interfere with the order of the court or to transfer the
cage from one sala to another without authority or order from the court where the case originated
and was being tried. He had neither the duty nor prerogative to re-assign the trial of the case to a
different branch of the same court. His duty as such clerk of court, in so far as the incident in
question was concerned, was simply to prepare the trial calendar. And this duty devolved upon the
clerk of court and not upon the "special deputy clerk of court" who purportedly signed the notice of
hearing.
It is of no moment that the motion for postponement had the conformity of the appellees' counsel.
The postponement of hearings does not depend upon agreement of the parties, but upon the court's
discretion.
3

The record further discloses that Casteel was represented by a total of 12 lawyers, none of whom
had ever withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956 intransferably
setting the case for hearing for May 2 and 3, 1956, was sufficient notice to all the appellant's eleven
other counsel of record. This is a well-settled rule in our jurisdiction.
4

It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant himself, to
appear before Judge Fernandez on the scheduled dates of hearing Parties and their lawyers have
no right to presume that their motions for postponement will be granted.
5
For indeed, the appellant
and his 12 lawyers cannot pretend ignorance of the recorded fact that since September 24, 1953
until the trial held on May 2, 1956, the case was under the advisement of Judge Fernandez who
presided over Branch I. There was, therefore, no necessity to "re-assign" the same to Branch II
because Judge Fernandez had exclusive control of said case, unless he was legally inhibited to try
the case and he was not.
There is truth in the appellant's contention that it is the duty of the clerk of court not of the Court
to prepare the trial calendar. But the assignment or reassignment of cases already pending in one
sala to another sala, and the setting of the date of trial after the trial calendar has been prepared, fall
within the exclusive control of the presiding judge.
The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the clerk of
court of the Court of First Instance of Davao was located directly below Branch I. If the appellant and
his counsel had exercised due diligence, there was no impediment to their going upstairs to the
second storey of the Court of First Instance building in Davao on May 2, 1956 and checking if the
case was scheduled for hearing in the said sala. The appellant after all admits that on May 2, 1956
his counsel went to the office of the clerk of court.
The appellant's statement that parties as a matter of right are entitled to notice of trial, is correct. But
he was properly accorded this right. He was notified in open court on March 21, 1956 that the case
was definitely and intransferably set for hearing on May 2 and 3, 1956 before Branch I. He cannot
argue that, pursuant to the doctrine in Siochi vs. Tirona,
6
his counsel was entitled to a timely notice
of the denial of his motion for postponement. In the cited case the motion for postponement was the
first one filed by the defendant; in the case at bar, there had already been a series of
postponements. Unlike the case at bar, the Siochi case was not intransferably set for hearing.
Finally, whereas the cited case did not spend for a long time, the case at bar was only finally and
intransferably set for hearing on March 21, 1956 after almost five years had elapsed from the
filing of the complaint on April 3, 1951.
The pretension of the appellant and his 12 counsel of record that they lacked ample time to prepare
for trial is unacceptable because between March 21, 1956 and May 2, 1956, they had one month
and ten days to do so. In effect, the appellant had waived his right to appear at the trial and therefore
he cannot be heard to complain that he has been deprived of his property without due process of
law.
7
Verily, the constitutional requirements of due process have been fulfilled in this case: the lower
court is a competent court; it lawfully acquired jurisdiction over the person of the defendant
(appellant) and the subject matter of the action; the defendant (appellant) was given an opportunity
to be heard; and judgment was rendered upon lawful hearing.
8

2. Finally, the appellant contends that the lower court incurred an error in ordering the issuance ex
parte of a writ of preliminary injunction against him, and in not dismissing the appellee's complaint.
We find this contention meritorious.
Apparently, the court a quo relied on exhibit A the so-called "contract of service" and the
appellees' contention that it created a contract of co-ownership and partnership between Inocencia
Deluao and the appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that everyone is conclusively presumed
to know the law. It must be assumed, conformably to such rule, that the parties entered into the so-
called "contract of service" cognizant of the mandatory and prohibitory laws governing the filing of
applications for fishpond permits. And since they were aware of the said laws, it must likewise be
assumed in fairness to the parties that they did not intend to violate them. This view must
perforce negate the appellees' allegation that exhibit A created a contract of co-ownership between
the parties over the disputed fishpond. Were we to admit the establishment of a co-ownership
violative of the prohibitory laws which will hereafter be discussed, we shall be compelled to declare
altogether the nullity of the contract. This would certainly not serve the cause of equity and justice,
considering that rights and obligations have already arisen between the parties. We shall therefore
construe the contract as one of partnership, divided into two parts namely, a contract of
partnership to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and
a contract of partnership to divide the fishpond between them after such award. The first is valid, the
second illegal.
It is well to note that when the appellee Inocencia Deluao and the appellant entered into the so-
called "contract of service" on November 25, 1949, there were two pending applications over the
fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural
Resources after it was disallowed by the Director of Fisheries on October 25, 1949. The other was
Felipe Deluao's application over the same area which was likewise rejected by the Director of
Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by letter dated
March 15, 1950 to the Secretary of Agriculture and Natural Resources. Clearly, although the
fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the holder of a
fishpond permit over the area. But be that as it may, they were not however precluded from
exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application
over the same area whichever event happened first. No law, rule or regulation prohibited them
from doing so. Thus, rather than let the fishpond remain idle they cultivated it.
The evidence preponderates in favor of the view that the initial intention of the parties was not to
form a co-ownership but to establish a partnership Inocencia Deluao as capitalist partner and
Casteel as industrial partner the ultimate undertaking of which was to divide into two equal parts
such portion of the fishpond as might have been developed by the amount extended by the plaintiffs-
appellees, with the further provision that Casteel should reimburse the expenses incurred by the
appellees over one-half of the fishpond that would pertain to him. This can be gleaned, among
others, from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money, same will redound to your benefit
because you are the ones interested in half of the work we have done so far, besides I did
not insist on our being partners in my fishpond permit, but it was you "Tatay" Eping the one
who wanted that we be partners and it so happened that we became partners because I am
poor, but in the midst of my poverty it never occurred to me to be unfair to you. Therefore so
that each of us may be secured, let us have a document prepared to the effect that we are
partners in the fishpond that we caused to be made here in Balasinon, but it does not mean
that you will treat me as one of your "Bantay" (caretaker) on wage basis but not earning
wages at all, while the truth is that we are partners. In the event that you are not amenable to
my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I
withdraw all my cases and be left without even a little and you likewise.
(emphasis supplied)
9

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their
partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although
denominated a "contract of service," was actually the memorandum of their partnership agreement.
That it was not a contract of the services of the appellant, was admitted by the appellees themselves
in their letter
10
to Casteel dated December 19, 1949 wherein they stated that they did not employ him
in his (Casteel's) claim but because he used their money in developing and improving the fishpond,
his right must be divided between them. Of course, although exhibit A did not specify any wage or
share appertaining to the appellant as industrial partner, he was so entitled this being one of the
conditions he specified for the execution of the document of partnership.
11

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond.
In a letter,
12
dated March 24, 1950, the appellant suggested that they divide the fishpond and the
remaining capital, and offered to pay the Deluaos a yearly installment of P3,000 presumably as
reimbursement for the expenses of the appellees for the development and improvement of the one-
half that would pertain to the appellant. Two days later, the appellee Felipe Deluao
replied,
13
expressing his concurrence in the appellant's suggestion and advising the latter to ask for a
reconsideration of the order of the Director of Fisheries disapproving his (appellant's) application, so
that if a favorable decision was secured, then they would divide the area.
Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further need to
maintain his petition for the reinvestigation of Casteel's application. Thus by letter
14
dated March 15,
1950 addressed to the Secretary of Agriculture and Natural Resources, he withdrew his petition on
the alleged ground that he was no longer interested in the area, but stated however that he wanted
his interest to be protected and his capital to be reimbursed by the highest bidder.
The arrangement under the so-called "contract of service" continued until the decisions both dated
September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR
Cases 353 and 353-B. This development, by itself, brought about the dissolution of the partnership.
Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership
because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership,
"... any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership." The approval of the appellant's fishpond application by the
decisions in DANR Cases 353 and 353-B brought to the fore several provisions of law which made
the continuation of the partnership unlawful and therefore caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources.
15
To the same effect is Condition No. 3 of the
fishpond permit which states that "The permittee shall not transfer or sublet all or any area herein
granted or any rights acquired therein without the previous consent and approval of this Office."
Parenthetically, we must observe that in DANR Case 353-B, the permit granted to one of the parties
therein, Leoncio Aradillos, was cancelled not solely for the reason that his permit covered a portion
of the area included in the appellant's prior fishpond application, but also because, upon
investigation, it was ascertained thru the admission of Aradillos himself that due to lack of capital, he
allowed one Lino Estepa to develop with the latter's capital the area covered by his fishpond permit
F-289-C with the understanding that he (Aradillos) would be given a share in the produce thereof.
16

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that
The lessee shall not assign, encumber, or sublet his rights without the consent of the
Secretary of Agriculture and Commerce, and the violation of this condition shall avoid the
contract; Provided, That assignment, encumbrance, or subletting for purposes of speculation
shall not be permitted in any case:Provided, further, That nothing contained in this section
shall be understood or construed to permit the assignment, encumbrance, or subletting of
lands leased under this Act, or under any previous Act, to persons, corporations, or
associations which under this Act, are not authorized to lease public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural
Resources issued in August 1937, prohibits a transfer or sublease unless first approved by the
Director of Lands and under such terms and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be allowed. If the permittee
or lessee had, unless otherwise specifically provided, held the permit or lease and actually
operated and made improvements on the area for at least one year, he/she may request
permission to sub-lease or transfer the area and improvements under certain conditions.
(a) Transfer subject to approval. A sub-lease or transfer shall only be valid when first
approved by the Director under such terms and conditions as may be prescribed, otherwise it
shall be null and void. A transfer not previously approved or reported shall be considered
sufficient cause for the cancellation of the permit or lease and forfeiture of the bond and for
granting the area to a qualified applicant or bidder, as provided in subsection (r) of Sec. 33 of
this Order.
Since the partnership had for its object the division into two equal parts of the fishpond between the
appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged
the unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was
dissolved by the approval of his application and the award to him of the fishpond. The approval was
an event which made it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership.
The appellees, however, argue that in approving the appellant's application, the Secretary of
Agriculture and Natural Resources likewise recognized and/or confirmed their property right to one-
half of the fishpond by virtue of the contract of service, exhibit A. But the untenability of this
argument would readily surface if one were to consider that the Secretary of Agriculture and Natural
Resources did not do so for the simple reason that he does not possess the authority to violate the
aforementioned prohibitory laws nor to exempt anyone from their operation.
However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the
foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership,
succeeding events reveal the intent of both parties to terminate the partnership by refusing to share
the fishpond with the other.
On December 27, 1950 Casteel wrote
17
the appellee Inocencia Deluao, expressing his desire to
divide the fishpond so that he could administer his own share, such division to be subject to the
approval of the Secretary of Agriculture and Natural Resources. By letter dated December 29,
1950,
18
the appellee Felipe Deluao demurred to Casteel's proposition because there were allegedly
no appropriate grounds to support the same and, moreover, the conflict over the fishpond had not
been finally resolved.
The appellant wrote on January 4, 1951 a last letter
19
to the appellee Felipe Deluao wherein the
former expressed his determination to administer the fishpond himself because the decision of the
Government was in his favor and the only reason why administration had been granted to the
Deluaos was because he was indebted to them. In the same letter, the appellant forbade Felipe
Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply thereto, Felipe
Deluao wrote a letter
20
dated January 5, 1951 in which he reiterated his refusal to grant the
administration of the fishpond to the appellant, stating as a ground his belief "that only the competent
agencies of the government are in a better position to render any equitable arrangement relative to
the present case; hence, any action we may privately take may not meet the procedure of legal
order."
Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions
not to share the fishpond with each other in direct violation of the undertaking for which they have
established their partnership each must be deemed to have expressly withdrawn from the
partnership, thereby causing its dissolution pursuant to art. 1830(2) of the Civil Code which
provides, inter alia, that dissolution is caused "by the express will of any partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and
administrative powers with regard to the survey, classification, lease, sale or any other form of
concession or disposition and management of the lands of the public domain, and, more specifically,
with regard to the grant or withholding of licenses, permits, leases and contracts over portions of the
public domain to be utilized as fishponds.
21
, Thus, we held in Pajo, et al. vs. Ago, et al. (L-15414,
June 30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et
al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural Resources)
by law regarding the disposition of public lands such as granting of licenses, permits, leases,
and contracts, or approving, rejecting, reinstating, or cancelling applications, or deciding
conflicting applications, are all executive and administrative in nature. It is a well-recognized
principle that purely administrative and discretionary functions may not be interfered with by
the courts (Coloso v. Board of Accountancy, G.R. No. L-5750, April 20, 1953). In general,
courts have no supervising power over the proceedings and action of the administrative
departments of the government. This is generally true with respect to acts involving the
exercise of judgment or discretion, and findings of fact. (54 Am. Jur. 558-559) Findings of
fact by an administrative board or official, following a hearing, are binding upon the courts
and will not be disturbed except where the board or official has gone beyond his statutory
authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to
his duty or with grave abuse of discretion... (emphasis supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the
appellant's fishpond application 1717 and awarded to him the possession of the area in question. In
view of the finality of the Secretary's decision in DANR Cases 353 and 353-B, and considering the
absence of any proof that the said official exceeded his statutory authority, exercised
unconstitutional powers, or acted with arbitrariness and in disregard of his duty, or with grave abuse
of discretion, we can do no less than respect and maintain unfettered his official acts in the
premises. It is a salutary rule that the judicial department should not dictate to the executive
department what to do with regard to the administration and disposition of the public domain which
the law has entrusted to its care and administration. Indeed, courts cannot superimpose their
discretion on that of the land department and compel the latter to do an act which involves the
exercise of judgment and discretion.
22

Therefore, with the view that we take of this case, and even assuming that the injunction was
properly issued because present all the requisite grounds for its issuance, its continuation, and,
worse, its declaration as permanent, was improper in the face of the knowledge later acquired by the
lower court that it was the appellant's application over the fishpond which was given due course.
After the Secretary of Agriculture and Natural Resources approved the appellant's application, he
became to all intents and purposes the legal permittee of the area with the corresponding right to
possess, occupy and enjoy the same. Consequently, the lower court erred in issuing the preliminary
mandatory injunction. We cannot overemphasize that an injunction should not be granted to take
property out of the possession and control of one party and place it in the hands of another whose
title has not been clearly established by law.
23

However, pursuant to our holding that there was a partnership between the parties for the
exploitation of the fishpond before it was awarded to Casteel, this case should be remanded to the
lower court for the reception of evidence relative to an accounting from November 25, 1949 to
September 15, 1950, in order for the court to determine (a) the profits realized by the partnership, (b)
the share (in the profits) of Casteel as industrial partner, (e) the share (in the profits) of Deluao as
capitalist partner, and (d) whether the amounts totalling about P27,000 advanced by Deluao to
Casteel for the development and improvement of the fishpond have already been liquidated.
Besides, since the appellee Inocencia Deluao continued in possession and enjoyment of the
fishpond even after it was awarded to Casteel, she did so no longer in the concept of a capitalist
partner but merely as creditor of the appellant, and therefore, she must likewise submit in the lower
court an accounting of the proceeds of the sales of all the fishes harvested from the fishpond from
September 16, 1950 until Casteel shall have been finally given the possession and enjoyment of the
same. In the event that the appellee Deluao has received more than her lawful credit of P27,000 (or
whatever amounts have been advanced to Casteel), plus 6% interest thereon per annum, then she
should reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered:
(1) dissolving the injunction issued against the appellant, (2) placing the latter back in possession of
the fishpond in litigation, and (3) remanding this case to the court of origin for the reception of
evidence relative to the accounting that the parties must perforce render in the premises, at the
termination of which the court shall render judgment accordingly. The appellant's counterclaim is
dismissed. No pronouncement as to costs.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO
R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE
B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO
R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J .:
These consolidated petitions seek the review of the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the
then Intermediate Appellate Court and directed that in all subsequent elections for directors of
Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's
choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate only
six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall vote only
among themselves to determine who the six (6) nominees will be, with cumulative voting to be
allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went
abroad to look for foreign partners, European or American who could help in its expansion plans. On
August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into an
Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors
agreed to participate in the ownership of an enterprise which would engage primarily in the business
of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares.
The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination
and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors,
which shall consist of nine individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation, three of the nine directors
shall be designated by American-Standard, and the other six shall be designated by
the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with
the Board of Investments for availment of incentives with the condition that at least 60% of the
capital stock of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the initially
harmonious relations between the two groups. According to the Filipino group, a basic disagreement
was due to their desire to expand the export operations of the company to which ASI objected as it
apparently had other subsidiaries of joint joint venture groups in the countries where Philippine
exports were contemplated. On March 8, 1983, the annual stockholders' meeting was held. The
meeting was presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the agenda, the stockholders then proceeded to the
election of the members of the board of directors. The ASI group nominated three persons namely;
Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out
of order on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during
the past annual stockholders' meetings to nominate only nine persons as nominees for the nine-
member board of directors, and the legal advice of Saniwares' legal counsel. The following events
then, transpired:
... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr.
Jaqua protested the decision of the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that
all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, AC-
G.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar.
The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all
votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John
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)
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.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar
and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R.
SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of the case to the Securities
and Exchange Commission with the directive that a new stockholders' meeting of Saniwares be
ordered convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration 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. 75975-76 assails the amended decision on the following
grounds:
11.1. 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:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED
INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during
its annual stockholders' meeting held on March 8, 1983. To answer this question the following
factors should be determined: (1) the nature of the business established by the parties whether it
was a joint venture or a corporation and (2) whether or not the ASI Group may vote their additional
10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp.
v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly
stated that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-
GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was
to establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in their pleading that the
"Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and therefore,
there can be, between the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing, except in the following
cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer
to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the
parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other ASI shall constitute the minority
stockholder. In any event, the evident intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into ajoint venture enterprise, and if some
words in the Agreement appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together attributing to the doubtful ones
that sense which may result from all of them taken jointly (Art. 1374, New Civil
Code). Moreover, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (Art. 1371,
New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint profit, the question whether
they intended by their agreement to create a joint adventure, or to assume some
other relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div.
40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George,
27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows that the parties agreed to
establish a joint venture and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent with a joint venture and
not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed
to accept the role of minority vis-a-vis the Philippine National group of investors, on
the condition that the Agreement should contain provisions to protect ASI as the
minority.
An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the
Agreement]. ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain transactions [Sec. 3
(b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the
right to designate the president and plant manager [Sec. 5 (6)]. The Agreement
further provides that the sales policy of Saniwares shall be that which is normally
followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard"
products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)].
Under the Agreement, ASI agreed to provide technology and know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes
of the board of directors for certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power. Furthermore, the grant to
ASI of the right to designate certain officers of the corporation; the super-majority
voting requirements for amendments of the articles and by-laws; and most
significantly to the issues of tms case, the provision that ASI shall designate 3 out of
the 9 directors and the other stockholders shall designate the other 6, clearly indicate
that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the
capital stock and the Philippine National stockholders who own the balance of 60%,
and that 2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of huge
multinational corporations of the developed world. Arrangements are formalized where a foreign
group becomes a minority owner of a firm in exchange for its manufacturing expertise, use of its
brand names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine
waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the local majority ownership and
actively tries to completely or predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent that such subversive
actions can be lawfully prevented, the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from
each other but are divisible into groups representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of determining
how closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is a close-
held corporation. Surely, appellants cannot honestly claim that Saniwares is a public
issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint venturers
(Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago,
M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry
v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with
legal questions as to the extent to which the requirements arising from the corporate
form of joint venture corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied on the joint venture agreement rather than
the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate
from the traditional pattern of corporation management. A noted authority has
pointed out that just as in close corporations, shareholders' agreements in joint
venture corporations often contain provisions which do one or more of the following:
(1) require greater than majority vote for shareholder and director action; (2) give
certain shareholders or groups of shareholders power to select a specified number of
directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply
that agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty five
stockholders, and therefore cannot qualify as a close corporation under section 96,
can some of them enter into an agreement to vote as a unit in the election of
directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling
agreements to protect their interests, as long as they do not intend to commit any
wrong, or fraud on the other stockholders not parties to the agreement. Of course,
voting or pooling agreements are perhaps more useful and more often resorted to in
close corporations. But they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of close
corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come
within the definition. In such case, its stockholders should not be precluded from
entering into contracts like voting agreements if these are otherwise valid. (Campos
& Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include appellants. (Rollo No. 75951, pp.
90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a) hereof
says that three of the nine directors shall be designated by ASI and the remaining six
by the other stockholders, i.e., the Filipino stockholders. This allocation of board
seats is obviously in consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the
parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as
in joint venture relationships between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the
particular contractual rights and obligations which the parties have assumed for
themselves.
On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the
first. Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should
recognize and uphold the division of the stockholders into two groups, and at the
same time uphold the right of the stockholders within each group to cumulative voting
in the process of determining who the group's nominees would be. In practical terms,
as suggested by appellant Luciano E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should not be allowed to interfere
in the voting within the Filipino group. Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the Agreement, and
may even be able to get a majority of the board seats, a result which is clearly
contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to
vote their additional equity pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner Salazar
adds that this right if granted to the ASI Group would not necessarily mean a violation of the Anti-
Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors
or governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section
1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The
point of query, however, is whether or not that provision is applicable to a joint venture with clearly
defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact
hardly distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a mutual
right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v.
Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d.
12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common
law jurisdictions is that the partnership contemplates a general business with some
degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P.
2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking. (Art. 1783,
Civil Code). It would seem therefore that under Philippine law, a joint venture is a
form of partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v.
Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to
a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members
of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would
be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly
stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act.
In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in the capital of the entity. It is to be noted, however, that
the same law also limits the election of aliens as members of the board of directors in proportion to
their allowance participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in future
dealings, this limitation of six to three board seats should always be maintained as long as the joint
venture agreement exists considering that in limiting 3 board seats in the 9-man board of directors
there are provisions already agreed upon and embodied in the parties' Agreement to protect the
interests arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined
by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot
now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is
dependent on the directors thus elected being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the management of Saniwares. The joint venture
character of the enterprise must always be taken into account, so long as the company exists under
its original agreement. Cumulative voting may not be used as a device to enable ASI to achieve
stealthily or indirectly what they cannot accomplish openly. There are substantial safeguards in the
Agreement which are intended to preserve the majority status of the Filipino investors as well as to
maintain the minority status of the foreign investors group as earlier discussed. They should be
maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983 annual
stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs against
the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.