G.R. No.

126881

October 3, 2000

They named their enterprise "Benguet Lumber" which they jointly

managed until Tan Eng Kee's death. Petitioners herein averred that
the business prospered due to the hard work and thrift of the alleged
partners. However, they claimed that in 1981, Tan Eng Lay and his
children caused the conversion of the partnership "Benguet Lumber"
into a corporation called "Benguet Lumber Company." The
incorporation was purportedly a ruse to deprive Tan Eng Kee and his
heirs of their rightful participation in the profits of the business.
Petitioners prayed for accounting of the partnership assets, and the
dissolution, winding up and liquidation thereof, and the equal division
of the net assets of Benguet Lumber.

HEIRS OF TAN ENG KEE, petitioners,

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

After trial, Regional Trial Court of Baguio City, Branch 7 rendered

judgment6 on April 12, 1995, to wit:

THE FOREGOING CONSIDERED, the appealed decision is

hereby set aside, and the complaint dismissed.

WHEREFORE, in view of all the foregoing, judgment is

hereby rendered:

The facts are:

a) Declaring that Benguet Lumber is a joint venture which is

akin to a particular partnership;

Following the death of Tan Eng Kee on September 13, 1984, Matilde
Abubo, the common-law spouse of the decedent, joined by their
children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio,
collectively known as herein petitioners HEIRS OF TAN ENG KEE,
filed suit against the decedent's brother TAN ENG LAY on February
19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the
Regional Trial Court of Baguio City was for accounting, liquidation
and winding up of the alleged partnership formed after World War II
between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the
petitioners filed an amended complaint4 impleading private
respondent herein BENGUET LUMBER COMPANY, as represented
by Tan Eng Lay. The amended complaint was admitted by the trial
court in its Order dated May 3, 1991.5

b) Declaring that the deceased Tan Eng Kee and Tan Eng
Lay are joint adventurers and/or partners in a business
venture and/or particular partnership called Benguet Lumber
and as such should share in the profits and/or losses of the
business venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the
same assets turned over to Benguet Lumber Co. Inc. and as
such the heirs or legal representatives of the deceased Tan
Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng
Kee as joint adventurer and/or as partner in a particular
partnership have descended to the plaintiffs who are his
legal heirs.

The amended complaint principally alleged that after the second

World War, Tan Eng Kee and Tan Eng Lay, pooling their resources
and industry together, entered into a partnership engaged in the
business of selling lumber and hardware and construction supplies.

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

and/or General Manager of Benguet Lumber Company Inc.
to render an accounting of all the assets of Benguet Lumber
Company, Inc. so the plaintiffs know their proper share in the
business;

Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo,

Jean, Mary and Willy, all surnamed Tan, for alleged falsification of
commercial documents by a private individual. On March 20, 1999,
the Municipal Trial Court of Baguio City, Branch 1, wherein the
charges were filed, rendered judgment9 dismissing the cases for
insufficiency of evidence.

f) Ordering the appointment of a receiver to preserve and/or

administer the assets of Benguet Lumber Company, Inc. until
such time that said corporation is finally liquidated are
directed to submit the name of any person they want to be
appointed as receiver failing in which this Court will appoint
the Branch Clerk of Court or another one who is qualified to
act as such.

In their assignment of errors, petitioners claim that:

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

g) Denying the award of damages to the plaintiffs for lack of

proof except the expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of
merit.
SO ORDERED.

II

Private respondent sought relief before the Court of Appeals which,

on March 13, 1996, rendered the assailed decision reversing the
judgment of the trial court. Petitioners' motion for
reconsideration7 was denied by the Court of Appeals in a
Resolution8 dated October 11, 1996.

THE HONORABLE COURT OF APPEALS ERRED IN

RELYING SOLELY ON THE SELF-SERVING TESTIMONY
OF RESPONDENT TAN ENG LAY THAT BENGUET
LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN
ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

Hence, the present petition.

III

As a side-bar to the proceedings, petitioners filed Criminal Case No.

78856 against Tan Eng Lay and Wilborn Tan for the use of allegedly
falsified documents in a judicial proceeding. Petitioners complained
that Exhibits "4" to "4-U" offered by the defendants before the trial
court, consisting of payrolls indicating that Tan Eng Kee was a mere
employee of Benguet Lumber, were fake, based on the discrepancy
in the signatures of Tan Eng Kee. They also filed Criminal Cases

THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT THE FOLLOWING FACTS WHICH WERE
DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO
NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP
JUST BECAUSE THERE WAS NO ARTICLES OF

PARTNERSHIP DULY RECORDED BEFORE THE

SECURITIES AND EXCHANGE COMMISSION:

THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT THERE WAS NO PARTNERSHIP
BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER
TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR
ASSETS OF BENGUET LUMBER IS DEFINITELY MORE
THAN P3,000.00 AND AS SUCH THE EXECUTION OF A
PUBLIC INSTRUMENT CREATING A PARTNERSHIP
SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC
INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE
17, DECISION).

a. THAT THE FAMILIES OF TAN ENG KEE AND

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

As a premise, we reiterate the oft-repeated rule that findings of facts

of the Court of Appeals will not be disturbed on appeal if such are
supported by the evidence.10 Our jurisdiction, it must be emphasized,
does not include review of factual issues. Thus:

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY

WERE SUPERVISING THE EMPLOYEES
THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE
THE ONES DETERMINING THE PRICES OF
STOCKS TO BE SOLD TO THE PUBLIC; AND

Filing of petition with Supreme Court. A party desiring to

appeal by certiorari from a judgment or final order or
resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by
law, may file with the Supreme Court a verified petition for
review on certiorari. The petition shall raise only questions of
law which must be distinctly set forth.11 [emphasis supplied]

e. THAT TAN ENG LAY AND TAN ENG KEE WERE

THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).
IV

Admitted exceptions have been recognized, though, and when

present, may compel us to analyze the evidentiary basis on which
the lower court rendered judgment. Review of factual issues is
therefore warranted:

THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT THERE WAS NO PARTNERSHIP JUST
BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE:
ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH
THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT
THEY DO NOT KNOW WHEN THE ESTABLISHMENT
KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS
STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).

(1) when the factual findings of the Court of Appeals and the
trial court are contradictory;
(2) when the findings are grounded entirely on speculation,
surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its
findings of fact is manifestly mistaken, absurd, or impossible;

(4) when there is grave abuse of discretion in the

appreciation of facts;

We have the admission that the father of the plaintiffs was

not a partner of the Benguet Lumber before the war. The
appellees however argued that (Rollo, p. 104; Brief, p. 6) this
is because during the war, the entire stocks of the pre-war
Benguet Lumber were confiscated if not burned by the
Japanese. After the war, because of the absence of capital
to start a lumber and hardware business, Lay and Kee
pooled the proceeds of their individual businesses earned
from buying and selling military supplies, so that the
common fund would be enough to form a partnership, both
in the lumber and hardware business. That Lay and Kee
actually established the Benguet Lumber in Baguio City, was
even testified to by witnesses. Because of the pooling of
resources, the post-war Benguet Lumber was eventually
established. That the father of the plaintiffs and Lay were
partners, is obvious from the fact that: (1) they conducted the
affairs of the business during Kee's lifetime, jointly, (2) they
were the ones giving orders to the employees, (3) they were
the ones preparing orders from the suppliers, (4) their
families stayed together at the Benguet Lumber compound,
and (5) all their children were employed in the business in
different capacities.

(5) when the appellate court, in making its findings, goes

beyond the issues of the case, and such findings are
contrary to the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised
on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant
facts which, if properly considered, will justify a different
conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation
of the specific evidence on which they are based; and
(10) when the findings of fact of the Court of Appeals are
premised on the absence of evidence but such findings are
contradicted by the evidence on record.12

xxx

In reversing the trial court, the Court of Appeals ruled, to wit:

When mention is made of a joint venture, it would

presuppose parity of standing between the parties, equal
proprietary interest and the exercise by the parties equally of
the conduct of the business, thus:
xxx

xxx

It is obvious that there was no partnership whatsoever.

Except for a firm name, there was no firm account, no firm
letterheads submitted as evidence, no certificate of
partnership, no agreement as to profits and losses, and no
time fixed for the duration of the partnership. There was even
no attempt to submit an accounting corresponding to the
period after the war until Kee's death in 1984. It had no
business book, no written account nor any memorandum for
that matter and no license mentioning the existence of a
partnership [citation omitted].

We note that the Court a quo over extended the issue

because while the plaintiffs mentioned only the existence of
a partnership, the Court in turn went beyond that by justifying
the existence of a joint venture.

xxx

xxx

xxx

Also, the exhibits support the establishment of only a

proprietorship. The certification dated March 4, 1971, Exhibit
"2", mentioned co-defendant Lay as the only registered
owner of the Benguet Lumber and Hardware. His application
for registration, effective 1954, in fact mentioned that his
business started in 1945 until 1985 (thereafter, the
incorporation). The deceased, Kee, on the other hand, was
merely an employee of the Benguet Lumber Company, on
the basis of his SSS coverage effective 1958, Exhibit "3". In
the Payrolls, Exhibits "4" to "4-U", inclusive, for the years
1982 to 1983, Kee was similarly listed only as an employee;
precisely, he was on the payroll listing. In the Termination
Notice, Exhibit "5", Lay was mentioned also as the proprietor.
xxx

xxx

the latter's capital assets, contrary to the allegations in pars.

6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a
partnership:
1) That Kee was living in a bunk house just across the
lumber store, and then in a room in the bunk house in
Trinidad, but within the compound of the lumber
establishment, as testified to by Tandoc; 2) that both Lay and
Kee were seated on a table and were "commanding people"
as testified to by the son, Elpidio Tan; 3) that both were
supervising the laborers, as testified to by Victoria Choi; and
4) that Dionisio Peralta was supposedly being told by Kee
that the proceeds of the 80 pieces of the G.I. sheets were
added to the business.

xxx

We would like to refer to Arts. 771 and 772, NCC, that a

partner [sic] may be constituted in any form, but when an
immovable is constituted, the execution of a public
instrument becomes necessary. This is equally true if the
capitalization exceeds P3,000.00, in which case a public
instrument is also necessary, and which is to be recorded
with the Securities and Exchange Commission. In this case
at bar, we can easily assume that the business
establishment, which from the language of the appellees,
prospered (pars. 5 & 9, Complaint), definitely exceeded
P3,000.00, in addition to the accumulation of real properties
and to the fact that it is now a compound. The execution of a
public instrument, on the other hand, was never established
by the appellees.

Partnership presupposes the following elements [citation

omitted]: 1) a contract, either oral or written. However, if it
involves real property or where the capital is P3,000.00 or
more, the execution of a contract is necessary; 2) the
capacity of the parties to execute the contract; 3) money
property or industry contribution; 4) community of funds and
interest, mentioning equality of the partners or one having a
proportionate share in the benefits; and 5) intention to divide
the profits, being the true test of the partnership. The
intention to join in the business venture for the purpose of
obtaining profits thereafter to be divided, must be
established. We cannot see these elements from the
testimonial evidence of the appellees.

And then in 1981, the business was incorporated and the

incorporators were only Lay and the members of his family.
There is no proof either that the capital assets of the
partnership, assuming them to be in existence, were
maliciously assigned or transferred by Lay, supposedly to the
corporation and since then have been treated as a part of

As can be seen, the appellate court disputed and differed from the
trial court which had adjudged that TAN ENG KEE and TAN ENG
LAY had allegedly entered into a joint venture. In this connection, we
have held that whether a partnership exists is a factual matter;
consequently, since the appeal is brought to us under Rule 45, we
cannot entertain inquiries relative to the correctness of the

assessment of the evidence by the court a quo.13 Inasmuch as the

Court of Appeals and the trial court had reached conflicting
conclusions, perforce we must examine the record to determine if the
reversal was justified.

(a) A joint adventure (an American concept similar to our joint

accounts) is a sort of informal partnership, with no firm name
and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and
can be individually liable therefor.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay
were partners in Benguet Lumber. A contract of partnership is
defined by law as one where:

(b) Usually, but not necessarily a joint adventure is limited to

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

. . . two or more persons bind themselves to contribute money,

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

A joint venture "presupposes generally a parity of standing between

the joint co-ventures or partners, in which each party has an equal
proprietary interest in the capital or property contributed, and where
each party exercises equal rights in the conduct of the
business."22 Nonetheless, in Aurbach, et. al. v. Sanitary Wares
Manufacturing Corporation, et. al.,23 we expressed the view that a
joint venture may be likened to a particular partnership, thus:

Two or more persons may also form a partnership for the

exercise of a profession.14
Thus, in order to constitute a partnership, it must be
established that (1) two or more persons bound themselves
to contribute money, property, or industry to a common fund,
and (2) they intend to divide the profits among
themselves.15 The agreement need not be formally reduced
into writing, since statute allows the oral constitution of a
partnership, save in two instances: (1) when immovable
property or real rights are contributed,16 and (2) when the
partnership has a capital of three thousand pesos or
more.17 In both cases, a public instrument is required.18 An
inventory to be signed by the parties and attached to the
public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to
the partnership.19

The legal concept of a joint venture is of common law origin.

It has no precise legal definition, but it has been generally
understood to mean an organization formed for some
temporary purpose. (Gates v. Megargel, 266 Fed. 811
[1920]) It is hardly distinguishable from the partnership, since
their elements are similar community of interest in the
business, sharing of profits and losses, and a mutual right of
control. (Blackner v. McDermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242
[1955]). The main distinction cited by most opinions in
common law jurisdiction is that the partnership contemplates
a general business with some degree of continuity, while the
joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v.
Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.

The trial court determined that Tan Eng Kee and Tan Eng Lay had
entered into a joint venture, which it said is akin to a particular
partnership.20 A particular partnership is distinguished from a joint
adventure, to wit:

Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel

266 Fed. 811 [1920]). This observation is not entirely
accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking.
(Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction
between these two business forms, and has held that
although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolaos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).

of petitioners' witnesses is directly controverted by Tan Eng Lay. It

should be noted that it is not with the number of witnesses wherein
preponderance lies;24 the quality of their testimonies is to be
considered. None of petitioners' witnesses could suitably account for
the beginnings of Benguet Lumber Company, except perhaps for
Dionisio Peralta whose deceased wife was related to Matilde
Abubo.25 He stated that when he met Tan Eng Kee after the
liberation, the latter asked the former to accompany him to get 80
pieces of G.I. sheets supposedly owned by both brothers. 26Tan Eng
Lay, however, denied knowledge of this meeting or of the
conversation between Peralta and his brother.27 Tan Eng Lay
consistently testified that he had his business and his brother had
his, that it was only later on that his said brother, Tan Eng Kee, came
to work for him. Be that as it may, co-ownership or co-possession
(specifically here, of the G.I. sheets) is not an indicium of the
existence of a partnership.28

Undoubtedly, the best evidence would have been the contract of

partnership itself, or the articles of partnership but there is none. The
alleged partnership, though, was never formally organized. In
addition, petitioners point out that the New Civil Code was not yet in
effect when the partnership was allegedly formed sometime in 1945,
although the contrary may well be argued that nothing prevented the
parties from complying with the provisions of the New Civil Code
when it took effect on August 30, 1950. But all that is in the past. The
net effect, however, is that we are asked to determine whether a
partnership existed based purely on circumstantial evidence. A
review of the record persuades us that the Court of Appeals correctly
reversed the decision of the trial court. The evidence presented by
petitioners falls short of the quantum of proof required to establish a
partnership.

Besides, it is indeed odd, if not unnatural, that despite the forty years
the partnership was allegedly in existence, Tan Eng Kee never asked
for an accounting. The essence of a partnership is that the partners
share in the profits and losses.29 Each has the right to demand an
accounting as long as the partnership exists.30 We have allowed a
scenario wherein "[i]f excellent relations exist among the partners at
the start of the business and all the partners are more interested in
seeing the firm grow rather than get immediate returns, a deferment
of sharing in the profits is perfectly plausible."31 But in the situation in
the case at bar, the deferment, if any, had gone on too long to be
plausible. A person is presumed to take ordinary care of his
concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed
P20,000.00 capital. In the second place, she did not furnish
any help or intervention in the management of the theatre. In
the third place, it does not appear that she has even
demanded from defendant any accounting of the expenses
and earnings of the business. Were she really a partner, her
first concern should have been to find out how the business

Unfortunately for petitioners, Tan Eng Kee has passed away. Only
he, aside from Tan Eng Lay, could have expounded on the precise
nature of the business relationship between them. In the absence of
evidence, we cannot accept as an established fact that Tan Eng Kee
allegedly contributed his resources to a common fund for the
purpose of establishing a partnership. The testimonies to that effect

was progressing, whether the expenses were legitimate,

whether the earnings were correct, etc. She was absolutely
silent with respect to any of the acts that a partner should
have done; all that she did was to receive her share of
P3,000.00 a month, which cannot be interpreted in any
manner than a payment for the use of the premises which
she had leased from the owners. Clearly, plaintiff had always
acted in accordance with the original letter of defendant of
June 17, 1945 (Exh. "A"), which shows that both parties
considered this offer as the real contract between
them.33 [emphasis supplied]

possessors do or do not share any profits made by the use

of the property;
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a
joint or common right or interest in any property which the
returns are derived;
(4) The receipt by a person of a share of the profits of a
business is a prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits
were received in payment:

A demand for periodic accounting is evidence of a

partnership.34 During his lifetime, Tan Eng Kee appeared never to
have made any such demand for accounting from his brother, Tang
Eng Lay.

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

This brings us to the matter of Exhibits "4" to "4-U" for private

respondents, consisting of payrolls purporting to show that Tan Eng
Kee was an ordinary employee of Benguet Lumber, as it was then
called. The authenticity of these documents was questioned by
petitioners, to the extent that they filed criminal charges against Tan
Eng Lay and his wife and children. As aforesaid, the criminal cases
were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in
fact shows that Tan Eng Kee received sums as wages of an
employee. In connection therewith, Article 1769 of the Civil Code
provides:

(c) As an annuity to a widow or representative of a

deceased partner;
(d) As interest on a loan, though the amount of
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of
a business or other property by installments or
otherwise.
In the light of the aforequoted legal provision, we conclude that Tan
Eng Kee was only an employee, not a partner. Even if the payrolls as
evidence were discarded, petitioners would still be back to square
one, so to speak, since they did not present and offer evidence that
would show that Tan Eng Kee received amounts of money allegedly
representing his share in the profits of the enterprise. Petitioners
failed to show how much their father, Tan Eng Kee, received, if any,
as his share in the profits of Benguet Lumber Company for any
particular period. Hence, they failed to prove that Tan Eng Kee and

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or co-

Tan Eng Lay intended to divide the profits of the business between
themselves, which is one of the essential features of a partnership.

relations existed between them. Whatever privileges Tan

Eng Lay gave his brother, and which were not given the
other employees, only proves the kindness and generosity of
Tan Eng Lay towards a blood relative.

Nevertheless, petitioners would still want us to infer or believe the

alleged existence of a partnership from this set of circumstances:
that Tan Eng Lay and Tan Eng Kee were commanding the
employees; that both were supervising the employees; that both
were the ones who determined the price at which the stocks were to
be sold; and that both placed orders to the suppliers of the Benguet
Lumber Company. They also point out that the families of the
brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber
Company compound, a privilege not extended to its ordinary
employees.

(iv) and even if it is assumed that Tan Eng Kee was

quarreling with Tan Eng Lay in connection with the pricing of
stocks, this does not adequately prove the existence of a
partnership relation between them. Even highly confidential
employees and the owners of a company sometimes argue
with respect to certain matters which, in no way indicates
that they are partners as to each other.35
In the instant case, we find private respondent's arguments to be
well-taken. Where circumstances taken singly may be inadequate to
prove the intent to form a partnership, nevertheless, the collective
effect of these circumstances may be such as to support a finding of
the existence of the parties' intent.36 Yet, in the case at bench, even
the aforesaid circumstances when taken together are not
persuasive indicia of a partnership. They only tend to show that Tan
Eng Kee was involved in the operations of Benguet Lumber, but in
what capacity is unclear. We cannot discount the likelihood that as a
member of the family, he occupied a niche above the rank-and-file
employees. He would have enjoyed liberties otherwise unavailable
were he not kin, such as his residence in the Benguet Lumber
Company compound. He would have moral, if not actual, superiority
over his fellow employees, thereby entitling him to exercise powers
of supervision. It may even be that among his duties is to place
orders with suppliers. Again, the circumstances proffered by
petitioners do not provide a logical nexus to the conclusion desired;
these are not inconsistent with the powers and duties of a manager,
even in a business organized and run as informally as Benguet
Lumber Company.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that
the above enumerated powers and privileges granted in
favor of Tan Eng Kee, were indicative of his being a partner
in Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store
gives orders and directions to his subordinates. So long,
therefore, that an employee's position is higher in rank, it is
not unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom
confidence is reposed by the owner, can order materials
from suppliers for and in behalf of Benguet Lumber.
Furthermore, even a partner does not necessarily have to
perform this particular task. It is, thus, not an indication that
Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in
the lumber compound and this privilege was not accorded to
other employees, the undisputed fact remains that Tan Eng
Kee is the brother of Tan Eng Lay. Naturally, close personal

There being no partnership, it follows that there is no dissolution,

winding up or liquidation to speak of. Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed

decision of the Court of Appeals is herebyAFFIRMED in toto. No
pronouncement as to costs.

YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes
and orders so as to make them conformable to law and justice
includes the right to reverse itself, especially when in its honest
opinion it has committed an error or mistake in judgment, and that to
adhere to its decision will cause injustice to a party litigant. 1

SO ORDERED.

On November 14, 2001, petitioners Marjorie Tocao and William T.

Belo filed a Motion for Reconsideration of our Decision dated
October 4, 2000. They maintain that there was no partnership
between petitioner Belo, on the one hand, and respondent Nenita A.
Anay, on the other hand; and that the latter being merely an
employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced
that, indeed, petitioner Belo acted merely as guarantor of Geminesse
Enterprise. This was categorically affirmed by respondent's own
witness, Elizabeth Bantilan, during her cross-examination.
Furthermore, Bantilan testified that it was Peter Lo who was the
company's financier. Thus:
Q - You mentioned a while ago the name William Belo.
Now, what is the role of William Belo with Geminesse
Enterprise?
A - William Belo is the friend of Marjorie Tocao and he
was the guarantor of the company.
G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.

What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody

who is Peter Lo and he acts as guarantor for us. We can
borrow money from him.

RESOLUTION

Q Lo?

10

You mentioned a certain Peter Lo. Who is this Peter

Peter Lo is based in Singapore.

Consequently, inasmuch as petitioner Belo was not a partner in

Geminesse Enterprise, respondent had no cause of action against
him and her complaint against him should accordingly be dismissed.

Q - What is the role of Peter Lo in the Geminesse

Enterprise?
A

He is the one fixing our orders that open the L/C.

You mean Peter Lo is the financier?

Yes, he is the financier.

As regards the award of damages, petitioners argue that respondent

should be deemed in bad faith for failing to account for stocks of
Geminesse Enterprise amounting to P208,250.00 and that,
accordingly, her claim for damages should be barred to that extent.
We do not agree. Given the circumstances surrounding private
respondent's sudden ouster from the partnership by petitioner Tocao,
her act of withholding whatever stocks were in her possession and
control was justified, if only to serve as security for her claims against
the partnership. However, while we do not agree that the same
renders private respondent in bad faith and should bar her claim for
damages, we find that the said sum of P208,250.00 should be
deducted from whatever amount is finally adjudged in her favor on
the basis of the formal account of the partnership affairs to be
submitted to the Regional Trial Court.

Q - And the defendant William Belo is merely the

guarantor of Geminesse Enterprise, am I correct?
A

Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's

evidence. It should be recalled that the business relationship created
between petitioner Tocao and respondent Anay was an informal
partnership, which was not even recorded with the Securities and
Exchange Commission. As such, it was understandable that Belo,
who was after all petitioner Tocao's good friend and confidante,
would occasionally participate in the affairs of the business, although
never in a formal or official capacity.3 Again, respondent's witness,
Elizabeth Bantilan, confirmed that petitioner Belo's presence in
Geminesse Enterprise's meetings was merely as guarantor of the
company and to help petitioner Tocao.4

WHEREFORE, based on the foregoing, the Motion for

Reconsideration of petitioners is PARTIALLY GRANTED. The
Regional Trial Court of Makati is hereby ordered to DISMISS the
complaint, docketed as Civil Case No. 88-509, as against petitioner
William T. Belo only. The sum of P208,250.00 shall be deducted from
whatever amount petitioner Marjorie Tocao shall be held liable to pay
respondent after the normal accounting of the partnership affairs.
SO ORDERED.

Furthermore, no evidence was presented to show that petitioner Belo

participated in the profits of the business enterprise. Respondent
herself professed lack of knowledge that petitioner Belo received any
share in the net income of the partnership.5 On the other hand,
petitioner Tocao declared that petitioner Belo was not entitled to any
share in the profits of Geminesse Enterprise.6 With no participation in
the profits, petitioner Belo cannot be deemed a partner since the
essence of a partnership is that the partners share in the profits and
losses.7

11

THE COMMISSIONER OF INTERNAL REVENUE and COURT OF

TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an unregistered
partnership or joint venture for income tax purposes is the issue in
this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from
Santiago Bernardino, et al. and on May 28, 1966, they bought
another three (3) parcels of land from Juan Roque. The first two
parcels of land were sold by petitioners in 1968 toMarenir
Development Corporation, while the three parcels of land were sold
by petitioners to Erlinda Reyes and Maria Samson on March
19,1970. Petitioners realized a net profit in the sale made in 1968 in
the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by availing of
the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR
Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970.
G.R. No. 78133 October 18, 1988
Petitioners protested the said assessment in a letter of June 26,
1979 asserting that they had availed of tax amnesties way back in
1974.

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

vs.

12

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

petitioners that in the years 1968 and 1970, petitioners as co-owners
in the real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and its
income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership

PARTNERSHIP SUBJECT TO CORPORATE

INCOME TAX, AND THAT THE BURDEN OF
OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS
OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY
LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.

was subject to corporate income tax as distinguished from profits derived

from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by
petitioners relieved petitioners of their individual income tax liabilities but did
not relieve them from the tax liability of the unregistered partnership. Hence,
the petitioners were required to pay the deficiency income tax assessed.

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

C. IN FINDING THAT THE INSTANT CASE IS

SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE
THE EVANGELISTA CASE.

the decision and action taken by respondent commissioner with costs

against petitioners.

D. IN RULING THAT THE TAX AMNESTY DID NOT

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

It ruled that on the basis of the principle enunciated

in Evangelista 3 an unregistered partnership was in fact formed by
petitioners which like a corporation was subject to corporate income tax
distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante

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

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling
of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their
father which together with their own personal funds they used in
buying several real properties. They appointed their brother to
manage their properties with full power to lease, collect, rent, issue
receipts, etc. They had the real properties rented or leased to various
tenants for several years and they gained net profits from the rental
income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.

Hence, this petition wherein petitioners invoke as basis thereof the

following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT
THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT
PETITIONERS FORMED AN UNREGISTERED

13

In resolving the issue, this Court held as follows:

Pursuant to this article, the essential elements of a

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

The issue in this case is whether petitioners are

subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise
known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the
real estate dealers' fixed tax. With respect to the tax
on corporations, the issue hinges on the meaning of
the terms corporation and partnership as used in
sections 24 and 84 of said Code, the pertinent parts
of which read:
Sec. 24. Rate of the tax on corporations.There
shall be levied, assessed, collected, and paid
annually upon the total net income received in the
preceding taxable year from all sources by every
corporation organized in, or existing under the laws
of the Philippines, no matter how created or
organized but not including duly registered general
co-partnerships (companies collectives), a tax upon
such income equal to the sum of the following: ...

1. Said common fund was not something they found

already in existence. It was not a property inherited
by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial
portion thereof in order to establish said common
fund.
2. They invested the same, not merely in one
transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00.
On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944),
they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transcations undertaken, as
well as the brief interregnum between each,
particularly the last three purchases, is strongly
indicative of a pattern or common design that was
not limited to the conservation and preservation of
the aforementioned common fund or even of the
property acquired by petitioners in February, 1943.

Sec. 84(b). The term "corporation" includes

partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies,
but does not include duly registered general copartnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines
provides:
By the contract of partnership two or more persons
bind themselves to contribute money, property, or
industry to a common fund, with the intention of
dividing the profits among themselves.

14

In other words, one cannot but perceive a character

of habituality peculiar to business transactions
engaged in for purposes of gain.

partnership, the collective effect of these

circumstances is such as to leave no room for doubt
on the existence of said intent in petitioners herein.
Only one or two of the aforementioned
circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not
in point. 5

3. The aforesaid lots were not devoted to residential

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

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

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

4. Since August, 1945, the properties have been

under the management of one person, namely,
Simeon Evangelists, with full power to lease, to
collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said
properties have been handled as if the same
belonged to a corporation or business enterprise
operated for profit.

In Evangelists, there was a series of transactions where petitioners

purchased twenty-four (24) lots showing that the purpose was not
limited to the conservation or preservation of the common fund or
even the properties acquired by them. The character of habituality
peculiar to business transactions engaged in for the purpose of gain
was present.
In the instant case, petitioners bought two (2) parcels of land in 1965.
They did not sell the same nor make any improvements thereon. In
1966, they bought another three (3) parcels of land from one seller. It
was only 1968 when they sold the two (2) parcels of land after which
they did not make any additional or new purchase. The remaining
three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

5. The foregoing conditions have existed for more

than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and
over twelve (12) years, since Simeon Evangelists
became the manager.
6. Petitioners have not testified or introduced any
evidence, either on their purpose in creating the set
up already adverted to, or on the causes for its
continued existence. They did not even try to offer
an explanation therefor.

In Evangelista, the properties were leased out to tenants for several

years. The business was under the management of one of the
partners. Such condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar. The co-ownership
started only in 1965 and ended in 1970.

Although, taken singly, they might not suffice to

establish the intent necessary to constitute a

15

Thus, in the concurring opinion of Mr. Justice Angelo Bautista

in Evangelista he said:

It is evident that an isolated transaction whereby two

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

I wish however to make the following observation

Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be
deemed a partnership or a co-ownership. Said
article paragraphs 2 and 3, provides;

Persons who contribute property or funds for a

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

(2) Co-ownership or co-possession does not itself

establish a partnership, whether such co-owners or
co-possessors do or do not share any profits made
by the use of the property;
(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons
sharing them have a joint or common right or interest
in any property from which the returns are derived;

A joint purchase of land, by two, does not constitute

a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the
sale of land create a partnership; the parties are only
tenants in common. (Clark vs. Sideway, 142 U.S.
682,12 Ct. 327, 35 L. Ed., 1157.)

From the above it appears that the fact that those

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

Where plaintiff, his brother, and another agreed to

become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of
disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no
partnership existed as between the three parties,
whatever their relation may have been as to third
parties. (Magee vs. Magee 123 N.E. 673, 233 Mass.
341.)
In order to constitute a partnership inter sese there
must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c)

16

and such a community of interest, as far as third

persons are concerned as enables each party to
make contract, manage the business, and dispose
of the whole property.-Municipal Paving Co. vs.
Herring 150 P. 1067, 50 III 470.)

tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership p. 7 However, as petitioners have

The common ownership of property does not itself

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

WHEREFROM, the petition is hereby GRANTED and the decision of

the respondent Court of Tax Appeals of March 30, 1987 is hereby
REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in
this case, without pronouncement as to costs.SO ORDERED.

availed of the benefits of tax amnesty as individual taxpayers in these

transactions, they are thereby relieved of any further tax liability arising
therefrom.

G.R. No. 159333

January 31, 2007

ARSENIO T. MENDIOLA, Petitioner,

vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS
COMMISSION, PACIFIC FOREST RESOURCES, PHILS., INC.
and/or CELLMARK AB, Respondents.

The sharing of returns does not in itself establish a partnership

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

RESOLUTION
PUNO, CJ:

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

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

For resolution is the Motion for Reconsideration1 dated September

23, 2006 filed by respondent Pacific Forest Resources, Inc. (Pacfor),
of the Decision2 of this Court dated July 31, 2006, where we held:
IN VIEW THEREOF, the petition is GRANTED. The Court of Appeals
January 30, 2003 Decision in CA-G.R. SP No. 71028 and July 30,
2003 Resolution, affirming the December 20, 2001 Decision of the
National Labor Relations Commission, are ANNULED and SET
ASIDE. The July 30, 2001 Decision of the Labor Arbiter is
REINSTATED with the MODIFICATION that the amount
of P250,000.00 representing an alleged increase in petitioners
salary shall be deducted from the grant of separation pay for lack of
evidence.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such
existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income

17

SO ORDERED.

dated July 30, 2001, shall be without effect only as to respondent

Cellmark AB.

The dispositive portion of the July 30, 2001 Decision of the Labor
Arbiter reads as follows:

SO ORDERED.

WHEREFORE, premises considered, judgment is hereby rendered

ordering herein respondents Cellmark AB and Pacific Forest
Resources, Inc., jointly and severally to compensate complainant
Arsenio T. Mendiola separation pay equivalent to at least one month
for every year of service, whichever is higher (sic), as reinstatement
is no longer feasible by reason of the strained relations of the parties
equivalent to five (5) months in the amount of $32,000.00 plus the
sum of P250,000.00; pay complainant the sum of P500,000.00 as
moral and exemplary damages and ten percent (10%) of the
amounts awarded as and for attorneys fees.
All other claims are dismissed for lack of basis.

G.R. No. 75875 December 15, 1989

1avvphi1.net

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.

SO ORDERED.
The Labor Arbiters decision held Cellmark solidarily liable with
respondent Pacfor. However, as respondent Pacfor pointed out in
its Motion for Reconsideration, the courts never acquired jurisdiction
over the person of Cellmark. Respondent Cellmark is the parent
corporation of respondent Pacfor. It is a corporation duly organized
under the laws of Sweden, with principal office in Gothenburg,
Sweden. It did not receive any summons from any court or quasijudicial body with regard to the instant case, nor did it voluntarily
submit itself to the jurisdiction of the Labor Arbiter.
1avvphi1.net

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.

With regard to the other issues, no substantial arguments have been

raised by respondent Pacfor. These issues have been thoroughly
discussed by this Court in its July 31, 2006 decision.
IN VIEW WHEREOF, the petitioners Motion for Reconsideration is
PARTIALLY GRANTED. The judgment rendered by the Labor Arbiter

18

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

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."

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.

The Agreement has the following provisions relevant to the issues in

these cases on the nomination and election of the directors of the
corporation:

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

3. Articles of Incorporation

GUTIERREZ, JR., J.:

(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

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.

(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)

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

19

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.

... 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, ACG.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

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:

20

(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)

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:

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

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.

21

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.

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.

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)

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)

II

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the

amended decision on the following grounds:

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

11.1.
ThatAmendedDecisionwouldsanctiontheCA'sdisrega
rd 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 .

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.

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)

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)

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

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

22

"Agreement" dated August 15,1962 wherein it is clearly stated that

the parties' intention was to form a corporation and not a joint
venture.

(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:

They specifically mention number 16 under Miscellaneous

Provisions which states:
xxx xxx xxx

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)

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)

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.

It has been ruled:

23

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)

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).

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:

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.

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)].

Premises considered, we believe that under the

Agreement there are two groups of stockholders
who established a corporation with provisions for a

24

special contractual relationship between the parties,

i.e., ASI and the other stockholders. (pp. 4-5)

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

Appeal

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.

In fact, the Philippine Corporation Code itself

recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting
rights.

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.

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.

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.

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,

25

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).

litigants who relied on the orthodox principles of

corporation law.

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.

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)

As correctly held by the SEC Hearing Officer:

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

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 LopezCampos 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

26

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 & LopezCampos, op cit, p. 405)

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 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:

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.

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.

On the one hand, the clearly established minority

position of ASI and the contractual allocation of
board seats Cannot be disregarded. On the other

27

hand, the rights of the stockholders to cumulative

voting should also be protected.

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:

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.

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

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)

28

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)

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)

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

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

29

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.

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.

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.

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

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

30

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.

RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and

CHEN HO-FU, respondents.
Jose C. Guico for petitioner.

SO ORDERED.
Wilfredo Cortez for private respondents.

FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager
of the marble quarrying and export business operated by a
registered partnership with the firm name of "Jade Mountain
Products Company Limited" ("Jade Mountain"). The partnership was
originally organized on 28 June 1984 with Lea Bendal and Rhodora
Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and
Yu Chang, all citizens of the Republic of China (Taiwan), as limited
partners. The partnership business consisted of exploiting a marble
deposit found on land owned by the Sps. Ricardo and Guillerma
Cruz, situated in Bulacan Province, under a Memorandum
Agreement dated 26 June 1984 with the Cruz spouses. 1 The
partnership had its main office in Makati, Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated

14 March 1985, as Assistant General Manager with a monthly salary
of P4,000.00. According to petitioner Yu, however, he actually
received only half of his stipulated monthly salary, since he had
accepted the promise of the partners that the balance would be paid
when the firm shall have secured additional operating funds from
abroad. Benjamin Yu actually managed the operations and finances
of the business; he had overall supervision of the workers at the
marble quarry in Bulacan and took charge of the preparation of
papers relating to the exportation of the firm's products.

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE
MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO,

Sometime in 1988, without the knowledge of Benjamin Yu, the

general partners Lea Bendal and Rhodora Bendal sold and

31

transferred their interests in the partnership to private respondent

Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited
partner, also sold and transferred his interest in the partnership to
Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership
interest. The partnership now constituted solely by Willy Co and
Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to
Mandaluyong, Metropolitan Manila. A Supplement to the
Memorandum Agreement relating to the operation of the marble
quarry was entered into with the Cruz spouses in February of
1988. 2 The actual operations of the business enterprise continued as

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a

decision holding that petitioner had been illegally dismissed. The
Labor Arbiter decreed his reinstatement and awarded him his claim
for unpaid salaries, backwages and attorney's fees. 5
On appeal, the National Labor Relations Commission ("NLRC")
reversed the decision of the Labor Arbiter and dismissed petitioner's
complaint in a Resolution dated 29 November 1990. The NLRC held
that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel
Zapanta had bought the Jade Mountain business, that the new
partnership had not retained petitioner Yu in his original position as
Assistant General Manager, and that there was no law requiring the
new partnership to absorb the employees of the old partnership.
Benjamin Yu, therefore, had not been illegally dismissed by the new
partnership which had simply declined to retain him in his former
managerial position or any other position. Finally, the NLRC held that
Benjamin Yu's claim for unpaid wages should be asserted against
the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the
proceedings before the Labor Arbiter. 6

before. All the employees of the partnership continued working in the

business, all, save petitioner Benjamin Yu as it turned out.

On 16 November 1987, having learned of the transfer of the firm's

main office from Makati to Mandaluyong, petitioner Benjamin Yu
reported to the Mandaluyong office for work and there met private
respondent Willy Co for the first time. Petitioner was informed by
Willy Co that the latter had bought the business from the original
partners and that it was for him to decide whether or not he was
responsible for the obligations of the old partnership, including
petitioner's unpaid salaries. Petitioner was in fact not allowed to work
anymore in the Jade Mountain business enterprise. His unpaid
salaries remained unpaid. 3

Petitioner Benjamin Yu is now before the Court on a Petition

for Certiorari, asking us to set aside and annul the Resolution of the
NLRC as a product of grave abuse of discretion amounting to lack or
excess of jurisdiction.

On 21 December 1988. Benjamin Yu filed a complaint for illegal

dismissal and recovery of unpaid salaries accruing from November
1984 to October 1988, moral and exemplary damages and attorney's
fees, against Jade Mountain, Mr. Willy Co and the other private
respondents. The partnership and Willy Co denied petitioner's
charges, contending in the main that Benjamin Yu was never hired
as an employee by the present or new partnership. 4

The basic contention of petitioner is that the NLRC has overlooked

the principle that a partnership has a juridical personality separate
and distinct from that of each of its members. Such independent
legal personality subsists, petitioner claims, notwithstanding changes
in the identities of the partners. Consequently, the employment
contract between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's membership. 7
Two (2) main issues are thus posed for our consideration in the case
at bar: (1) whether the partnership which had hired petitioner Yu as
Assistant General Manager had been extinguished and replaced by

32

a new partnerships composed of Willy Co and Emmanuel Zapanta;

and (2) if indeed a new partnership had come into existence,
whether petitioner Yu could nonetheless assert his rights under his
employment contract as against the new partnership.

undertaking is
specified;
xxx xxx xxx

In respect of the first issue, we agree with the result reached by the
NLRC, that is, that the legal effect of the changes in the membership
of the partnership was the dissolution of the old partnership which
had hired petitioner in 1984 and the emergence of a new firm
composed of Willy Co and Emmanuel Zapanta in 1987.

(2) in contravention
of the agreement
between the
partners, where the
circumstances do
not permit a
dissolution under
any other provision
of this article, by the
express will of any
partner at any time;

The applicable law in this connection of which the NLRC seemed

quite unaware is found in the Civil Code provisions relating to
partnerships. Article 1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the
change in the relation of the partners caused by any
partner ceasing to be associated in the carrying
on as distinguished from the winding up of the
business. (Emphasis supplied)

xxx xxx xxx

(Emphasis
supplied)

Article 1830 of the same Code must also be noted:

In the case at bar, just about all of the partners had sold their
partnership interests (amounting to 82% of the total partnership
interest) to Mr. Willy Co and Emmanuel Zapanta. The record does
not show what happened to the remaining 18% of the original
partnership interest. The acquisition of 82% of the partnership
interest by new partners, coupled with the retirement or withdrawal of
the partners who had originally owned such 82% interest, was
enough to constitute a new partnership.

Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the
partners;
xxx xxx xxx
(b) by the express
will of any partner,
who must act in
good faith, when no
definite term or
particular

The occurrence of events which precipitate the legal consequence of

dissolution of a partnership do not, however, automatically result in
the termination of the legal personality of the old partnership. Article
1829 of the Civil Code states that:

33

[o]n dissolution the partnership is not terminated, but

continues until the winding up of partnership affairs
is completed.

(1) When any new partner is admitted into an

existing partnership, or when any partner retires and
assigns (or the representative of the deceased
partner assigns) his rights in partnership property to
two or more of the partners, or to one or more of the
partners and one or more third persons, if the
business is continued without liquidation of the
partnership affairs;

In the ordinary course of events, the legal personality of the expiring

partnership persists for the limited purpose of winding up and closing
of the affairs of the partnership. In the case at bar, it is important to
underscore the fact that the business of the old partnership was
simply continued by the new partners, without the old partnership
undergoing the procedures relating to dissolution and winding up of
its business affairs. In other words, the new partnership simply took
over the business enterprise owned by the preceeding partnership,
and continued using the old name of Jade Mountain Products
Company Limited, without winding up the business affairs of the old
partnership, paying off its debts, liquidating and distributing its net
assets, and then re-assembling the said assets or most of them and
opening a new business enterprise. There were, no doubt, powerful
tax considerations which underlay such an informal approach to
business on the part of the retiring and the incoming partners. It is
not, however, necessary to inquire into such matters.

(2) When all but one partner retire and assign (or the
representative of a deceased partner assigns) their
rights in partnership property to the remaining
partner, who continues the business without
liquidation of partnership affairs, either alone or with
others;
(3) When any Partner retires or dies and the
business of the dissolved partnership is continued as
set forth in Nos. 1 and 2 of this Article, with the
consent of the retired partners or the representative
of the deceased partner, but without any assignment
of his right in partnership property;

What is important for present purposes is that, under the above

described situation, not only the retiring partners (Rhodora Bendal,
et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the
preceding partnership. In Singson, et al. v. Isabela Saw Mill, et
al, 8 the Court held that under facts very similar to those in the case at bar, a

(4) When all the partners or their representatives

assign their rights in partnership property to one or
more third persons who promise to pay the debts
and who continue the business of the dissolved
partnership;

withdrawing partner remains liable to a third party creditor of the old

partnership. 9 The liability of the new partnership, upon the other hand, in the
set of circumstances obtaining in the case at bar, is established in Article
1840 of the Civil Code which reads as follows:

(5) When any partner wrongfully causes a

dissolution and remaining partners continue the
businessunder the provisions of article 1837, second
paragraph, No. 2, either alone or with
others, andwithout liquidation of the partnership
affairs;

Art. 1840. In the following cases creditors of the

dissolved partnership are also creditors of the
person or partnership continuing the business:

34

(6) When a partner is expelled and the remaining

partners continue the business either alone or with
others without liquidation of the partnership affairs;

is not necessary for the Court to determine under which one or mare
of the above six (6) paragraphs, the case at bar would fall, if only
because the facts on record are not detailed with sufficient precision
to permit such determination. It is, however, clear to the Court that
under Article 1840 above, Benjamin Yu is entitled to enforce his
claim for unpaid salaries, as well as other claims relating to his
employment with the previous partnership, against the new Jade
Mountain.

The liability of a third person becoming a partner in

the partnership continuing the business, under this
article, to the creditors of the dissolved partnership
shall be satisfied out of the partnership property only,
unless there is a stipulation to the contrary.

It is at the same time also evident to the Court that the new
partnership was entitled to appoint and hire a new general or
assistant general manager to run the affairs of the business
enterprise take over. An assistant general manager belongs to the
most senior ranks of management and a new partnership is entitled
to appoint a top manager of its own choice and confidence. The nonretention of Benjamin Yu as Assistant General Manager did not
therefore constitute unlawful termination, or termination without just
or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership

When the business of a partnership after dissolution

is continued under any conditions set forth in this
article the creditors of the retiring or deceased
partner or the representative of the deceased
partner, have a prior right to any claim of the retired
partner or the representative of the deceased
partner against the person or partnership continuing
the business on account of the retired or deceased
partner's interest in the dissolved partnership or on
account of any consideration promised for such
interest or for his right in partnership property.

had its own new General Manager, apparently Mr. Willy Co, the principal
new owner himself, who personally ran the business of Jade Mountain.
Benjamin Yu's old position as Assistant General Manager thus became
superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled
to separation pay at the rate of one month's pay for each year of service that
he had rendered to the old partnership, a fraction of at least six (6) months
being considered as a whole year.

Nothing in this article shall be held to modify any

right of creditors to set assignment on the ground of
fraud.
xxx xxx xxx

While the new Jade Mountain was entitled to decline to retain

petitioner Benjamin Yu in its employ, we consider that Benjamin Yu
was very shabbily treated by the new partnership. The old
partnership certainly benefitted from the services of Benjamin Yu
who, as noted, previously ran the whole marble quarrying,
processing and exporting enterprise. His work constituted valueadded to the business itself and therefore, the new partnership
similarly benefitted from the labors of Benjamin Yu. It is worthy of
note that the new partnership did not try to suggest that there was
any cause consisting of some blameworthy act or omission on the
part of Mr. Yu which compelled the new partnership to terminate his

(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade Mountain are
also creditors of the new Jade Mountain which continued the
business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin
Yu in respect of his claim for unpaid wages, is entitled to priority visa-visany claim of any retired or previous partner insofar as such
retired partner's interest in the dissolved partnership is concerned. It

35

services. Nonetheless, the new Jade Mountain did not notify him of
the change in ownership of the business, the relocation of the main
office of Jade Mountain from Makati to Mandaluyong and the
assumption by Mr. Willy Co of control of operations. The treatment
(including the refusal to honor his claim for unpaid wages) accorded
to Assistant General Manager Benjamin Yu was so summary and
cavalier as to amount to arbitrary, bad faith treatment, for which the
new Jade Mountain may legitimately be required to respond by
paying moral damages. This Court, exercising its discretion and in
view of all the circumstances of this case, believes that an indemnity
for moral damages in the amount of P20,000.00 is proper and
reasonable.

(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and
(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.

In addition, we consider that petitioner Benjamin Yu is entitled to

interest at the legal rate of six percent (6%) per annum on the
amount of unpaid wages, and of his separation pay, computed from
the date of promulgation of the award of the Labor Arbiter. Finally,
because the new Jade Mountain compelled Benjamin Yu to resort to
litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total
amount due from private respondent Jade Mountain.

[G.R. No. 30616 : December 10, 1990.]

192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO
B. MAGLANA,Defendant-Appellee.

WHEREFORE, for all the foregoing, the Petition for Certiorari is

GRANTED DUE COURSE, the Comment filed by private
respondents is treated as their Answer to the Petition for Certiorari,
and the Decision of the NLRC dated 29 November 1990 is hereby
NULLIFIED and SET ASIDE. A new Decision is hereby ENTERED
requiring private respondent Jade Mountain Products Company
Limited to pay to petitioner Benjamin Yu the following amounts:

DECISION

PARAS, J.:

This is a direct appeal to this Court from a decision ** of the then

Court of First Instance of Davao, Seventh Judicial District, Branch
III, in Civil Case No. 3518, dismissing appellant's complaint.

(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;

As found by the trial court, the antecedent facts of the case are as
follows:
On January 14, 1955, Maglana and Rojas executed their Articles of
Co-Partnership (Exhibit "A") called Eastcoast Development
Enterprises (EDE) with only the two of them as partners. The
partnership EDE with an indefinite term of existence was duly

(b) separation pay computed at the rate of P4,000.00 monthly pay

multiplied by three (3) years of service or a total of P12,000.00;

36

registered on January 21, 1955 with the Securities and Exchange

Commission.

On October 25, 1956, Pahamotang, Maglana and Rojas executed a

document entitled "CONDITIONAL SALE OF INTEREST IN THE
PARTNERSHIP, EASTCOAST DEVELOPMENT ENTERPRISE" (Exhibits
"C" and "D") agreeing among themselves that Maglana and Rojas
shall purchase the interest, share and participation in the
Partnership of Pahamotang assessed in the amount of P31,501.12.
It was also agreed in the said instrument that after payment of the
sum of P31,501.12 to Pahamotang including the amount of loan
secured by Pahamotang in favor of the partnership, the two
(Maglana and Rojas) shall become the owners of all equipment
contributed by Pahamotang and the EASTCOAST DEVELOPMENT
ENTERPRISES, the name also given to the second partnership, be
dissolved. Pahamotang was paid in fun on August 31, 1957. No
other rights and obligations accrued in the name of the second
partnership (R.A. 921).

One of the purposes of the duly-registered partnership was to

"apply or secure timber and/or minor forests products licenses and
concessions over public and/or private forest lands and to operate,
develop and promote such forests rights and concessions." (Rollo,
p. 114).
A duly registered Articles of Co-Partnership was filed together with
an application for a timber concession covering the area located at
Cateel and Baganga, Davao with the Bureau of Forestry which was
approved and Timber License No. 35-56 was duly issued and
became the basis of subsequent renewals made for and in behalf
of the duly registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall
manage the business affairs of the partnership, including
marketing and handling of cash and is authorized to sign all papers
and instruments relating to the partnership, while appellant Rojas
shall be the logging superintendent and shall manage the logging
operations of the partnership. It is also provided in the said articles
of co-partnership that all profits and losses of the partnership shall
be divided share and share alike between the partners.

After the withdrawal of Pahamotang, the partnership was

continued by Maglana and Rojas without the benefit of any written
agreement or reconstitution of their written Articles of Partnership
(Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract
with another logging enterprise, the CMS Estate, Inc. He left and
abandoned the partnership (Decision, R.A. 947).

During the period from January 14, 1955 to April 30, 1956, there
was no operation of said partnership (Record on Appeal [R.A.] p.
946).

On February 4, 1957, Rojas withdrew his equipment from the

partnership for use in the newly acquired area (Decision, R.A.
948).

Because of the difficulties encountered, Rojas and Maglana decided

to avail of the services of Pahamotang as industrial partner.

The equipment withdrawn were his supposed contributions to the

first partnership and was transferred to CMS Estate, Inc. by way of
chattel mortgage (Decision, R.A. p. 948).

On March 4, 1956, Maglana, Rojas and Agustin Pahamotang

executed their Articles of Co-Partnership (Exhibit "B" and Exhibit
"C")
under
the
firm
name
EASTCOAST
DEVELOPMENT
ENTERPRISES (EDE). Aside from the slight difference in the
purpose of the second partnership which is to hold and secure
renewal of timber license instead of to secure the license as in the
first partnership and the term of the second partnership is fixed to
thirty (30) years, everything else is the same.

On March 17, 1957, Maglana wrote Rojas reminding the latter of

his obligation to contribute, either in cash or in equipment, to the
capital investments of the partnership as well as his obligation to
perform his duties as logging superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will
not be able to comply with the promised contributions and he will
not work as logging superintendent. Maglana then told Rojas that
the latter's share will just be 20% of the net profits. Such was the
sharing from 1957 to 1959 without complaint or dispute (Decision,
R.A. 949).

The partnership formed by Maglana, Pahamotang and Rojas

started operation on May 1, 1956, and was able to ship logs and
realize profits. An income was derived from the proceeds of the
logs in the sum of P643,633.07 (Decision, R.A. 919).

: nad

37

Meanwhile, Rojas took funds from the partnership more than his
contribution. Thus, in a letter dated February 21, 1961 (Exhibit
"10") Maglana notified Rojas that he dissolved the partnership
(R.A. 949).

(a) The nature of partnership and the legal relations of

Maglana and Rojas after the dissolution of the second
partnership;
(b) Their sharing basis: whether in proportion to their
contribution or share and share alike;

On April 7, 1961, Rojas filed an action before the Court of First

Instance of Davao against Maglana for the recovery of properties,
accounting, receivership and damages, docketed as Civil Case No.
3518 (Record on Appeal, pp. 1-26).

(c) The ownership of properties bought by Maglana in his

wife's name;
(d) The damages suffered and who should be liable for
them; and

Rojas' petition for appointment of a receiver was denied (R.A.

894).

(e) The legal effect of the letter dated February 23, 1961
of Maglana dissolving the partnership (Decision, R.A. pp.
895-896).

Upon motion of Rojas on May 23, 1961, Judge Romero appointed

commissioners to examine the long and voluminous accounts of
the Eastcoast Development Enterprises (Ibid., pp. 894-895).

- nad

After trial, the lower court rendered its decision on March 11,
1968, the dispositive portion of which reads as follows:

The motion to dismiss the complaint filed by Maglana on June 21,

1961 (Ibid., pp. 102-114) was denied by Judge Romero for want of
merit (Ibid., p. 125). Judge Romero also required the inclusion of
the entire year 1961 in the report to be submitted by the
commissioners
(Ibid.,
pp.
138-143).
Accordingly,
the
commissioners started examining the records and supporting
papers of the partnership as well as the information furnished
them by the parties, which were compiled in three (3) volumes.

"WHEREFORE, the above facts and issues duly considered,

judgment is hereby rendered by the Court declaring that:
"1. The nature of the partnership and the legal relations of
Maglana and Rojas after Pahamotang retired from the
second partnership, that is, after August 31, 1957, when
Pahamotang was finally paid his share the partnership of
the defendant and the plaintiff is one of a de facto and at
will;

On May 11, 1964, Maglana filed his motion for leave of court to
amend his answer with counterclaim, attaching thereto the
amended answer (Ibid., pp. 26-336), which was granted on May
22, 1964 (Ibid., p. 336).

"2. Whether the sharing of partnership profits should be on

the basis of computation, that is the ratio and proportion
of their respective contributions, or on the basis of share
and share alike this covered by actual contributions of
the plaintiff and the defendant and by their verbal
agreement; that the sharing of profits and losses is on the
basis of actual contributions; that from 1957 to 1959, the
sharing is on the basis of 80% for the defendant and 20%
for the plaintiff of the profits, but from 1960 to the date of
dissolution, February 23, 1961, the plaintiff's share will be
on the basis of his actual contribution and, considering his
indebtedness to the partnership, the plaintiff is not entitled
to any share in the profits of the said partnership;

On May 27, 1964, Judge M.G. Reyes approved the submitted

Commissioners' Report (Ibid., p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the
order dated May 27, 1964 approving the report of the
commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration
was denied (Ibid., pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964
and the following issues were agreed upon to be submitted to the
trial court:

"3. As to whether the properties which were bought by the

defendant and placed in his or in his wife's name were

38

acquired with partnership funds or with funds of

defendant and the Court declares that there is
evidence that these properties were acquired by
partnership funds, and therefore the same should
belong to the partnership;

the
no
the
not

"10. The Court also directs and orders plaintiff Rojas to pay
the sum of P62,988.19 his personal account to the
partnership;
"11. The Court also credits the defendant the amount of
P85,000.00 the amount he should have received as logging
superintendent, and which was not paid to him, and this
should be considered as part of Maglana's contribution
likewise to the partnership; and

"4. As to whether damages were suffered and, if so, how

much, and who caused them and who should be liable for
them the Court declares that neither parties is entitled
to damages, for as already stated above it is not a wise
policy to place a price on the right of a person to litigate
and/or to come to Court for the assertion of the rights they
believe they are entitled to;

"12. The complaint is hereby dismissed with costs against

the plaintiff.
: rd

"SO ORDERED." Decision, Record on Appeal, pp. 985-989).

"5. As to what is the legal effect of the letter of defendant

to the plaintiff dated February 23, 1961; did it dissolve the
partnership or not the Court declares that the letter of
the defendant to the plaintiff dated February 23, 1961, in
effect dissolved the partnership;

Rojas interposed the instant appeal.

"6. Further, the Court relative to the canteen, which sells

foodstuffs, supplies, and other merchandise to the laborers
and employees of the Eastcoast Development Enterprises,
the COURT DECLARES THE SAME AS NOT BELONGING
TO THE PARTNERSHIP;

The lower court is of the view that the second partnership

superseded the first, so that when the second partnership was
dissolved there was no written contract of co-partnership; there
was no reconstitution as provided for in the Maglana, Rojas and
Pahamotang partnership contract. Hence, the partnership which
was carried on by Rojas and Maglana after the dissolution of the
second partnership was a de facto partnership and at will. It was
considered as a partnership at will because there was no term,
express or implied; no period was fixed, expressly or impliedly
(Decision, R.A. pp. 962-963).

The main issue in this case is the nature of the partnership and
legal relationship of the Maglana-Rojas after Pahamotang retired
from the second partnership.

"7. That the alleged sale of forest concession Exhibit 9-B,

executed by Pablo Angeles David is VALID AND
BINDING UPON THE PARTIES AND SHOULD BE
CONSIDERED AS PART OF MAGLANA'S CONTRIBUTION TO
THE PARTNERSHIP;

On the other hand, Rojas insists that the registered partnership

under the firm name of Eastcoast Development Enterprises (EDE)
evidenced by the Articles of Co-Partnership dated January 14,
1955 (Exhibit "A") has not been novated, superseded and/or
dissolved by the unregistered articles of co-partnership among
appellant Rojas, appellee Maglana and Agustin Pahamotang, dated
March 4, 1956 (Exhibit "C") and accordingly, the terms and
stipulations of said registered Articles of Co-Partnership (Exhibit
"A") should govern the relations between him and Maglana. Upon
withdrawal of Agustin Pahamotang from the unregistered
partnership (Exhibit "C"), the legally constituted partnership EDE
(Exhibit "A") continues to govern the relations between them and
it was legal error to consider a de facto partnership between said

"8. Further, the Court orders and directs plaintiff Rojas to

pay or turn over to the partnership the amount of
P69,000.00 the profits he received from the CMS Estate,
Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay
the further sum of P85,000.00 which according to him he
is still entitled to receive from the CMS Estate, Inc. is
hereby denied considering that it has not yet been actually
received, and further the receipt is merely based upon an
expectancy and/or still speculative;

39

two partners or a partnership at will. Hence, the letter of appellee

Maglana dated February 23, 1961, did not legally dissolve the
registered partnership between them, being in contravention of the
partnership agreement agreed upon and stipulated in their Articles
of Co-Partnership (Exhibit "A"). Rather, appellant is entitled to the
rights enumerated in Article 1837 of the Civil Code and to the
sharing profits between them of "share and share alike" as
stipulated in the registered Articles of Co-Partnership (Exhibit "A").

the fact that Maglana on March 17, 1957, wrote Rojas, reminding
the latter of his obligation to contribute either in cash or in
equipment, to the capital investment of the partnership as well as
his obligation to perform his duties as logging superintendent. This
reminder cannot refer to any other but to the provisions of the
duly registered Articles of Co-Partnership. As earlier stated, Rojas
replied that he will not be able to comply with the promised
contributions and he will not work as logging superintendent. By
such statements, it is obvious that Roxas understood what
Maglana was referring to and left no room for doubt that both
considered themselves governed by the articles of the duly
registered partnership.

After a careful study of the records as against the conflicting

claims of Rojas and Maglana, it appears evident that it was not the
intention of the partners to dissolve the first partnership, upon the
constitution of the second one, which they unmistakably called an
"Additional Agreement" (Exhibit "9-B") (Brief for DefendantAppellee, pp. 24-25). Except for the fact that they took in one
industrial partner; gave him an equal share in the profits and fixed
the term of the second partnership to thirty (30) years, everything
else was the same. Thus, they adopted the same name,
EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same
purposes and the capital contributions of Rojas and Maglana as
stipulated in both partnerships call for the same amounts. Just as
important is the fact that all subsequent renewals of Timber
License No. 35-36 were secured in favor of the First Partnership,
the original licensee. To all intents and purposes therefore, the
First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership (Exhibit "C") which was
never registered (Brief for Plaintiff-Appellant, p. 5). Otherwise
stated, even during the existence of the second partnership, all
business transactions were carried out under the duly registered
articles. As found by the trial court, it is an admitted fact that even
up to now, there are still subsisting obligations and contracts of the
latter (Decision, R.A. pp. 950-957). No rights and obligations
accrued in the name of the second partnership except in favor of
Pahamotang which was fully paid by the duly registered
partnership (Decision, R.A., pp. 919-921).

Under the circumstances, the relationship of Rojas and Maglana

after the withdrawal of Pahamotang can neither be considered as a
De Facto Partnership, nor a Partnership at Will, for as stressed,
there is an existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally
dissolve the partnership in the case at bar, the answer is in the
affirmative.
Hence, as there are only two parties when Maglana notified Rojas
that he dissolved the partnership, it is in effect a notice of
withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a
specified term, one partner can cause its dissolution by expressly
withdrawing even before the expiration of the period, with or
without justifiable cause. Of course, if the cause is not justified or
no cause was given, the withdrawing partner is liable for damages
but in no case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the
dissolution. And in whatever way he may view the situation, the
conclusion is inevitable that Rojas and Maglana shall be guided in
the liquidation of the partnership by the provisions of its duly
registered Articles of Co-Partnership; that is, all profits and losses
of the partnership shall be divided "share and share alike" between
the partners.

On the other hand, there is no dispute that the second partnership

was dissolved by common consent. Said dissolution did not affect
the first partnership which continued to exist. Significantly,
Maglana and Rojas agreed to purchase the interest, share and
participation in the second partnership of Pahamotang and that
thereafter, the two (Maglana and Rojas) became the owners of
equipment contributed by Pahamotang. Even more convincing, is

But an accounting must first be made and which in fact was

ordered by the trial court and accomplished by the commissioners
appointed for the purpose.

40

On the basis of the Commissioners' Report, the corresponding

contribution of the partners from 1956-1961 are as follows:
Eufracio Rojas who should have contributed P158,158.00,
contributed only P18,750.00 while Maglana who should have
contributed P160,984.00, contributed P267,541.44 (Decision, R.A.
p. 976). It is a settled rule that 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 (Article 1786, Civil Code) and for interests
and damages from the time he should have complied with his
obligation (Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals,
133 SCRA 94 [1984]). Being a contract of partnership, each
partner must share in the profits and losses of the venture. That is
the essence of a partnership (Ibid., p. 95).

PREMISES CONSIDERED, the assailed decision of the Court of First

Instance of Davao, Branch III, is hereby MODIFIED in the sense
that the duly registered partnership of Eastcoast Development
Enterprises continued to exist until liquidated and that the sharing
basis of the partners should be on share and share alike as
provided for in its Articles of Partnership, in accordance with the
computation of the commissioners. We also hereby AFFIRM the
decision of the trial court in all other respects.
: nad

SO ORDERED.

Thus, as reported in the Commissioners' Report, Rojas is not

entitled to any profits. In their voluminous reports which was
approved by the trial court, they showed that on 50-50% basis,
Rojas will be liable in the amount of P131,166.00; on 80-20%, he
will be liable for P40,092.96 and finally on the basis of actual
capital contribution, he will be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners
after the withdrawal of Pahamotang which is unquestionably a
continuation of the duly registered partnership and the sharing of
profits and losses which should be on the basis of share and share
alike as provided for in the duly registered Articles of CoPartnership, no plausible reason could be found to disturb the
findings and conclusions of the trial court.
: nad

As to whether Maglana is liable for damages because of such

withdrawal, it will be recalled that after the withdrawal of
Pahamotang, Rojas entered into a management contract with
another logging enterprise, the CMS Estate, Inc., a company
engaged in the same business as the partnership. He withdrew his
equipment, refused to contribute either in cash or in equipment to
the capital investment and to perform his duties as logging
superintendent, as stipulated in their partnership agreement. The
records also show that Rojas not only abandoned the partnership
but also took funds in an amount more than his contribution
(Decision, R.A., p. 949).

G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX
APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete and Special Attorneys B. Gatdula, Jr.
and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

In the given situation Maglana cannot be said to be in bad faith nor

can he be liable for damages.

41

REYES, J.B.L., J.:

The present case is a petition for review, filed by the Commissioner

of Internal Revenue, of the tax court's aforesaid decision. It raises
these issues:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.,"

was formed on 30 September 1947 by herein respondent William J.
Suter as the general partner, and Julia Spirig and Gustav Carlson, as
the limited partners. The partners contributed, respectively,
P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1
October 1947, the limited partnership was registered with the
Securities and Exchange Commission. The firm engaged, among
other activities, in the importation, marketing, distribution and
operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office
and held itself out as a limited partnership, handling and carrying
merchandise, using invoices, bills and letterheads bearing its tradename, maintaining its own books of accounts and bank accounts,
and had a quota allocation with the Central Bank.

(a) Whether or not the corporate personality of the William J. Suter

"Morcoin" Co., Ltd. should be disregarded for income tax purposes,
considering that respondent William J. Suter and his wife, Julia Spirig
Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage
of the partners, respondent William J. Suter and Julia Spirig Suter
and the subsequent sale to them by the remaining partner, Gustav
Carlson, of his participation of P2,000.00 in the partnership for a
nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is
that the marriage of Suter and Spirig and their subsequent
acquisition of the interests of remaining partner Carlson in the
partnership dissolved the limited partnership, and if they did not, the
fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have
exclusive ownership and control of the business; consequently the
income tax return of respondent Suter for the years in question
should have included his and his wife's individual incomes and that
of the limited partnership, in accordance with Section 45 (d) of the
National Internal Revenue Code, which provides as follows:

In 1948, however, general partner Suter and limited partner Spirig

got married and, thereafter, on 18 December 1948, limited partner
Carlson sold his share in the partnership to Suter and his wife. The
sale was duly recorded with the Securities and Exchange
Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a
corporation, without objection by the herein petitioner, Commissioner
of Internal Revenue, until in 1959 when the latter, in an assessment,
consolidated the income of the firm and the individual incomes of the
partners-spouses Suter and Spirig resulting in a determination of a
deficiency income tax against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955.

(d) Husband and wife. In the case of married persons,

whether citizens, residents or non-residents, only one
consolidated return for the taxable year shall be filed by
either spouse to cover the income of both spouses; ....

Respondent Suter protested the assessment, and requested its

cancellation and withdrawal, as not in accordance with law, but his
request was denied. Unable to secure a reconsideration, he
appealed to the Court of Tax Appeals, which court, after trial,
rendered a decision, on 11 November 1965, reversing that of the
Commissioner of Internal Revenue.

In refutation of the foregoing, respondent Suter maintains, as the

Court of Tax Appeals held, that his marriage with limited partner
Spirig and their acquisition of Carlson's interests in the partnership in
1948 is not a ground for dissolution of the partnership, either in the
Code of Commerce or in the New Civil Code, and that since its

42

juridical personality had not been affected and since, as a limited

partnership, as contra distinguished from a duly registered general
partnership, it is taxable on its income similarly with corporations,
Suter was not bound to include in his individual return the income of
the limited partnership.

P18,000.00 by Julia Spirig and neither one of them was an industrial

partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter by Article 1677 of
the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose
Casan, in his Derecho Civil, 7th Edition, 1952, Volume 4, page 546,
footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin"
Co., Ltd., has been dissolved by operation of law because of the
marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was
organized is rested by the appellant upon the opinion of now Senator
Tolentino in Commentaries and Jurisprudence on Commercial Laws
of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

Los conyuges, segun esto, no pueden celebrar entre si el

contrato de sociedad universal, pero o podran constituir
sociedad particular? Aunque el punto ha sido muy debatido,
nos inclinamos a la tesis permisiva de los contratos de
sociedad particular entre esposos, ya que ningun precepto
de nuestro Codigo los prohibe, y hay que estar a la norma
general segun la que toda persona es capaz para contratar
mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable
a esta misma tesis en su resolution de 3 de febrero de 1936,
mas parece cambiar de rumbo en la de 9 de marzo de 1943.

A husband and a wife may not enter into a contract

of general copartnership, because under the Civil Code,
which applies in the absence of express provision in the
Code of Commerce, persons prohibited from making
donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that
the marriage of partners necessarily brings about the
dissolution of a pre-existing partnership. (1 Guy de Montella
58)

Nor could the subsequent marriage of the partners operate to

dissolve it, such marriage not being one of the causes provided for
that purpose either by the Spanish Civil Code or the Code of
Commerce.

The petitioner-appellant has evidently failed to observe the fact that

William J. Suter "Morcoin" Co., Ltd. was not a universal partnership,
but a particular one. As appears from Articles 1674 and 1675 of the
Spanish Civil Code, of 1889 (which was the law in force when the
subject firm was organized in 1947), a universal partnership requires
either that the object of the association be all the present property of
the partners, as contributed by them to the common fund, or else
"all that the partners may acquire by their industry or work during the
existence of the partnership". William J. Suter "Morcoin" Co., Ltd.
was not such a universal partnership, since the contributions of the
partners were fixed sums of money, P20,000.00 by William Suter and

The appellant's view, that by the marriage of both partners the

company became a single proprietorship, is equally erroneous. The
capital contributions of partners William J. Suter and Julia Spirig
were separately owned and contributed by them before their
marriage; and after they were joined in wedlock, such contributions
remained their respective separate property under the Spanish Civil
Code (Article 1396):
The following shall be the exclusive property of each spouse:

43

(a) That which is brought to the marriage as his or her

own; ....

dealings with its customers prior to appellee's marriage, and had

been filing its own income tax returns as such independent entity.
The change in its membership, brought about by the marriage of the
partners and their subsequent acquisition of all interest therein, is no
ground for withdrawing the partnership from the coverage of Section
24 of the tax code, requiring it to pay income tax. As far as the
records show, the partners did not enter into matrimony and
thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business
conduit to dodge the tax laws. Regularity, not otherwise, is
presumed.

Thus, the individual interest of each consort in William J. Suter

"Morcoin" Co., Ltd. did not become common property of both after
their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the
partnership has a juridical personality of its own, distinct and
separate from that of its partners (unlike American and English law
that does not recognize such separate juridical personality), the
bypassing of the existence of the limited partnership as a taxpayer
can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnership's
separate individuality makes it impossible to equate its income with
that of the component members. True, section 24 of the Internal
Revenue Code merges registered general co-partnerships
(compaias colectivas) with the personality of the individual partners
for income tax purposes. But this rule is exceptional in its disregard
of a cardinal tenet of our partnership laws, and can not be extended
by mere implication to limited partnerships.

As the limited partnership under consideration is taxable on its

income, to require that income to be included in the individual tax
return of respondent Suter is to overstretch the letter and intent of
the law. In fact, it would even conflict with what it specifically provides
in its Section 24: for the appellant Commissioner's stand results in
equal treatment, tax wise, of a general copartnership (compaia
colectiva) and a limited partnership, when the code plainly
differentiates the two. Thus, the code taxes the latter on its income,
but not the former, because it is in the case of compaias
colectivas that the members, and not the firm, are taxable in their
individual capacities for any dividend or share of the profit derived
from the duly registered general partnership (Section 26, N.I.R.C.;
Araas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 8889).

The rulings cited by the petitioner (Collector of Internal Revenue vs.

University of the Visayas, L-13554, Resolution of 30 October 1964,
and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for
disregarding the fiction of legal personality of the corporations
involved therein are not applicable to the present case. In the cited
cases, the corporations were already subject to tax when the fiction
of their corporate personality was pierced; in the present case, to do
so would exempt the limited partnership from income taxation but
would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely
served as business conduits or alter egos of the stockholders, a
factor that justified a disregard of their corporate personalities for tax
purposes. This is not true in the present case. Here, the limited
partnership is not a mere business conduit of the partner-spouses; it
was organized for legitimate business purposes; it conducted its own

lawphi1.nt

But it is argued that the income of the limited partnership is actually

or constructively the income of the spouses and forms part of the
conjugal partnership of gains. This is not wholly correct. As pointed
out in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register
of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna
become conjugal only when no longer needed to defray the
expenses for the administration and preservation of the paraphernal
capital of the wife. Then again, the appellant's argument erroneously
confines itself to the question of the legal personality of the limited
partnership, which is not essential to the income taxability of the

44

partnership since the law taxes the income of even joint accounts
that have no personality of their own. 1Appellant is, likewise, mistaken
in that it assumes that the conjugal partnership of gains is a taxable
unit, which it is not. What is taxable is the "income of both spouses"
(Section 45 [d] in their individual capacities. Though the amount of
income (income of the conjugal partnership vis-a-vis the joint income
of husband and wife) may be the same for a given taxable year, their
consequences would be different, as their contributions in the
business partnership are not the same.

The difference in tax rates between the income of the limited

partnership being consolidated with, and when split from the income
of the spouses, is not a justification for requiring consolidation; the
revenue code, as it presently stands, does not authorize it, and even
bars it by requiring the limited partnership to pay tax on its own
income.
FOR THE FOREGOING REASONS, the decision under review is
hereby affirmed. No costs.

45