Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-35469

March 17, 1932

E. S. LYONS, plaintiff-appellant,
vs.
C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.
Harvey & O'Brien for appellant.
DeWitt, Perkins & Brandy for appellee.
STREET, J.:
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C.
W. Rosenstock, as executor of the estate of H. W. Elser, deceased, consequent upon the taking of
an appeal by the executor from the allowance of the claim sued upon by the committee on claims in
said estate. The purpose of the action is to recover four hundred forty-six and two thirds shares of
the stock of J. K. Pickering & Co., Ltd., together with the sum of about P125,000, representing the
dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon hearing
the cause the trial court absolved the defendant executor from the complaint, and the plaintiff
appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where
he was engaged during the years with which we are here concerned in buying, selling, and
administering real estate. In several ventures which he had made in buying and selling property of
this kind the plaintiff, E. S. Lyons, had joined with him, the profits being shared by the two in equal
parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or missionary agent, of
the Methodist Episcopal Church, went on leave to the United States and was gone for nearly a year
and a half, returning on September 21, 1920. On the eve of his departure Elser made a written
statements showing that Lyons was, at that time, half owner with Elser of three particular pieces of
real property. Concurrently with this act Lyons execute in favor of Elser a general power of attorney
empowering him to manage and dispose of said properties at will and to represent Lyons fully and
amply, to the mutual advantage of both. During the absence of Lyons two of the pieces of property
above referred to were sold by Elser, leaving in his hands a single piece of property located at 616618 Carried Street, in the City of Manila, containing about 282 square meters of land, with the
improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000
square meters, near the City of Manila, and he discerned therein a fine opportunity for the promotion
and development of a suburban improvement. This property, which will be herein referred to as the
San Juan Estate, was offered by its owners for P570,000. To afford a little time for maturing his
plans, Elser purchased an option on this property for P5,000, and when this option was about to

expire without his having been able to raise the necessary funds, he paid P15,000 more for an
extension of the option, with the understanding in both cases that, in case the option should be
exercised, the amounts thus paid should be credited as part of the first payment. The amounts paid
for this option and its extension were supplied by Elser entirely from his own funds. In the end he
was able from his own means, and with the assistance which he obtained from others, to acquire
said estate. The amount required for the first payment was P150,000, and as Elser had available
only about P120,000, including the P20,000 advanced upon the option, it was necessary to raise the
remainder by obtaining a loan for P50,000. This amount was finally obtained from a Chinese
merchant of the city named Uy Siuliong. This loan was secured through Uy Cho Yee, a son of the
lender; and in order to get the money it was necessary for Elser not only to give a personal note
signed by himself and his two associates in the projected enterprise, but also by the Fidelity & Surety
Company. The money thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this
money and what he already had in bank Elser purchased the San Juan Estate on or about June 28,
1920. For the purpose of the further development of the property a limited partnership had, about
this time, been organized by Elser and three associates, under the name of J. K. Pickering &
Company; and when the transfer of the property was effected the deed was made directly to this
company. As Elser was the principal capitalist in the enterprise he received by far the greater
number of the shares issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be
induced to come in with him and supply part of the means necessary to carry the enterprise through.
In this connection it appears that on May 20, 1920, Elser wrote Lyons a letter, informing him that he
had made an offer for a big subdivision and that, if it should be acquired and Lyons would come in,
the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the first option
expired, Elser cabled Lyons that he had bought the San Juan Estate and thought it advisable for
Lyons to resign (Exhibit M-13), meaning that he should resign his position with the mission board in
New York. On the same date he wrote Lyons a letter explaining some details of the purchase, and
added "have advised in my cable that you resign and I hope you can do so immediately and will
come and join me on the lines we have so often spoken about. . . . There is plenty of business for us
all now and I believe we have started something that will keep us going for some time." In one or
more communications prior to this, Elser had sought to impress Lyons with the idea that he should
raise all the money he could for the purpose of giving the necessary assistance in future deals in real
estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him
averse from joining in the purchase of the San Juan Estate. In fact upon this visit of Lyons to the
United States a grave doubt had arisen as to whether he would ever return to Manila, and it was only
in the summer of 1920 that the board of missions of his church prevailed upon him to return to
Manila and resume his position as managing treasurer and one of its trustees. Accordingly, on June
21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new
project and adding that from the standpoint of making money, he had passed up a good thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay
out of this venture, was that the board of mission was averse to his engaging in business activities
other than those in which the church was concerned; and some of Lyons' missionary associates had
apparently been criticizing his independent commercial activities. This fact was dwelt upon in the

letter above-mentioned. Upon receipt of this letter Elser was of course informed that it would be out
of the question to expect assistance from Lyons in carrying out the San Juan project. No further
efforts to this end were therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his book
showed that he was indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to
Lyons from profits and earnings derived from other properties; and when the J. K. Pickering &
Company was organized and stock issued, Elser indorsed to Lyons 200 of the shares allocated to
himself, as he then believed that Lyons would be one of his associates in the deal. It will be noted
that the par value of these 200 shares was more than P8,000 in excess of the amount which Elser in
fact owed to Lyons; and when the latter returned to the Philippine Islands, he accepted these shares
and sold them for his own benefit. It seems to be supposed in the appellant's brief that the transfer of
these shares to Lyons by Elser supplies some sort of basis for the present action, or at least
strengthens the considerations involved in a feature of the case to be presently explained. This view
is manifestly untenable, since the ratification of the transaction by Lyons and the appropriation by
him of the shares which were issued to him leaves no ground whatever for treating the transaction
as a source of further equitable rights in Lyons. We should perhaps add that after Lyons' return to
the Philippine Islands he acted for a time as one of the members of the board of directors of the J. K.
Pickering & Company, his qualification for this office being derived precisely from the ownership of
these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that,
when Elser obtained the loan of P50,000 to complete the amount needed for the first payment on the
San Juan Estate, the lender, Uy Siuliong, insisted that he should procure the signature of the Fidelity
& Surety Co. on the note to be given for said loan. But before signing the note with Elser and his
associates, the Fidelity & Surety Co. insisted upon having security for the liability thus assumed by it.
To meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in
the property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June
30, 1920, at which time Elser expected that Lyons would come in on the purchase of the San Juan
Estate. But when he learned from the letter from Lyons of July 21, 1920, that the latter had
determined not to come into this deal, Elser began to cast around for means to relieve the Carriedo
property of the encumbrance which he had placed upon it. For this purpose, on September 9, 1920,
he addressed a letter to the Fidelity & Surety Co., asking it to permit him to substitute a property
owned by himself at 644 M. H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering &
Company, in lieu of the Carriedo property, as security. The Fidelity & Surety Co. agreed to the
proposition; and on September 15, 1920, Elser executed in favor of the Fidelity & Surety Co. a new
mortgage on the M. H. del Pillar property and delivered the same, with 1,000 shares of J. K.
Pickering & Company, to said company. The latter thereupon in turn executed a cancellation of the
mortgage on the Carriedo property and delivered it to Elser. But notwithstanding the fact that these
documents were executed and delivered, the new mortgage and the release of the old were never
registered; and on September 25, 1920, thereafter, Elser returned the cancellation of the mortgage
on the Carriedo property and took back from the Fidelity & Surety Co. the new mortgage on the M.
H. del Pilar property, together with the 1,000 shares of the J. K. Pickering & Company which he had
delivered to it.

The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had
arrived in Manila on September 21, 1920, and shortly thereafter, in the course of a conversation with
Elser told him to let the Carriedo mortgage remain on the property ("Let the Carriedo mortgage
ride"). Mrs. Elser testified to the conversation in which Lyons used the words above quoted, and as
that conversation supplies the most reasonable explanation of Elser's recession from his purpose of
relieving the Carriedo property, the trial court was, in our opinion, well justified in accepting as a
proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This
concession was not only reasonable under the circumstances, in view of the abundant solvency of
Elser, but in view of the further fact that Elser had given to Lyons 200 shares of the stock of the J. K.
Pickering & Co., having a value of nearly P8,000 in excess of the indebtedness which Elser had
owed to Lyons upon statement of account. The trial court found in effect that the excess value of
these shares over Elser's actual indebtedness was conceded by Elser to Lyons in consideration of
the assistance that had been derived from the mortgage placed upon Lyon's interest in the Carriedo
property. Whether the agreement was reached exactly upon this precise line of thought is of little
moment, but the relations of the parties had been such that it was to be expected that Elser would
be generous; and he could scarcely have failed to take account of the use he had made of the joint
property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of
P50,000 to Uy Siuliong on January 18, 1921, although it was not due until more than five months
later. It will thus be seen that the mortgaging of the Carriedo property never resulted in damage to
Lyons to the extent of a single cent; and although the court refused to allow the defendant to prove
the Elser was solvent at this time in an amount much greater than the entire encumbrance placed
upon the property, it is evident that the risk imposed upon Lyons was negligible. It is also plain that
no money actually deriving from this mortgage was ever applied to the purchase of the San Juan
Estate. What really happened was the Elser merely subjected the property to a contingent liability,
and no actual liability ever resulted therefrom. The financing of the purchase of the San Juan Estate,
apart from the modest financial participation of his three associates in the San Juan deal, was the
work of Elser accomplished entirely upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity
of redemption in the Carriedo property, Lyons, as half owner of said property, became, as it were,
involuntarily the owner of an undivided interest in the property acquired partly by that money; and it
is insisted for him that, in consideration of this fact, he is entitled to the four hundred forty-six and
two-thirds shares of J. K. Pickering & Company, with the earnings thereon, as claimed in his
complaint.
Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong
in the manner already explained had been used to held finance the purchase of the San Juan
Estate. He seems to have supposed that the Carried property had been mortgaged to aid in putting
through another deal, namely, the purchase of a property referred to in the correspondence as the
"Ronquillo property"; and in this connection a letter of Elser of the latter part of May, 1920, can be
quoted in which he uses this language:
As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part
of the money for Ronquillo buy (P60,000) if the owner comes through.

Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property,
and Lyons leads us to infer that he thought that the money obtained by mortgaging the Carriedo
property had been used in the purchase of this property. It doubtedless appeared so to him in the
retrospect, but certain consideration show that he was inattentive to the contents of the quotation
from the letter above given. He had already been informed that, although Elser was angling for the
Ronquillo property, its price had gone up, thus introducing a doubt as to whether he could get it; and
the quotation above given shows that the intended use of the money obtained by mortgaging the
Carriedo property was that only part of the P50,000 thus obtained would be used in this way, if the
deal went through. Naturally, upon the arrival of Lyons in September, 1920, one of his first inquiries
would have been, if he did not know before, what was the status of the proposed trade for the
Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something
to this effect;: "I have mortgaged the property on Carriedo Street, secured by my personal note. You
are amply protected. I wish you to join me in the San Juan Subdivision. Borrow all money you can."
Lyons says that no such cablegram was received by him, and we consider this point of fact of little
moment, since the proof shows that Lyons knew that the Carriedo mortgage had been executed, and
after his arrival in Manila he consented for the mortgage to remain on the property until it was paid
off, as shortly occurred. It may well be that Lyons did not at first clearly understand all the
ramifications of the situation, but he knew enough, we think, to apprise him of the material factors in
the situation, and we concur in the conclusion of the trial court that Elser did not act in bad faith and
was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If
Elser had used any money actually belonging to Lyons in this deal, he would under article 1724 of
the Civil Code and article 264 of the Code of Commerce, be obligated to pay interest upon the
money so applied to his own use. Under the law prevailing in this jurisdiction a trust does not
ordinarily attach with respect to property acquired by a person who uses money belonging to another
(Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual
relation of partnership had existed in the money used, the case might be difference; and much
emphasis is laid in the appellant's brief upon the relation of partnership which, it is claimed, existed.
But there was clearly no general relation of partnership, under article 1678 of the Civil Code. It is
clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed of
himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons a
participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and
the United States with reference to trust supply a basis for this action. The doctrines referred to
operate, however, only where money belonging to one person is used by another for the acquisition
of property which should belong to both; and it takes but little discernment to see that the situation
here involved is not one for the application of that doctrine, for no money belonging to Lyons or any
partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan
Estate. Of course, if any damage had been caused to Lyons by the placing of the mortgage upon the
equity of redemption in the Carriedo property, Elser's estate would be liable for such damage. But it
is evident that Lyons was not prejudice by that act.

The appellee insist that the trial court committed error in admitting the testimony of Lyons upon
matters that passed between him and Elser while the latter was still alive. While the admission of this
testimony was of questionable propriety, any error made by the trial court on this point was error
without injury, and the determination of the question is not necessary to this decision. We therefore
pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.
Avancea, C.J., Johnson, Malcolm, Villamor, Villa-Real and Imperial, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4935

May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA,

INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.
Araneta and Araneta for appellee.
Jose A. Buendia for appellant.
REYES, J.:
This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to
recover possesion of registered land situated in barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times with respect to the extent and description of the land
sought to be recovered. The original complaint described the land as a portion of a lot registered in
plaintiff's name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and
as containing an area of 13 hectares more or less. But the complaint was amended by reducing the
area of 6 hectares, more or less, after the defendant had indicated the plaintiff's surveyors the
portion of land claimed and occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiff's surveyors that a portion of the area was embraced in
another certificate of title, which was plaintiff's Transfer Certificate of Title No. 37677. And still later, in
the course of trial, after defendant's surveyor and witness, Quirino Feria, had testified that the area
occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again,
with the leave of court, amended its complaint to make its allegations conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive
and public and notorious possession (of land in dispute) under claim of ownership, adverse to the
entire world by defendant and his predecessor in interest" from "time in-memorial". The answer

further alleges that registration of the land in dispute was obtained by plaintiff or its predecessors in
interest thru "fraud or error and without knowledge (of) or interest either personal or thru publication
to defendant and/or predecessors in interest." The answer therefore prays that the complaint be
dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right
to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter
a monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.
Appealing directly to this court because of the value of the property involved, defendant makes the
following assignment or errors:
I. The trial court erred in not dismissing the case on the ground that the case was not brought
by the real property in interest.
II. The trial court erred in admitting the third amended complaint.
III. The trial court erred in denying defendant's motion to strike.
IV. The trial court erred in including in its decision land not involved in the litigation.
V. The trial court erred in holding that the land in dispute is covered by transfer certificates of
Title Nos. 37686 and 37677.
Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the
land.
VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount
of P132.62 monthly from January, 1940, until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant.
As to the first assigned error, there is nothing to the contention that the present action is not brought
by the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is
that an action be brought in the name of, but not necessarily by, the real party in interest. (Section 2,
Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in
the name of the plaintiff. That practice appears to have been followed in this case, since the
complaint is signed by the law firm of Araneta and Araneta, "counsel for plaintiff" and commences
with the statement "comes now plaintiff, through its undersigned counsel." It is true that the
complaint also states that the plaintiff is "represented herein by its Managing Partner Gregorio
Araneta, Inc.", another corporation, but there is nothing against one corporation being represented
by another person, natural or juridical, in a suit in court. The contention that Gregorio Araneta, Inc.
can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit, for the true rule is that "though a corporation has no power
to enter into a partnership, it may nevertheless enter into a joint venture with another where the

nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil
Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the
record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by
mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to evidence. When issues not raised by the pleadings are
tried by express or implied consent of the parties, they shall be treated in all respects, as if
they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made
upon motion of any party at my time, even of the trial of these issues. If evidence is objected
to at the trial on the ground that it is not within the issues made by the pleadings, the court
may allow the pleadings to be amended and shall be so freely when the presentation of the
merits of the action will be subserved thereby and the objecting party fails to satisfy the court
that the admission of such evidence would prejudice him in maintaining his action or defense
upon the merits. The court may grant a continuance to enable the objecting party to meet
such evidence.
Under this provision amendment is not even necessary for the purpose of rendering judgment on
issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in
this Rules of Court:
Under this section, American courts have, under the New Federal Rules of Civil Procedure,
ruled that where the facts shown entitled plaintiff to relief other than that asked for, no
amendment to the complaint is necessary, especially where defendant has himself raised the
point on which recovery is based, and that the appellate court treat the pleadings as
amended to conform to the evidence, although the pleadings were not actually amended. (I
Moran, Rules of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial,
that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red
pencil with the name Quirino Bolaos," defendant later changed his lawyer and also his theory and
tried to prove that the land in dispute was not covered by plaintiff's certificate of title. The evidence,
however, is against defendant, for it clearly establishes that plaintiff is the registered owner of lot No.
4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or
less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot
No. 4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less,
covered by transfer certificate of title No. 37677 of the land records of the same province, both lots
having been originally registered on July 8, 1914 under original certificate of title No. 735. The
identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino,
witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established
by the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses

clearly shows that the portion claimed by defendant is made up of a part of lot 4-B-3-C and major on
portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of title already
mentioned. This fact also appears admitted in defendant's answer to the third amended complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914,
the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice
to defendant, as more than one year has already elapsed from the issuance and entry of the decree.
Neither court the decree be collaterally attacked by any person claiming title to, or interest in, the
land prior to the registration proceedings. (Sorogonvs. Makalintal,1 45 Off. Gaz., 3819.) Nor could
title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or
adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under
claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge
of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure
possession under a decree of registration does not prescribed. (Francisco vs. Cruz, 43 Off. Gaz.,
5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose
Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.
As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should
be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.'
But it appears from the record that that reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied
by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore
be P132.62 a month. It is appears from the testimony of J. A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant. And
it cannot be supposed that defendant has been paying rents, for he has been asserting all along that
the premises in question 'have always been since time immemorial in open, continuous, exclusive
and public and notorious possession and under claim of ownership adverse to the entire world by
defendant and his predecessors in interest.' This assignment of error is thus clearly without merit.
Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.
During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to
dismiss alleging that there is pending before the Court of First Instance of Rizal another action
between the same parties and for the same cause and seeking to sustain that allegation with a copy
of the complaint filed in said action. But an examination of that complaint reveals that appellant's
allegation is not correct, for the pretended identity of parties and cause of action in the two suits
does not appear. That other case is one for recovery of ownership, while the present one is for
recovery of possession. And while appellant claims that he is also involved in that order action
because it is a class suit, the complaint does not show that such is really the case. On the contrary, it
appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of
others. The motion for dismissal is clearly without merit.
Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador, and Concepcion,
JJ., concur.

THIRD DIVISION
[G.R. No. 136448. November 3, 1999]
LIM

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

FISHING

GEAR

DECISION
PANGANIBAN, J.:

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

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court
on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing the unpaid price of the floats not covered
by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on
their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 andP68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration of the nets
during the pendency of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in

effect, the plaintiff attached its own properties. It [was] for this reason also that this
Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount
of P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not put up a single centavo to
raise the amount of P900,000.00 aside from the fact that they are not the owners of the
nets and floats. For this reason, the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation enumerated above and for
plaintiff to retain possession and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. [3]
The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory
to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit was brought against the three in their capacities as
general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent
corporation as shown by a Certification from the Securities and Exchange Commission. [5] On
September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of the

nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have
waived his right to cross-examine witnesses and to present evidence on his behalf, because of his
failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. [6] The trial
court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing
nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited with
the said court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing
Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.
[10]
The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in
the amount of P5,750,000.00 including the fishing net. ThisP5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or
Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit and
loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. By a contract of partnership, two or
more persons bind themselves to contribute money, property or industry to a common fund with
the intention of dividing the profits among themselves (Article 1767, New Civil Code).[13]
Hence, petitioner brought this recourse before this Court.[14]
The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A

COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM
ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT
EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING
FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE
NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
purchased from respondent, the Court must resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered into a partnership.
This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that
the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had
merely leased to the two the main asset of the purported partnership -- the fishing boatF/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower
courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:

Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao
and Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne
Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration
of nullity of commercial documents; (b) reformation of contracts; (c) declaration of
ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth P3.35 million,
financed by a loan secured from Jesus Lim who was petitioners brother. In their Compromise
Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss.These boats, the purchase
and the repair of which were financed with borrowed money, fell under the term common fund
under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had indeed
formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but
also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing,
were obviously acquired in furtherance of their business. It would have been inconceivable for
Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid
equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the
main assets of the partnership, and they agreed that the proceeds from the sales and operations
thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to the
rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes
beyond the bounds of a petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was entered into
only to end the dispute among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an embodiment of the
relationship extant among the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts have done so and have found, correctly, a
preexisting partnership among the parties. In implying that the lower courts have decided on the
basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC
delved into the history of the document and explored all the possible consequential combinations
in harmony with law, logic and fairness. Verily, the two lower courts factual findings mentioned
above nullified petitioners argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to
Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdeswhere the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to
the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor would do what petitioner did. Indeed, his consent to
the sale proved that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua
and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale of the boats, as well as the
division among the three of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an
asset of the partnership. It is not uncommon to register the properties acquired from a loan in the

name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the
brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship among the three of them was merely that of lessorlessee, instead of partners.
Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may
be estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for contracts
entered into or for other acts performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to be

sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred from denying
its corporate existence in a suit brought against the alleged corporation. In such case, all those
who benefited from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be
paid for the nets it sold. The only question here is whether petitioner should be held
jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only those who
dealt in the name of the ostensible corporation should be held liable. Since his name does not
appear on any of the contracts and since he never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the
boat which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to
be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said association and
is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the
Court in Alonso v. Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position , entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance

and chief enemy, deserves scant consideration from courts. There should be no vested
rights in technicalities.
Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his partners owed. The nets and the
floats were specifically manufactured and tailor-made according to their own design, and were
bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to
assure the payment of the price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full
payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Melo, (Chairman), Purisima, and Gonzaga-Reyes, JJ., concur.

THIRD DIVISION
AURELIO K. LITONJUA, JR.,
Petitioner,
- versus

G.R. NOS. 166299-300

Present:

EDUARDO K. LITONJUA,
SR., ROBERT T. YANG,
PANGANIBAN, J., Chairman
ANGLO PHILS. MARITIME,
INC., CINEPLEX, INC., DDM SANDOVAL- GUTIERREZ,
GARMENTS, INC., EDDIE K. CORONA,
CARPIO MORALES and

LITONJUA SHIPPING
GARCIA, JJ.
AGENCY, INC., EDDIE K.
LITONJUA SHIPPING CO.,
Promulgated:
INC., LITONJUA
SECURITIES, INC.
(formerly E. K. Litonjua
December 13, 2005
Sec), LUNETA THEATER,
INC., E & L REALTY,
(formerly E & L INTL
SHIPPING CORP.), FNP
CO., INC., HOME
ENTERPRISES, INC.,
BEAUMONT DEV. REALTY
CO., INC., GLOED LAND
CORP., EQUITY TRADING
CO., INC., 3D CORP., L
DEV. CORP, LCM
THEATRICAL
ENTERPRISES, INC.,
LITONJUA SHIPPING CO.
INC., MACOIL INC., ODEON
REALTY CORP., SARATOGA
REALTY, INC., ACT
THEATER INC. (formerly
General Theatrical & Film
Exchange, INC.), AVENUE
REALTY, INC., AVENUE
THEATER, INC. and LVF
PHILIPPINES, INC.,
(Formerly VF
PHILIPPINES),
Respondent
s.
x-------------------------------------------------x

DECISION
GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court,

petitioner Aurelio K. Litonjua, Jr. seeks to nullify and set aside the
Decision of the Court of Appeals (CA) dated March 31, 2004 [1] in
consolidated cases C.A. G.R. Sp. No. 76987 and C.A. G.R. SP. No
78774 and its Resolution dated December 07, 2004,[2] denying
petitioners motion for reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent
Eduardo K. Litonjua, Sr. (Eduardo) are brothers. The legal dispute
between them started when, on December 4, 2002, in the
Regional Trial Court (RTC) at Pasig City, Aurelio filed a suit against
his brother Eduardo and herein respondent Robert T. Yang (Yang)
and several corporations for specific performance and accounting.
In his complaint,[3] docketed as Civil Case No. 69235 and
eventually raffled to Branch 68 of the court, [4] Aurelio alleged that,
since June 1973, he and Eduardo are into a joint
venture/partnership arrangement in the Odeon Theater business
which had expanded thru investment in Cineplex, Inc., LCM
Theatrical Enterprises, Odeon Realty Corporation (operator of
Odeon I and II theatres), Avenue Realty, Inc., owner of lands and
buildings, among other corporations. Yang is described in the
complaint as petitioners and Eduardos partner in their Odeon
Theater investment.[5] The same complaint also contained the
following material averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a
joint venture/partnership for the continuation of their family business
and common family funds .
3.01.1 This joint venture/[partnership] agreement was contained in a
memorandum addressed by Eduardo to his siblings, parents and other
relatives. Copy of this memorandum is attached hereto and made an
integral part as Annex A and the portion referring to [Aurelio]
submarked as Annex A-1.

3.02 It was then agreed upon between [Aurelio] and Eduardo that in
consideration of [Aurelios] retaining his share in the remaining family
businesses (mostly, movie theaters, shipping and land development) and
contributing his industry to the continued operation of these businesses,
[Aurelio] will be given P1 Million or 10% equity in all these businesses
and those to be subsequently acquired by them whichever is greater. . . .
4.01 from 22 June 1973 to about August 2001, or [in] a span of 28 years,
[Aurelio] and Eduardo had accumulated in their joint venture/partnership
various assets including but not limited to the corporate defendants and
[their] respective assets.
4.02 In addition . . . the joint venture/partnership had also acquired
[various other assets], but Eduardo caused to be registered in the names
of other parties.
xxx xxx xxx
4.04 The substantial assets of most of the corporate defendants consist of
real properties . A list of some of these real properties is attached hereto
and made an integral part as Annex B.
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo
became sour so that [Aurelio] requested for an accounting and
liquidation of his share in the joint venture/partnership [but these
demands for complete accounting and liquidation were not heeded].
xxx xxx xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe that
Eduardo and/or the corporate defendants as well as Bobby [Yang], are
transferring . . . various real properties of the corporations belonging to
the joint venture/partnership to other parties in fraud of [Aurelio]. In
consequence, [Aurelio] is therefore causing at this time the annotation on
the titles of these real properties a notice of lis pendens .(Emphasis in the
original; underscoring and words in bracket added.)

For ease of reference, Annex A-1 of the complaint, which

petitioner asserts to have been meant for him by his brother
Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married. .
I am trying my best to mold you the way I work so you can follow the
pattern . You will be the only one left with the company, among us
brothers and I will ask you to stay as I want you to run this office every
time I am away. I want you to run it the way I am trying to run it because
I will be all alone and I will depend entirely to you (sic). My sons will
not be ready to help me yet until about maybe 15/20 years from now.
Whatever is left in the corporation, I will make sure that you get ONE
MILLION PESOS (P1,000,000.00) or ten percent (10%) equity,
whichever is greater. We two will gamble the whole thing of what I have
and what you are entitled to. . It will be you and me alone on this. If ever
I pass away, I want you to take care of all of this. You keep my share for
my two sons are ready take over but give them the chance to run the
company which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give you first
ONE HUNDRED THOUSANDS PESOS: (P100, 000.00) in cash or
asset, like Lt. Artiaga so you can live better there. The rest I will give
you in form of stocks which you can keep. This stock I assure you is
good and saleable. I will also gladly give you the share of Wack-Wack
and Valley Golf because you have been good. The rest will be in stocks
from all the corporations which I repeat, ten percent (10%) equity. [6]

On December 20, 2002, Eduardo and the corporate respondents,

as defendants a quo, filed a joint ANSWER With Compulsory
Counterclaim denying under oath the material allegations of the
complaint, more particularly that portion thereof depicting
petitioner and Eduardo as having entered into a contract of
partnership. As affirmative defenses, Eduardo, et al., apart from
raising a jurisdictional matter, alleged that the complaint states
no cause of action, since no cause of action may be derived from

the actionable document, i.e., Annex A-1, being void under the
terms of Article 1767 in relation to Article 1773 of the Civil
Code, infra. It is further alleged that whatever undertaking
Eduardo agreed to do, if any, under Annex A-1, are unenforceable
under the provisions of the Statute of Frauds. [7]
For his part, Yang - who was served with summons long after the
other defendants submitted their answer moved to dismiss on the
ground, inter alia, that, as to him, petitioner has no cause of
action and the complaint does not state any. [8] Petitioner opposed
this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve
Affirmative Defenses.[9] To this motion, petitioner interposed
an Opposition with ex-Parte Motion to Set the Case for Pre-trial. [10]
Acting on the separate motions immediately adverted to
above, the trial court, in an Omnibus Order dated March 5, 2003,
denied the affirmative defenses and, except for Yang, set the case
for pre-trial on April 10, 2003.[11]
In another Omnibus Order of April 2, 2003, the same court
denied the motion of Eduardo, et al., for reconsideration[12] and
Yangs motion to dismiss. The following then transpired insofar as
Yang is concerned:
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right
to seek reconsideration of the April 2, 2003 Omnibus Order and to pursue his failed
motion to dismiss[13] to its full resolution.
2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of
April 2, 2003, but his motion was denied in an Order of July 4, 2003. [14]
3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorari under Rule 65 of the Rules of Court, docketed asCA-G.R. SP No.
78774,[15] to nullify the separate orders of the trial court, the first denying his motion to
dismiss the basic complaint and, the second, denying his motion for reconsideration.

Earlier, Eduardo and the corporate defendants, on the

contention that grave abuse of discretion and injudicious haste
attended the issuance of the trial courts aforementioned Omnibus
Orders dated March 5, and April 2, 2003, sought relief from the
CA via similar recourse. Their petition for certiorari was docketed
as CA G.R. SP No. 76987.
Per its resolution dated October
14th Division ordered the consolidation
78774 with CA G.R. SP No. 76987.

2, 2003,[16] the CAs

of CA G.R. SP No.

Following the submission by the parties of their respective

Memoranda of Authorities, the appellate court came out with the
herein assailed Decision dated March 31, 2004, finding for
Eduardo and Yang, as lead petitioners therein, disposing as
follows:
WHEREFORE, judgment is hereby rendered granting the
issuance of the writ of certiorari in these consolidated cases annulling,
reversing and setting aside the assailed orders of the court a quo dated
March 5, 2003, April 2, 2003 and July 4, 2003 and the complaint filed by
private respondent [now petitioner Aurelio] against all the petitioners
[now herein respondents Eduardo, et al.] with the court a quo is
hereby dismissed.
SO ORDERED.[17] (Emphasis in the original; words in bracket added.)

Explaining its case disposition, the appellate court stated, inter

alia, that the alleged partnership, as evidenced by the actionable
documents, Annex A and A-1 attached to the complaint, and
upon which petitioner solely predicates his right/s allegedly
violated by Eduardo, Yang and the corporate defendants a
quo is void or legally inexistent.
In time, petitioner moved for reconsideration but his motion
was denied by the CA in its equally assailedResolution of
December 7, 2004.[18] .

Hence, petitioners present recourse, on the contention that the

CA erred:
A. When it ruled that there was no partnership created by the actionable
document because this was not a public instrument and immovable
properties were contributed to the partnership.
B. When it ruled that the actionable document did not create a
demandable right in favor of petitioner.
C. When it ruled that the complaint stated no cause of action against
[respondent] Robert Yang; and
D. When it ruled that petitioner has changed his theory on appeal when
all that Petitioner had done was to support his pleaded cause of action by
another legal perspective/argument.

The petition lacks merit.

Petitioners demand, as defined in the petitory portion of his
complaint in the trial court, is for delivery or payment to him, as
Eduardos and Yangs partner, of his partnership/joint venture
share, after an accounting has been duly conducted of what he
deems to be partnership/joint venture property. [19]
A partnership exists when two or more persons agree to
place their money, effects, labor, and skill in lawful commerce or
business, with the understanding that there shall be a
proportionate sharing of the profits and losses between them.
[20]
A contract of partnership is defined by the Civil Code as one
where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the
intention of dividing the profits among themselves. [21] A joint
venture, on the other hand, is hardly distinguishable from, and
may be likened to, a partnership since their elements are
similar, i.e., community of interests in the business and sharing

of profits and losses. Being a form of partnership, a joint venture

is generally governed by the law on partnership. [22]
The underlying issue that necessarily comes to mind in this
proceedings is whether or not petitioner and respondent Eduardo
are partners in the theatre, shipping and realty business, as one
claims but which the other denies. And the issue bearing on the
first assigned error relates to the question of what legal provision
is applicable under the premises, petitioner seeking, as it were, to
enforce the actionable document - Annex A-1 - which he depicts
in his complaint to be the contract of partnership/joint venture
between himself and Eduardo. Clearly, then, a look at the legal
provisions determinative of the existence, or defining the formal
requisites, of a partnership is indicated. Foremost of these are the
following provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where
immovable property or real rights are contributed thereto, in which case
a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three
thousand pesos or more, in money or property, shall appear in a public
instrument, which must be recorded in the Office of the Securities and
Exchange Commission.
Failure to comply with the requirement of the preceding paragraph shall
not affect the liability of the partnership and the members thereof to third
persons.
Art. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said property is not
made, signed by the parties, and attached to the public instrument.

Annex A-1,
personal in tone,
document, there
meet the public

on its face, contains typewritten entries,

but is unsigned and undated. As an unsigned
can be no quibbling that Annex A-1 does not
instrumentation requirements exacted under

Article 1771 of the Civil Code. Moreover, being unsigned and

doubtless referring to a partnership involving more than
P3,000.00 in money or property, Annex A-1 cannot be presented
for notarization, let alone registered with the Securities and
Exchange Commission (SEC), as called for under the Article 1772
of the Code. And inasmuch as the inventory requirement under
the succeeding Article 1773 goes into the matter of validity when
immovable property is contributed to the partnership, the next
logical point of inquiry turns on the nature of petitioners
contribution, if any, to the supposed partnership.
The CA, addressing the foregoing query, correctly stated that
petitioners contribution consisted of immovables and real rights.
Wrote that court:
A further examination of the allegations in the complaint would
show that [petitioners] contribution to the so-called partnership/joint
venture was his supposed share in the family business that is consisting
of movie theaters, shipping and land development under paragraph 3.02
of the complaint. In other words, his contribution as a partner in the
alleged partnership/joint venture consisted of immovable properties and
real rights. .[23]

Significantly enough, petitioner matter-of-factly concurred

with the appellate courts observation that, prescinding from what
he himself alleged in his basic complaint, his contribution to the
partnership consisted of his share in the Litonjua family
businesses which owned variable immovable properties.
Petitioners assertion in his motion for reconsideration [24] of the
CAs decision, that what was to be contributed to the business [of
the partnership] was [petitioners] industry and his share in the
family [theatre and land development] business leaves no room
for speculation as to what petitioner contributed to the perceived
partnership.
Lest it be overlooked, the contract-validating inventory
requirement under Article 1773 of the Civil Code applies as long

real property or real rights are initially brought into the

partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his brother
Eduardo, contributed immovables. In context, the more important
consideration is that real property was contributed, in which case
an inventory of the contributed property duly signed by the
parties should be attached to the public instrument, else there is
legally no partnership to speak of.
Petitioner, in an obvious bid to evade the application of
Article 1773, argues that the immovables in question were not
contributed, but were acquired after the formation of the
supposed partnership. Needless to stress, the Court cannot
accord cogency to this specious argument. For, as earlier stated,
petitioner himself admitted contributing his share in the supposed
shipping, movie theatres and realty development family
businesses which already owned immovables even before
Annex A-1 was allegedly executed.
Considering thus the value and nature of petitioners alleged
contribution to the purported partnership, the Court, even if so
disposed, cannot plausibly extend Annex A-1 the legal effects
that petitioner so desires and pleads to be given. Annex A-1, in
fine, cannot support the existence of the partnership sued upon
and sought to be enforced. The legal and factual milieu of the
case calls for this disposition. A partnership may be constituted in
any form, save when immovable property or real rights are
contributed thereto or when the partnership has a capital of at
least P3,000.00, in which case a public instrument shall be
necessary.[25] And if only to stress what has repeatedly been
articulated, an inventory to be signed by the parties and attached
to the public instrument is alsoindispensable to the validity of the
partnership whenever immovable property is contributed to it.

Given the foregoing perspective, what the appellate court

wrote in its assailed Decision [26] about the probative value and
legal effect of Annex A-1 commends itself for concurrence:
Considering that the allegations in the complaint showed that [petitioner]
contributed immovable properties to the alleged partnership, the Memorandum
(Annex A of the complaint) which purports to establish the said
partnership/joint venture is NOT a public instrument and there was NO
inventory of the immovable property duly signed by the parties. As such, the
said Memorandum is null and void for purposes of establishing the existence of
a valid contract of partnership. Indeed, because of the failure to comply with
the essential formalities of a valid contract, the purported partnership/joint
venture is legally inexistent and it produces no effect whatsoever. Necessarily, a
void or legally inexistent contract cannot be the source of any contractual or
legal right. Accordingly, the allegations in the complaint, including the
actionable document attached thereto, clearly demonstrates that [petitioner] has
NO valid contractual or legal right which could be violated by the [individual
respondents] herein. As a consequence, [petitioners] complaint does NOT state
a valid cause of action because NOT all the essential elements of a cause of
action are present. (Underscoring and words in bracket added.)

Likewise well-taken are the following complementary excerpts

from the CAs equally assailed Resolution of December 7,
2004[27] denying petitioners motion for reconsideration:
Further, We conclude that despite glaring defects in the allegations in the
complaint as well as the actionable document attached thereto (Rollo, p.
191), the [trial] court did not appreciate and apply the legal provisions
which were brought to its attention by herein [respondents] in the their
pleadings. In our evaluation of [petitioners] complaint, the latter
alleged inter alia to have contributed immovable properties to the
alleged partnership but the actionable document is not a public document
and there was no inventory of immovable properties signed by the
parties. Both the allegations in the complaint and the actionable
documents considered, it is crystal clear that [petitioner] has no valid or
legal right which could be violated by [respondents]. (Words in bracket
added.)

Under the second assigned error, it is petitioners posture that

Annex A-1, assuming its inefficacy or nullity as a partnership
document, nevertheless created demandable rights in his
favor. As petitioner succinctly puts it in this petition:
43. Contrariwise, this actionable document, especially its above-quoted
provisions, established an actionable contract even though it may not be
a partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).
44. It may not be a contract of loan, or a mortgage or whatever, but surely the
contract does create rights and obligations of the parties and which rights
and obligations may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically labeled or
pigeonholed into a category of nominate contract does not mean it is
void or unenforceable.
Petitioner has thus thrusted the notion of an innominate contract
on this Court - and earlier on the CA after he experienced a
reversal of fortune thereat - as an afterthought. The appellate
court, however, cannot really be faulted for not yielding to
petitioners dubious stratagem of altering his theory of joint
venture/partnership to an innominate contract. For, at bottom, the
appellate courts certiorari jurisdiction was circumscribed by what
was alleged to have been the order/s issued by the trial court in
grave abuse of discretion. As respondent Yang pointedly
observed,[28] since the parties basic position had been welldefined, that of petitioner being that the actionable document
established a partnership/joint venture, it is on those positions
that the appellate court exercised its certiorari jurisdiction.
Petitioners act of changing his original theory is an impermissible
practice and constitutes, as the CA aptly declared, an admission
of the untenability of such theory in the first place.
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance,
he has now contended that the actionable instrument may be considered
an innominate contract. xxx Verily, this now changes [petitioners]
theory of the case which is not only prohibited by the Rules but also is

an implied admission that the very theory he himself has adopted, filed
and prosecuted before the respondent court is erroneous.
Be that as it may . . We hold that this new theory contravenes [petitioners]
theory of the actionable document being a partnership document. If
anything, it is so obvious we do have to test the sufficiency of the cause
of action on the basis of partnership law xxx. [29] (Emphasis in the
original; Words in bracket added).

But even assuming in gratia argumenti that Annex A-1 partakes

of a perfected innominate contract, petitioners complaint would
still be dismissible as against Eduardo and, more so, against Yang.
It cannot be over-emphasized that petitioner points to Eduardo as
the author of Annex A-1. Withal, even on this consideration alone,
petitioners claim against Yang is doomed from the very start.
As it were, the only portion of Annex A-1 which could perhaps be
remotely regarded as vesting petitioner with a right to demand
from respondent Eduardo the observance of a determinate
conduct, reads:
xxx You will be the only one left with the company, among us brothers and I
will ask you to stay as I want you to run this office everytime I am away.
I want you to run it the way I am trying to run it because I will be alone
and I will depend entirely to you, My sons will not be ready to help me
yet until about maybe 15/20 years from now. Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater.
(Underscoring added)

It is at once apparent that what respondent Eduardo imposed

upon himself under the above passage, if he indeed wrote
Annex A-1, is a promise which is not to be performed within
one year from contract execution on June 22, 1973.
Accordingly, the agreement embodied in Annex A-1 is
covered by the Statute of Frauds and ergounenforceable for
non-compliance therewith.[30] By force of the statute of

frauds, an agreement that by its terms is not to be

performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the
party charged. Corollarily, no action can be proved unless
the requirement exacted by the statute of frauds is complied
with.[31]
Lest it be overlooked, petitioner is the intended beneficiary of the
P1 Million or 10% equity of the family businesses supposedly
promised by Eduardo to give in the near future. Any
suggestion that the stated amount or the equity component
of the promise was intended to go to a common fund would
be to read something not written in Annex A-1. Thus, even
this angle alone argues against the very idea of a
partnership, the creation of which requires two or more
contracting minds mutually agreeing to contribute money,
property or industryto a common fund with the intention of
dividing the profits between or among themselves. [32]
In sum then, the Court rules, as did the CA, that petitioners
complaint for specific performance anchored on an actionable
document of partnership which is legally inexistent or void or, at
best, unenforceable does not state a cause of action as against
respondent Eduardo and the corporate defendants. And if no of
action can successfully be maintained against respondent
Eduardo because no valid partnership existed between him and
petitioner, the Court cannot see its way clear on how the same
action could plausibly prosper against Yang. Surely, Yang could
not have become a partner in, or could not have had any form of
business relationship with, an inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide the
logical nexus that would tie Yang to him as his partner. In fact,
attendant circumstances would indicate the contrary. Consider :
1. Petitioner asserted in his complaint that his so-called joint
venture/partnership with Eduardo was for the continuation of their family

business and common family funds which were theretofore being mainly
managed by Eduardo. [33] But Yang denies kinship with the Litonjua family and
petitioner has not disputed the disclaimer.
2. In some detail, petitioner mentioned what he had contributed to the joint
venture/partnership with Eduardo and what his share in the businesses will be.
No allegation is made whatsoever about what Yang contributed, if any, let alone
his proportional share in the profits. But such allegation cannot, however, be
made because, as aptly observed by the CA, the actionable document did not
contain such provision, let alone mention the name of Yang. How, indeed,
could a person be considered a partner when the document purporting to
establish the partnership contract did not even mention his name.
3. Petitioner states in par. 2.01 of the complaint that [he] and Eduardo are
business partners in the [respondent] corporations, while Bobby is his and
Eduardos partner in their Odeon Theater investment (par. 2.03). This means
that the partnership between petitioner and Eduardo came first; Yang became
their partner in their Odeon Theater investment thereafter. Several paragraphs
later, however, petitioner would contradict himself by alleging that his
investment and that of Eduardo and Yang in the Odeon theater business has
expanded through a reinvestment of profit income and direct investments in
several corporation including but not limited to [six] corporate respondents
This simply means that the Odeon Theatre business came before the corporate
respondents. Significantly enough, petitioner refers to the corporate
respondents as progeny of the Odeon Theatre business. [34]

Needless to stress, petitioner has not sufficiently established in

his complaint the legal vinculum whence he sourced his right to
drag Yang into the fray. The Court of Appeals, in its assailed
decision, captured and formulated the legal situation in the
following wise:
[Respondent] Yang, is impleaded because, as alleged in the complaint, he
is a partner of [Eduardo] and the [petitioner] in the Odeon Theater
Investment which expanded through reinvestments of profits and direct
investments in several corporations, thus:
xxx xxx xxx

Clearly, [petitioners] claim against Yang arose from his alleged

partnership with petitioner and the respondent. However, there was NO
allegation in the complaint which directly alleged how the supposed
contractual relation was created between [petitioner] and Yang. More
importantly, however, the foregoing ruling of this Court that the
purported partnership between [Eduardo] is void and legally inexistent
directly affects said claim against Yang. Since [petitioner] is trying to
establish his claim against Yang by linking him to the legally inexistent
partnership . . . such attempt had become futile because there was
NOTHING that would contractually connect [petitioner] and Yang. To
establish a valid cause of action, the complaint should have a statement
of fact upon which to connect [respondent] Yang to the alleged
partnership between [petitioner] and respondent [Eduardo], including
their alleged investment in the Odeon Theater. A statement of facts on
those matters is pivotal to the complaint as they would constitute the
ultimate facts necessary to establish the elements of a cause of action
against Yang. [35]

Pressing its point, the CA later stated in its resolution

denying petitioners motion for reconsideration the following :
xxx Whatever the complaint calls it, it is the actionable document
attached to the complaint that is controlling. Suffice it to state, We have
not ignored the actionable document As a matter of fact, We emphasized
in our decision that insofar as [Yang] is concerned, he is not even
mentioned in the said actionable document. We are therefore puzzled
how a person not mentioned in a document purporting to establish a
partnership could be considered a partner.[36] (Words in bracket ours).

The last issue raised by petitioner, referring to whether or

not he changed his theory of the case, as peremptorily
determined by the CA, has been discussed at length earlier and
need not detain us long. Suffice it to say that after the CA has
ruled that the alleged partnership is inexistent, petitioner took a
different tack. Thus, from a joint venture/partnership theory which
he adopted and consistently pursued in his complaint, petitioner
embraced the innominate contract theory. Illustrative of this shift
is petitioners statement in par. #8 of his motion for

reconsideration of the CAs decision combined with what he said in

par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership,
joint venture, or whatever, is a legal matter. What is determinative for
purposes of sufficiency of the complainants allegations, is whether the
actionable document bears out an actionable contract be it a partnership,
a joint venture or whatever or some innominate contract It may be noted
that one kind of innominate contract is what is known as du ut facias (I
give that you may do).[37]
43. Contrariwise, this actionable document, especially its abovequoted provisions, established an actionable contract even though it may
not be a partnership. This actionable contract is what is known as an
innominate contract (Civil Code, Article 1307). [38]

Springing surprises on the opposing party is offensive to the

sporting idea of fair play, justice and due process; hence, the
proscription against a party shifting from one theory at the trial
court to a new and different theory in the appellate court. [39] On
the same rationale, an issue which was neither averred in the
complaint cannot be raised for the first time on appeal. [40] It is not
difficult, therefore, to agree with the CA when it made short shrift
of petitioners innominate contract theory on the basis of the
foregoing basic reasons.
Petitioners protestation that his act of introducing the concept of
innominate contract was not a case of changing theories but of
supporting his pleaded cause of action that of the existence of a
partnership - by another legal perspective/argument, strikes the
Court as a strained attempt to rationalize an untenable position.
Paragraph 12 of his motion for reconsideration of the CAs decision
virtually relegates partnership as a fall-back theory. Two
paragraphs later, in the same notion, petitioner faults the
appellate court for reading, with myopic eyes, the actionable
document solely as establishing a partnership/joint venture.
Verily, the cited paragraphs are a study of a party hedging on

whether or not to pursue the original cause of action or altogether

abandoning the same, thus:
12. Incidentally, assuming that the actionable document created a partnership
between [respondent] Eduardo, Sr. and [petitioner], no immovables were
contributed to this partnership. xxx
14. All told, the Decision takes off from a false premise that the
actionable document attached to the complaint does not establish a
contractual relationship between [petitioner] and Eduardo, Sr. and
Roberto T Yang simply because his document does not create a
partnership or a joint venture. This is a myopic reading of the actionable
document.

Per the Courts own count, petitioner used in his complaint the
mixed words joint venture/partnership nineteen (19) times and
the term partner four (4) times. He made reference to the law of
joint venture/partnership [being applicable] to the business
relationship between [him], Eduardo and Bobby [Yang] and to
his rights
in
all
specific
properties
of
their
joint
venture/partnership. Given this consideration, petitioners right of
action against respondents Eduardo and Yang doubtless pivots on
the existence of the partnership between the three of them, as
purportedly evidenced by the undated and unsigned Annex A-1.
A void Annex A-1, as an actionable document of partnership,
would strip petitioner of a cause of action under the premises. A
complaint for delivery and accounting of partnership property
based on such void or legally non-existent actionable document is
dismissible for failure to state of action. So, in gist, said the Court
of Appeals. The Court agrees.
WHEREFORE, the instant petition is DENIED and the impugned
Decision and Resolution of the Court of AppealsAFFIRMED.
Cost against the petitioner.
SO ORDERED.

THIRD DIVISION
[G.R. No. 112675. January 25, 1999]
AFISCO
INSURANCE
CORPORATION;
CCC
INSURANCE
CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY;
CONSOLIDATED
INSURANCE
CO.,
INC.;
DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES;
EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE
INSURANCE
COMPANY;
EQUITABLE
INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION INC.;
FGU INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE
SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH
INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN INSURANCE COMPANY; METRO-TAISHO
INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO.,
LTD.;
PAN-MALAYAN
INSURANCE
CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLES TRANSEAST ASIA INSURANCE CORPORATION; PERLACOMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.;
PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE
CORPORATION;
PROVIDENT
INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO.,
INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL
SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO.,
INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY &
INSURANCE CO., INC.; STATE BONDING & INSURANCE CO.,
INC.; SUMMA INSURANCE CORPORATION; TABACALERA

INSURANCE
CO.,
INC.all
assessed
as
POOL
OF
MACHINERY INSURERS, petitioners, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
PANGANIBAN, J.:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company. May the clearing house or insurance pool so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal Revenue
Code (NIRC)? Should the pools remittances to the member companies and to the said foreign
firm be taxable as dividends? Under the facts of this case, has the governments right to assess
and collect said tax prescribed?
The Case

These are the main questions raised in the Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which
dismissed petitioners appeal of the October 19, 1992 Decision[3] of the Court of Tax
Appeals[4] (CTA) which had previously sustained petitioners liability for deficiency income tax,
interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioners. [5]

The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying reconsideration.
The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The

reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool

composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and
filed an Information Return of Organization Exempt from Income Tax for the year
ending in 1975, on the basis of which it was assessed by the Commissioner of Internal
Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding
taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich
and to the petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency
income tax, interest, and with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich
Reinsurance Company P3,728,412.00
===========
35% withholding tax at

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penaltynon-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00
===========
10% withholding tax at
source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penaltynon-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68

COLLECTIBLE ===========[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the
address given in the information return filed. Hence, this Petition for Review before us.[9]
The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name,
was a partnership or association subject to tax as a corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of their respective
shares of reinsurance premiums, pertaining to their individual and separate contracts
of reinsurance, were dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House
had already prescribed.[10]
The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
prescribed.
First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point out
that the reinsurance policies were written by them individually and separately, and that their
liability was limited to the extent of their allocated share in the original risks thus reinsured.
[11]
Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited to its principal
function of allocating and distributing the risk(s) arising from the original insurance among the
signatories to the treaty or the members of the pool based on their ability to absorb the risk(s)

ceded[;] as well as the performance of incidental functions, such as records, maintenance,

collection and custody of funds, etc.[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers,
did not share the same risk or solidary liability; [14] (2)there was no common fund;[15] (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation;[16] and (4) the pool or clearing house was not and could not
possibly have engaged in the business of reinsurance from which it could have derived income
for itself.[17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue,
the agency tasked with the enforcement of tax laws, is accorded much weight and even finality,
when there is no showing that it is patently wrong, [18] particularly in this case where the findings
and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals.[19] Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
its authority.[20]
This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of the
NIRC, as worded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is
hereby imposed upon the taxable net income received during each taxable year from
all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or
organized,but not including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and
building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRCs inclusion of such entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997,[21]which amended the Tax Code. Pertinent provisions of the new law read as
follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. -(A) In General. -- Except as otherwise provided in this Code, an income tax of thirtyfive percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation,
as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation
xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which had no
legal personalities apart from their individual members.[23] The Court of Appeals astutely
appliedEvangelista:[24]

xxx Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the Tax
Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on. * * * (8 Mertens Law of Federal
Income Taxation, p. 562 Note 63)

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two
or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.[25] Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits. [26] In other words, a
partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves. [27] Meanwhile, an
association implies associates who enter into a joint enterprise x x x for the transaction of
business.[28]
In the case before us, the ceding companies entered into a Pool Agreement [29] or an
association[30] that would handle all the insurance businesses covered under their quota-share
reinsurance treaty[31] and surplus reinsurance treaty[32]with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.[33] This common fund pays for the
administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums.The ceding companies share in the business ceded to
the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement.[36] Profit motive or business is, therefore, the primordial reason for the
pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business. x x x If together they have conducted business, profit
must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that
profit actually resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts
obtaining therein are not on all fours with the present case.In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions. [39] The

Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:

Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the same
taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends. [41] They add
that even if such remittances were treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and
Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice
when it should be taxed only once. That is, xxx taxing the same person twice by the same
jurisdiction for the same thing.[46] In the instant case, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right. [47] Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as
their own.
On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a

foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties which required
the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3 [49] and 10[50] of the Quota Share Reinsurance
Treaty and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty. The foregoing interpretation
of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for
corporate taxes on the basis of the information return it had submitted for the year ending 1975, a
taxable year when said treaty was not yet in effect.[54] Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984.[55]
Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC,[57] because the taxpayer
cannot be located at the address given in the information return filed and for which reason there
was delay in sending the assessment.[58] Indeed, whether the governments right to collect and
assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return filed
in 1980 indicated therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law

clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are herebyAFFIRMED. Costs against petitioners.
SO ORDERED.
Romero, (Chairman), Vitug, Purisima, and Gonzaga-

\
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees,

vs.
VICENTE POLISTICO, ET AL., defendants-appellants.
Marcelino Lontok and Manuel dela Rosa for appellants.
Sumulong & Lavides for appellees.
VILLAMOR, J.:
This is an action to bring about liquidation of the funds and property of the association called
"Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants were
designated as president-treasurer, directors and secretary of said association.
It is well to remember that this case is now brought before the consideration of this court for the
second time. The first one was when the same plaintiffs appeared from the order of the court below
sustaining the defendant's demurrer, and requiring the former to amend their complaint within a
period, so as to include all the members of "Turnuhan Polistico & Co.," either as plaintiffs or as a
defendants. This court held then that in an action against the officers of a voluntary association to
wind up its affairs and enforce an accounting for money and property in their possessions, it is not
necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico,
47 Phil., 345.) The case having been remanded to the court of origin, both parties amend,
respectively, their complaint and their answer, and by agreement of the parties, the court appointed
Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to examine all the books,
documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the
parties might desire to present.
The commissioner rendered his report, which is attached to the record, with the following resume:

Income:

Member's shares............................

97,263.70

Credits paid................................

6,196.55

Interest received...........................

4,569.45

Miscellaneous...............................

1,891.00

P109,620.70

Expenses:

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

68,146.25

Loans on real-estate.......................

9,827.00

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

4,258.55

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

1,095.00

Miscellaneous...............................

1,686.10

85,012.90

Cash on hand........................................

24,607.80

The defendants objected to the commissioner's report, but the trial court, having examined the
reasons for the objection, found the same sufficiently explained in the report and the evidence, and
accepting it, rendered judgment, holding that the association "Turnuhan Polistico & Co." is unlawful,
and sentencing the defendants jointly and severally to return the amount of P24,607.80, as well as
the documents showing the uncollected credits of the association, to the plaintiffs in this case, and to
the rest of the members of the said association represented by said plaintiffs, with costs against the
defendants.
The defendants assigned several errors as grounds for their appeal, but we believe they can all be
reduced to two points, to wit: (1) That not all persons having an interest in this association are
included as plaintiffs or defendants; (2) that the objection to the commissioner's report should have
been admitted by the court below.
As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants,
we are of opinion that, the trial court having examined all the evidence touching the grounds for the
objection and having found that they had been explained away in the commissioner's report, the
conclusion reached by the court below, accepting and adopting the findings of fact contained in said
report, and especially those referring to the disposition of the association's money, should not be
disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts
made by a referee appointed under the provisions of section 135 of the Code of Civil Procedure
stand upon the same basis, when approved by the Court, as findings made by the judge himself.
And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under section 140 of the
Code of Civil Procedure it is made the duty of the court to render judgment in accordance with the
report of the referee unless the court shall unless for cause shown set aside the report or recommit it
to the referee. This provision places upon the litigant parties of the duty of discovering and exhibiting
to the court any error that may be contained therein." The appellants stated the grounds for their
objection. The trial examined the evidence and the commissioner's report, and accepted the findings
of fact made in the report. We find no convincing arguments on the appellant's brief to justify a
reversal of the trial court's conclusion admitting the commissioner's findings.
There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39
Phil., 962), but the appellants allege that because it is so, some charitable institution to whom the
partnership funds may be ordered to be turned over, should be included, as a party defendant. The
appellants refer to article 1666 of the Civil Code, which provides:
A partnership must have a lawful object, and must be established for the common benefit of
the partners.

When the dissolution of an unlawful partnership is decreed, the profits shall be given to
charitable institutions of the domicile of the partnership, or, in default of such, to those of the
province.
Appellant's contention on this point is untenable. According to said article, no charitable institution is
a necessary party in the present case of determination of the rights of the parties. The action which
may arise from said article, in the case of unlawful partnership, is that for the recovery of the
amounts paid by the member from those in charge of the administration of said partnership, and it is
not necessary for the said parties to base their action to the existence of the partnership, but on the
fact that of having contributed some money to the partnership capital. And hence, the charitable
institution of the domicile of the partnership, and in the default thereof, those of the province are not
necessary parties in this case. The article cited above permits no action for the purpose of obtaining
the earnings made by the unlawful partnership, during its existence as result of the business in
which it was engaged, because for the purpose, as Manresa remarks, the partner will have to base
his action upon the partnership contract, which is to annul and without legal existence by reason of
its unlawful object; and it is self evident that what does not exist cannot be a cause of action. Hence,
paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is
decreed, the profits cannot inure to the benefit of the partners, but must be given to some charitable
institution.
We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear
explanation of the scope and spirit of the provision of the Civil Code which we are concerned.
Commenting on said article Manresa, among other things says:
When the subscriptions of the members have been paid to the management of the
partnership, and employed by the latter in transactions consistent with the purposes of the
partnership may the former demand the return of the reimbursement thereof from the
manager or administrator withholding them?
Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered
juridically non-existent, the contract entered into can have no legal effect; and in that case,
how can it give rise to an action in favor of the partners to judicially demand from the
manager or the administrator of the partnership capital, each one's contribution?
The authors discuss this point at great length, but Ricci decides the matter quite clearly,
dispelling all doubts thereon. He holds that the partner who limits himself to demanding only
the amount contributed by him need not resort to the partnership contract on which to base
his action. And he adds in explanation that the partner makes his contribution, which passes
to the managing partner for the purpose of carrying on the business or industry which is the
object of the partnership; or in other words, to breathe the breath of life into a partnership
contract with an objection forbidden by law. And as said contrast does not exist in the eyes of
the law, the purpose from which the contribution was made has not come into existence, and
the administrator of the partnership holding said contribution retains what belongs to
others, without any consideration; for which reason he is not bound to return it and he who
has paid in his share is entitled to recover it.
But this is not the case with regard to profits earned in the course of the partnership,
because they do not constitute or represent the partner's contribution but are the result of the
industry, business or speculation which is the object of the partnership, and therefor, in order
to demand the proportional part of the said profits, the partner would have to base his action
on the contract which is null and void, since this partition or distribution of the profits is one of
the juridical effects thereof. Wherefore considering this contract asnon-existent, by reason of

its illicit object, it cannot give rise to the necessary action, which must be the basis of the
judicial complaint. Furthermore, it would be immoral and unjust for the law to permit a profit
from an industry prohibited by it.
Hence the distinction made in the second paragraph of this article of this Code, providing
that the profits obtained by unlawful means shall not enrich the partners, but shall upon the
dissolution of the partnership, be given to the charitable institutions of the domicile of the
partnership, or, in default of such, to those of the province.
This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of
the former law, which did not describe the purpose to which those profits denied the partners
were to be applied, nor state what to be done with them.
The profits are so applied, and not the contributions, because this would be an excessive
and unjust sanction for, as we have seen, there is no reason, in such a case, for depriving
the partner of the portion of the capital that he contributed, the circumstances of the two
cases being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful partnership, the
amounts contributed are to be returned by the partners, because it only deals with the
disposition of the profits; but the fact that said contributions are not included in the disposal
prescribed profits, shows that in consequences of said exclusion, the general law must be
followed, and hence the partners should reimburse the amount of their respective
contributions. Any other solution is immoral, and the law will not consent to the latter
remaining in the possession of the manager or administrator who has refused to return them,
by denying to the partners the action to demand them. (Manresa, Commentaries on the
Spanish Civil Code, vol. XI, pp. 262-264)
The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with
costs against the appellants; provided, however, the defendants shall pay the legal interest on the
sum of P24,607.80 from the date of the decision of the court, and provided, further, that the
defendants shall deposit this sum of money and other documents evidencing uncollected credits in
the office of the clerk of the trial court, in order that said court may distribute them among the
members of said association, upon being duly identified in the manner that it may deem proper. So
ordered.
Avancea, C.J., Johnson, Street, Johns, Romualdez, and Villa-Real, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

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

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and

compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the

decision of the respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in question, with costs against
the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to
the tax on corporations, the issue hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compaias
colectivas), a tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations or
insurance companies, but does not include duly registered general copartnerships.
(compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
properly, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property

acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945
to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus,
the affairs relative to said properties have been handled as if the same belonged to a
corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" which are
possessed of the aforementioned personality have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person even if true, on which we express no opinion tends

to increase the similarity between the nature of their venture and that corporations, and is, therefore,
an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, jointstock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is
created by an agreement, a declaration of trust, a statute, or otherwise. It includes a
voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name known) which
is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562
Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation."It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:
Entities liable to residence tax.-Every corporation, no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how
created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with
express purpose of engaging in real estate business for profit. The series of transactions which they
had undertaken attest to this. This appears in the following portion of the decision:
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. On April 3, 1944, they purchase 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state
for P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner in February,
1943, In other words, we cannot but perceive a character of habitually peculiar
to business transactions engaged in for purposes of gain.
I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish partnership, whether or not the
person sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co-ownership shared or do
not share any profits made by the use of 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 judicial
personality different from that of the individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain the
title to their respective contribution, are not thereby rendered partners. They have no
common stock or capital, and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the law of Partnership by Floyd R.
Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in respect
thereto; nor does not agreement to share the profits and loses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S
Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiff's commissions, no partnership existed as between
the parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N.
E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same;
(b) generally a participating in both profits and losses; (c) and such a community of interest,
as far as third persons are concerned as enables each party to make contract, manage the
business, and dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067,
50 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for 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.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances (referring to the series of transactions) such as to leave no room for doubt on
the existence of said intent in petitioners herein."

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents

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.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed
of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as distinguished from profits derived from
the partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities

but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA
Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated 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.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA
CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA
CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental

income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to
the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (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.
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:
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. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several
persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way
of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon 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.
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.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became coowners thereof.
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.
In Evangelista, the properties were leased out to tenants for several years. The business was under
the management of one of the partners. Such condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common
does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside
from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence
of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who

severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of
the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142
U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the 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) and such a community
of interest, as far as third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole property.-Municipal Paving
Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross 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.
And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as

petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they
are thereby relieved of any further tax liability arising therefrom.

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.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION

HEIRS OF JOSE LIM,

represented by ELENITO LIM,
Petitioners,

- versus -

G.R. No. 172690

Present:
CORONA, J.,
Chairperson,
VELASCO, JR.,
NACHURA,
DEL CASTILLO,* and
MENDOZA, JJ.
Promulgated:

JULIET VILLA LIM,

Respondent.

March 3, 2010

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the
Rules of Civil Procedure, assailing the Court of Appeals (CA) Decision [2] dated
June 29, 2005, which reversed and set aside the decision [3] of the Regional Trial
Court (RTC) ofLucena City, dated April 12, 2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow
Cresencia Palad (Cresencia); and their children Elenito, Evelia, Imelda, Edelyna
and Edison, all surnamed Lim (petitioners), represented by Elenito Lim (Elenito).
They filed a Complaint[4]for Partition, Accounting and Damages against respondent
Juliet Villa Lim (respondent), widow of the late Elfledo Lim (Elfledo), who was
the eldest son of Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in
Cagsiay, Mauban, Quezon. Sometime in 1980, Jose, together with his friends
Jimmy Yu (Jimmy) and Norberto Uy (Norberto), formed a partnership to engage in
the trucking business. Initially, with a contribution of P50,000.00 each, they
purchased a truck to be used in the hauling and transport of lumber of the sawmill.
Jose managed the operations of this trucking business until his death on August 15,
1981. Thereafter, Jose's heirs, including Elfledo, and partners agreed to continue
the business under the management of Elfledo. The shares in the partnership
profits and income that formed part of the estate of Jose were held in trust by
Elfledo, with petitioners' authority for Elfledo to use, purchase or acquire
properties using said funds.
Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate
serving as his fathers driver in the trucking business. He was never a partner or an

investor in the business and merely supervised the purchase of additional trucks
using the income from the trucking business of the partners. By the time the
partnership ceased, it had nine trucks, which were all registered in Elfledo's name.
Petitioners asseverated that it was also through Elfledos management of the
partnership that he was able to purchase numerous real properties by using the
profits derived therefrom, all of which were registered in his name and that of
respondent. In addition to the nine trucks, Elfledo also acquired five other motor
vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir.
Petitioners claimed that respondent took over the administration of the
aforementioned properties, which belonged to the estate of Jose, without their
consent and approval. Claiming that they are co-owners of the properties,
petitioners required respondent to submit an accounting of all income, profits and
rentals received from the estate of Elfledo, and to surrender the administration
thereof. Respondent refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself
a partner of Norberto and Jimmy. Respondent also claimed that per testimony of
Cresencia, sometime in 1980, Jose gave Elfledo P50,000.00 as the latter's capital
in an informal partnership with Jimmy and Norberto. When Elfledo and
respondent got married in 1981, the partnership only had one truck; but through
the efforts of Elfledo, the business flourished. Other than this trucking business,
Elfledo, together with respondent, engaged in other business ventures. Thus, they
were able to buy real properties and to put up their own car assembly and repair
business. When Norberto was ambushed and killed on July 16, 1993, the trucking
business started to falter. When Elfledo died on May 18, 1995 due to a heart attack,
respondent talked to Jimmy and to the heirs of Norberto, as she could no longer
run the business. Jimmy suggested that three out of the nine trucks be given to him
as his share, while the other three trucks be given to the heirs of Norberto.
However, Norberto's wife, Paquita Uy, was not interested in the vehicles. Thus, she
sold the same to respondent, who paid for them in installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and
the partnership with Jimmy and Norberto ceased upon his demise. Respondent also
stressed that Jose left no properties that Elfledo could have held in trust.
Respondent maintained that all the properties involved in this case were purchased

and acquired through her and her husbands joint efforts and hard work, and
without any participation or contribution from petitioners or from Jose.
Respondent submitted that these are conjugal partnership properties; and thus, she
had the right to refuse to render an accounting for the income or profits of their
own business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in
favor of petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1) Ordering the partition of the above-mentioned properties equally
between the plaintiffs and heirs of Jose Lim and the defendant Juliet
Villa-Lim; and
2) Ordering the defendant to submit an accounting of all incomes,
profits and rentals received by her from said properties.
SO ORDERED.

Aggrieved, respondent appealed to the CA.

On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing
petitioners' complaint for lack of merit. Undaunted, petitioners filed their Motion
for Reconsideration,[5] which the CA, however, denied in its Resolution[6] dated
May 8, 2006.

Hence, this Petition, raising the sole question, viz.:

IN THE APPRECIATION BY THE COURT OF THE EVIDENCE
SUBMITTED BY THE PARTIES, CAN THE TESTIMONY OF ONE
OF THE PETITIONERS BE GIVEN GREATER WEIGHT THAN
THAT BY A FORMER PARTNER ON THE ISSUE OF THE
IDENTITY OF THE OTHER PARTNERS IN THE PARTNERSHIP?[7]

In essence, petitioners argue that according to the testimony of Jimmy, the sole
surviving partner, Elfledo was not a partner; and that he and Norberto entered into
a partnership with Jose. Thus, the CA erred in not giving that testimony greater
weight than that of Cresencia, who was merely the spouse of Jose and not a party
to the partnership.[8]
Respondent counters that the issue raised by petitioners is not proper in a petition
for review on certiorari under Rule 45 of the Rules of Civil Procedure, as it would
entail the review, evaluation, calibration, and re-weighing of the factual findings of
the CA. Moreover, respondent invokes the rationale of the CA decision that, in
light of the admissions of Cresencia and Edison and the testimony of respondent,
the testimony of Jimmy was effectively refuted; accordingly, the CA's reversal of
the RTC's findings was fully justified.[9]
We resolve first the procedural matter regarding the propriety of the instant
Petition.
Verily, the evaluation and calibration of the evidence necessarily involves
consideration of factual issues an exercise that is not appropriate for a petition for
review on certiorari under Rule 45. This rule provides that the parties may raise
only questions of law, because the Supreme Court is not a trier of facts. Generally,
we are not duty-bound to analyze again and weigh the evidence introduced in and
considered by the tribunals below.[10] When supported by substantial evidence, the
findings of fact of the CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the following
recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation,
surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd or
impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both
appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of
specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners'
main and reply briefs are not disputed by the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on
the supposed absence of evidence and contradicted by the evidence on
record.[11]

We note, however, that the findings of fact of the RTC are contrary to those of the
CA. Thus, our review of such findings is warranted.
On the merits of the case, we find that the instant Petition is bereft of merit.
A partnership exists when two or more persons agree to place their money, effects,
labor, and skill in lawful commerce or business, with the understanding that there
shall be a proportionate sharing of the profits and losses among them. A contract of
partnership is defined by the Civil Code as one where two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.[12]
Undoubtedly, the best evidence would have been the contract of partnership or the
articles of partnership. Unfortunately, there is none in this case, because the
alleged partnership was never formally organized. Nonetheless, we are asked to
determine who between Jose and Elfledo was the partner in the trucking business.
A careful review of the records persuades us to affirm the CA decision. The
evidence presented by petitioners falls short of the quantum of proof required to
establish that: (1) Jose was the partner and not Elfledo; and (2) all the properties

acquired by Elfledo and respondent form part of the estate of Jose, having been
derived from the alleged partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece
of evidence against respondent. It must be considered and weighed along with
petitioners' other evidence vis--vis respondent's contrary evidence. In civil cases,
the party having the burden of proof must establish his case by a preponderance of
evidence. "Preponderance of evidence" is the weight, credit, and value of the
aggregate evidence on either side and is usually considered synonymous with the
term "greater weight of the evidence" or "greater weight of the credible evidence."
"Preponderance of evidence" is a phrase that, in the last analysis, means
probability of the truth. It is evidence that is more convincing to the court as
worthy of belief than that which is offered in opposition thereto.[13]Rule 133,
Section 1 of the Rules of Court provides the guidelines in determining
preponderance of evidence, thus:
SECTION I. Preponderance of evidence, how determined. In civil cases,
the party having burden of proof must establish his case by a
preponderance of evidence. In determining where the preponderance or
superior weight of evidence on the issues involved lies, the court may
consider all the facts and circumstances of the case, the witnesses'
manner of testifying, their intelligence, their means and opportunity of
knowing the facts to which they are testifying, the nature of the facts to
which they testify, the probability or improbability of their testimony,
their interest or want of interest, and also their personal credibility so far
as the same may legitimately appear upon the trial. The court may also
consider the number of witnesses, though the preponderance is not
necessarily with the greater number.

At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals [14] is
enlightening. Therein, we cited Article 1769 of the Civil Code, which provides:
Art. 1769. In determining whether a partnership exists, these rules shall
apply:
(1) Except as provided by Article 1825, persons who are not partners as
to each other are not partners as to third persons;

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

partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived;
(4) The receipt by a person of a share of the profits of a business is a
prima facie evidence that he is a partner in the business, but no such
inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased
partner;
(d) As interest on a loan, though the amount of payment vary with
the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or
other property by installments or otherwise.

Applying the legal provision to the facts of this case, the following circumstances
tend to prove that Elfledo was himself the partner of Jimmy and
Norberto: 1) Cresencia testified that Jose gave Elfledo P50,000.00, as share in the
partnership, on a date that coincided with the payment of the initial capital in the
partnership;[15] (2) Elfledo ran the affairs of the partnership, wielding absolute
control,power and authority, without any intervention or opposition whatsoever
from any of petitioners herein;[16] (3) all of the properties, particularly the nine
trucks of the partnership, were registered in the name of Elfledo; (4) Jimmy
testified that Elfledo did not receive wages or salaries from the partnership,
indicating that what he actually received were shares of the profits of the business;
[17]
and (5) none of the petitioners, as heirs of Jose, the alleged partner, demanded
periodic accounting from Elfledo during his lifetime. As repeatedly stressed
in Heirs of Tan Eng Kee,[18] a demand for periodic accounting is evidence of a
partnership.

Furthermore, petitioners failed to adduce any evidence to show that the real and
personal properties acquired and registered in the names of Elfledo and respondent
formed part of the estate of Jose, having been derived from Jose's alleged
partnership with Jimmy and Norberto. They failed to refute respondent's claim that
Elfledo and respondent engaged in other businesses. Edison even admitted that
Elfledo also sold Interwood lumber as a sideline.[19] Petitioners could not offer any
credible evidence other than their bare assertions. Thus, we apply the basic rule of
evidence that between documentary and oral evidence, the former carries more
weight.[20]
Finally, we agree with the judicious findings of the CA, to wit:
The above testimonies prove that Elfledo was not just a hired help but
one of the partners in the trucking business, active and visible in the
running of its affairs from day one until this ceased operations upon his
demise. The extent of his control, administration and management of the
partnership and its business, the fact that its properties were placed in his
name, and that he was not paid salary or other compensation by the
partners, are indicative of the fact that Elfledo was a partner and a
controlling one at that. It is apparent that the other partners only
contributed in the initial capital but had no say thereafter on how the
business was ran. Evidently it was through Elfredos efforts and hard
work that the partnership was able to acquire more trucks and otherwise
prosper. Even the appellant participated in the affairs of the partnership
by acting as the bookkeeper sans salary.
It is notable too that Jose Lim died when the partnership was barely a
year old, and the partnership and its business not only continued but
also flourished. If it were true that it was Jose Lim and not Elfledo
who was the partner, then upon his death the partnership should have
been dissolved and its assets liquidated. On the contrary, these were not
done but instead its operation continued under the helm of Elfledo and
without any participation from the heirs of Jose Lim.
Whatever properties appellant and her husband had acquired, this was
through their own concerted efforts and hard work. Elfledo did not limit
himself to the business of their partnership but engaged in other lines of
businesses as well.

In sum, we find no cogent reason to disturb the findings and the ruling of the CA
as they are amply supported by the law and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals
Decision dated June 29, 2005 is AFFIRMED.Costs against petitioners.
SO ORDERED.
THIRD DIVISION
[G.R. No. 143340. August 15, 2001]

LILIBETH
SUNGA-CHAN
and
SUNGA, petitioners, vs. LAMBERTO T. CHUA, respondent.

CECILIA

DECISION
GONZAGA-REYES, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the
Decision of the Court of Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua
vs.
[1]

Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying
the motion for reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga
(hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against
Lilibeth Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner
Cecilia), daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for
Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages
with Writ of Preliminary Attachment with the Regional Trial Court, Branch 11, Sindangan,
Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience,
respondent and Jacinto allegedly agreed to register the business name of their partnership,
SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to
Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the

intention that the profits would be equally divided between them. The partnership allegedly had
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife of
respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or remuneration
of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her
wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business
operation went quite well and was profitable. Respondent claimed that he could attest to the
success of their business because of the volume of orders and deliveries of filled Shellane
cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished
respondent with the merchandise inventories, balance sheets and net worth of Shellite from 1977
to 1989, respondent however suspected that the amount indicated in these documents were
understated and undervalued by Jacinto and Josephine for their own selfish reasons and for tax
avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and
particularly his daughter, petitioner Lilibeth, took over the operations, control, custody,
disposition and management of Shellite without respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal,
winding up and restitution of his net shares in the partnership, petitioners failed to
comply. Petitioner Lilibeth allegedly continued the operations of Shellite, converting to her own
use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and
reasons to evade respondents demands, she disbursed out of the partnership funds the amount of
P200,000.00 and partially paid the same to respondent. Petitioner Lilibeth allegedly informed
respondent that the P200,000.00 represented partial payment of the latters share in the
partnership, with a promise that the former would make the complete inventory and winding up
of the properties of the business establishment. Despite such commitment, petitioners allegedly
failed to comply with their duty to account, and continued to benefit from the assets and income
of Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the
Securities and Exchange Commission (SEC) in Manila, not the Regional Trial Court in
Zambaonga del Norte had jurisdiction over the action. Respondent opposed the motion to
dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance
denied the motion to dismiss.

On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims,
contending that they are not liable for partnership shares, unreceived income/profits, interests,
damages and attorneys fees, that respondent does not have a cause of action against them, and
that the trial court has no jurisdiction over the nature of the action, the SEC being the agency that
has original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys
fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that
the claim for winding up of partnership affairs, accounting and recovery of shares in partnership
affairs, accounting and recovery of shares in partnership assets /properties should be dismissed
and prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and
Mandamus with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial
of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial
Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by
petitioner, as petitioners failed to show that a reversible error was committed by the appellate
court."
[2]

On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
remanded to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the
hearing of the case on January 17, 1996. Respondent presented his evidence while petitioners
were considered to have waived their right to present evidence for their failure to attend the
scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The
dispositive portion of the Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:

(1) DIRECTING them to render an accounting in acceptable form under accounting

procedures and standards of the properties, assets, income and profits of the Shellite
Gas Appliance Center since the time of death of Jacinto L. Sunga, from whom they
continued the business operations including all businesses derived from the Shellite
Gas Appliance Center; submit an inventory, and appraisal of all these properties,
assets, income, profits, etc. to the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties,
assets, income and profits they misapplied and converted to their own use and
advantage that legally pertain to the plaintiff and account for the properties mentioned
in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will (sic) in
schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits
from the partnership from 1988 to may 30, 1992, when the plaintiff learned of the
closure of the store the sum of P35,000.00 per month, with legal rate of interest until
fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its
business activities pursuant to law, after delivering to the plaintiff all the interest,
shares, participation and equity in the partnership, or the value thereof in money or
moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in
bad faith and hold them liable to the plaintiff the sum of P50,000.00 as moral and
exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic)
and P25,00.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED.

[3]

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the
case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of
the Decision reads:

WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED

in all respects.
[4]

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by
petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters
invitation and offer and that upon his death the partnership assets and business were taken
over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did
not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assumingarguendo that indeed
there was a partnership, the finding of highly exaggerated amounts or values in the
partnership assets and profits.[5]

Petitioners question the correctness of the finding of the trial court and the Court of Appeals
that a partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the
absence of any written document to show such partnership between respondent and Jacinto,
petitioners argue that these courts were proscribed from hearing the testimonies of respondent
and his witness, Josephine, to prove the alleged partnership three years after Jacintos death. To
support this argument, petitioners invoke the Dead Mans Statute or Survivorship Rule under
Section 23, Rule 130 of the Rules of Court that provides:

SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties or

assignors of parties to a case, or persons in whose behalf a case is prosecuted, against
an executor or administrator or other representative of a deceased person, or against a
person of unsound mind, upon a claim or demand against the estate of such deceased
person, or against such person of unsound mind, cannot testify as to any matter of fact

occurring before the death of such deceased person or before such person became of
unsound mind.
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person
(Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary. Hence,
based on the intention of the parties, as gathered from the facts and ascertained from their
language and conduct, a verbal contract of partnership may arise. The essential points that must
be proven to show that a partnership was agreed upon are (1) mutual contribution to a common
stock, and (2) a joint interest in the profits. Understandably so, in view of the absence of a
written contract of partnership between respondent and Jacinto, respondent resorted to the
introduction of documentary and testimonial evidence to prove said partnership.The crucial issue
to settle then is whether or not the Dead Mans Statute applies to this case so as to render
inadmissible respondents testimony and that of his witness, Josephine.
[6]

[7]

[8]

The Dead Mans Statute provides that if one party to the alleged transaction is precluded
from testifying by death, insanity, or other mental disabilities, the surviving party is not entitled
to the undue advantage of giving his own uncontradicted and unexplained account of the
transaction. But before this rule can be successfully invoked to bar the introduction of
testimonial evidence, it is necessary that:
[9]

1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person
or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased
person or against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such deceased
person or before such person became of unsound mind.[10]

Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim against respondent in their answer before
the trial court, and with the filing of their counterclaim, petitioners themselves effectively
[11]

removed this case from the ambit of the Dead Mans Statute. Well entrenched is the rule that
when it is the executor or administrator or representatives of the estate that sets up the
counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the
deceased to defeat the counterclaim. Moreover, as defendant in the counterclaim, respondent is
not disqualified from testifying as to matters of fact occurring before the death of the deceased,
said action not having been brought against but by the estate or representatives of the deceased.
[12]

[13]

[14]

Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple
reason that she is not a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted. Records show that respondent offered the testimony of Josephine to establish the
existence of the partnership between respondent and Jacinto. Petitioners insistence that Josephine
is the alter ego of respondent does not make her an assignor because the term assignor of a party
means assignor of a cause of action which has arisen, and not the assignor of a right assigned
before any cause of action has arisen. Plainly then, Josephine is merely a witness of respondent,
the latter being the party plaintiff.
[15]

We are not convinced by petitioners allegation that Josephines testimony lacks probative
value because she was allegedly coerced by respondent, her brother-in-law, to testify in his favor.
Josephine merely declared in court that she was requested by respondent to testify and that if she
were not requested to do so she would not have testified. We fail to see how we can conclude
from this candid admission that Josephines testimony is involuntary when she did not in any way
categorically say that she was forced to be a witness of respondent. Also, the fact that Josephine
is the sister of the wife of respondent does not diminish the value of her testimony since
relationship per se, without more, does not affect the credibility of witnesses.
[16]

Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot
prevail over the factual findings of the trial court and the Court of Appeals that a partnership was
established between respondent and Jacinto. Based not only on the testimonial evidence, but the
documentary evidence as well, the trial court and the Court of Appeals considered the evidence
for respondent as sufficient to prove the formation of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of
judicial precedents, a factual matter like the finding of the existence of a partnership between
respondent and Jacinto cannot be inquired into by this Court on review. This Court can no
longer be tasked to go over the proofs presented by the parties and analyze, assess and weigh
them to ascertain if the trial court and the appellate court were correct in according superior
credit to this or that piece of evidence of one party or the other. It must be also pointed out that
petitioners failed to attend the presentation of evidence of respondent. Petitioners cannot now
turn to this Court to question the admissibility and authenticity of the documentary evidence of
respondent when petitioners failed to object to the admissibility of the evidence at the time that
such evidence was offered.
[17]

[18]

[19]

With regard to petitioners insistence that laches and/or prescription should have extinguished
respondents claim, we agree with the trial court and the Court of Appeals that the action for
accounting filed by respondent three (3) years after Jacintos death was well within the prescribed
period. The Civil Code provides that an action to enforce an oral contract prescribes in six (6)
years while the right to demand an accounting for a partners interest as against the person
continuing the business accrues at the date of dissolution, in the absence of any contrary
agreement. Considering that the death of a partner results in the dissolution of the partnership ,
in this case, it was after Jacintos death that respondent as the surviving partner had the right to an
account of his interest as against petitioners. It bears stressing that while Jacintos death dissolved
the partnership, the dissolution did not immediately terminate the partnership. The Civil
Code expressly provides that upon dissolution, the partnership continues and its legal
personality is retained until the complete winding up of its business, culminating in its
termination.
[20]

[21]

[22]

[23]

[24]

In a desperate bid to cast doubt on the validity of the oral partnership between respondent
and Jacinto, petitioners maintain that said partnership that had an initial capital of P200,000.00
should have been registered with the Securities and Exchange Commission (SEC) since
registration is mandated by the Civil Code. True, Article 1772 of the Civil Code requires that
partnerships with a capital of P3,000.00 or more must register with the SEC, however, this
registration requirement is not mandatory. Article 1768 of the Civil Code explicitly provides
that the partnership retains its juridical personality even if it fails to register. The failure to
register the contract of partnership does not invalidate the same as among the partners, so long as
the contract has the essential requisites, because the main purpose of registration is to give notice
to third parties, and it can be assumed that the members themselves knew of the contents of their
contract. In the case at bar, non-compliance with this directory provision of the law will not
invalidate the partnership considering that the totality of the evidence proves that respondent and
Jacinto indeed forged the partnership in question.
[25]

[26]

WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed
decision is AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September
1947 by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav
Carlson, as the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and
P2,000.00 to the partnership. On 1 October 1947, the limited partnership was registered with the
Securities and Exchange Commission. The firm engaged, among other activities, in the importation,
marketing, distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office and held itself out as a limited
partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its
trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation
with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The
sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by
the herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an
assessment, consolidated the income of the firm and the individual incomes of the partners-spouses
Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in
the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not
in accordance with law, but his request was denied. Unable to secure a reconsideration, he
appealed to the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November
1965, reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax
court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent
William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner,
Gustav Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and
Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the
partnership dissolved the limited partnership, and if they did not, the fiction of juridical personality of
the partnership should be disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business; consequently the income tax return of respondent Suter for
the years in question should have included his and his wife's individual incomes and that of the
limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which
provides as follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents or nonresidents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in
1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New
Civil Code, and that since its juridical personality had not been affected and since, as a limited
partnership, as contra distinguished from a duly registered general partnership, it is taxable on its
income similarly with corporations, Suter was not bound to include in his individual return the income
of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant
upon the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial
Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under
the Civil Code, which applies in the absence of express provision in the Code of Commerce,
persons prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co.,
Ltd. was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of
the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the association be all the present
property of the partners, as contributed by them to the common fund, or else "all that the partners
may acquire by their industry or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were
fixed sums of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter by Article 1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal,
pero o podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos
inclinamos a la tesis permisiva de los contratos de sociedad particular entre esposos, ya que
ningun precepto de nuestro Codigo los prohibe, y hay que estar a la norma general segun la
que toda persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su
resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de
1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being
one of the causes provided for that purpose either by the Spanish Civil Code or the Code of
Commerce.
The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia
Spirig were separately owned and contributed by them before their marriage; and after they were
joined in wedlock, such contributions remained their respective separate property under the Spanish
Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and English
law that does not recognize such separate juridical personality), the bypassing of the existence of
the limited partnership as a taxpayer can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnership's separate individuality makes it
impossible to equate its income with that of the component members. True, section 24 of the Internal
Revenue Code merges registered general co-partnerships (compaias colectivas) with the
personality of the individual partners for income tax purposes. But this rule is exceptional in its
disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to
limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority
for disregarding the fiction of legal personality of the corporations involved therein are not applicable
to the present case. In the cited cases, the corporations were already subject to tax when the fiction
of their corporate personality was pierced; in the present case, to do so would exempt the limited

partnership from income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely served as business conduits
or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for
tax purposes. This is not true in the present case. Here, the limited partnership is not a mere
business conduit of the partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage, and had been filing its
own income tax returns as such independent entity. The change in its membership, brought about by
the marriage of the partners and their subsequent acquisition of all interest therein, is no ground for
withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to pay
income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy
the interests of the remaining partner with the premeditated scheme or design to use the partnership
as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the
law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code
taxes the latter on its income, but not the former, because it is in the case of compaias
colectivas that the members, and not the firm, are taxable in their individual capacities for any
dividend or share of the profit derived from the duly registered general partnership (Section 26,
N.I.R.C.; Araas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).
lawphi1.nt

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

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

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the
then Intermediate Appellate Court and directed that in all subsequent elections for directors of
Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's
choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate only
six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall vote only
among themselves to determine who the six (6) nominees will be, with cumulative voting to be
allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went
abroad to look for foreign partners, European or American who could help in its expansion plans. On
August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into an
Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors
agreed to participate in the ownership of an enterprise which would engage primarily in the business
of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares.
The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination
and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors,
which shall consist of nine individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation, three of the nine directors
shall be designated by American-Standard, and the other six shall be designated by
the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain

officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with
the Board of Investments for availment of incentives with the condition that at least 60% of the
capital stock of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the initially
harmonious relations between the two groups. According to the Filipino group, a basic disagreement
was due to their desire to expand the export operations of the company to which ASI objected as it
apparently had other subsidiaries of joint joint venture groups in the countries where Philippine
exports were contemplated. On March 8, 1983, the annual stockholders' meeting was held. The
meeting was presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the agenda, the stockholders then proceeded to the
election of the members of the board of directors. The ASI group nominated three persons namely;
Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out of
order on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during the
past annual stockholders' meetings to nominate only nine persons as nominees for the nine-member
board of directors, and the legal advice of Saniwares' legal counsel. The following events then,
transpired:
... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr.
Jaqua protested the decision of the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that
all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, ACG.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar.
The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin
and David Whittingham and the six originally nominated by Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, and Baldwin Young. The Secretary then certified for the election of
the following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo,
Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan,

Baldwin Young. The representative of ASI then moved to recess the meeting which
was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP
No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin Young,
who announced that the motion was carried and declared the meeting adjourned.
Protests against the adjournment were registered and having been ignored, Mr.
Jaqua the ASI representative, stated that the meeting was not adjourned but only
recessed and that the meeting would be reconvened in the next room. The Chairman
then threatened to have the stockholders who did not agree to the decision of the
Chairman on the casting of votes bodily thrown out. The ASI Group, Luciano E.
Salazar and other stockholders, allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the elevator lobby of the American
Standard Building. The continued meeting was presided by Luciano E. Salazar, while
Andres Gatmaitan acted as Secretary. On the basis of the cumulative votes cast
earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar
voted for himself, thus the said five directors were certified as elected directors by the
Acting Secretary, Andres Gatmaitan, with the explanation that there was a tie among
the other six (6) nominees for the four (4) remaining positions of directors and that
the body decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares,
Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique
Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second petition was for quo warranto and application for
receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and Charles
Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for
Avelino Cruz claimed to be the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar
and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed
the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP
No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of the case to the Securities
and Exchange Commission with the directive that a new stockholders' meeting of Saniwares be
ordered convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John
Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

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

PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER
OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS
INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual
agreements entered into by stockholders and the replacement of the conditions of
such agreements with terms never contemplated by the stockholders but merely
dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of
the control of a corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED
INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during
its annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined: (1) the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity
during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp.
v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly
stated that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, RolloGR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was
to establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in their pleading that the
"Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and therefore,
there can be, between the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing, except in the following
cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.
(b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer
to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the
parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other ASI shall constitute the minority
stockholder. In any event, the evident intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into ajoint venture enterprise, and if some
words in the Agreement appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together attributing to the doubtful ones
that sense which may result from all of them taken jointly (Art. 1374, New Civil
Code). Moreover, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (Art. 1371,
New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint profit, the question whether
they intended by their agreement to create a joint adventure, or to assume some
other relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div.
40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George,
27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows that the parties agreed to
establish a joint venture and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent with a joint venture and
not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed
to accept the role of minority vis-a-vis the Philippine National group of investors, on
the condition that the Agreement should contain provisions to protect ASI as the
minority.
An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the
Agreement]. ASI is contractually entitled to designate a member of the Executive

Committee and the vote of this member is required for certain transactions [Sec. 3
(b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the
right to designate the president and plant manager [Sec. 5 (6)]. The Agreement
further provides that the sales policy of Saniwares shall be that which is normally
followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard"
products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)].
Under the Agreement, ASI agreed to provide technology and know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes
of the board of directors for certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power. Furthermore, the grant to
ASI of the right to designate certain officers of the corporation; the super-majority
voting requirements for amendments of the articles and by-laws; and most
significantly to the issues of tms case, the provision that ASI shall designate 3 out of
the 9 directors and the other stockholders shall designate the other 6, clearly indicate
that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the
capital stock and the Philippine National stockholders who own the balance of 60%,
and that 2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of huge
multinational corporations of the developed world. Arrangements are formalized where a foreign
group becomes a minority owner of a firm in exchange for its manufacturing expertise, use of its
brand names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine

waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the local majority ownership and
actively tries to completely or predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent that such subversive
actions can be lawfully prevented, the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from
each other but are divisible into groups representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of determining
how closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is a closeheld corporation. Surely, appellants cannot honestly claim that Saniwares is a public
issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint venturers

(Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago,

M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry
v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with
legal questions as to the extent to which the requirements arising from the corporate
form of joint venture corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied on the joint venture agreement rather than
the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate
from the traditional pattern of corporation management. A noted authority has pointed
out that just as in close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the following: (1)
require greater than majority vote for shareholder and director action; (2) give certain
shareholders or groups of shareholders power to select a specified number of
directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply
that agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty five
stockholders, and therefore cannot qualify as a close corporation under section 96,
can some of them enter into an agreement to vote as a unit in the election of
directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling
agreements to protect their interests, as long as they do not intend to commit any
wrong, or fraud on the other stockholders not parties to the agreement. Of course,
voting or pooling agreements are perhaps more useful and more often resorted to in
close corporations. But they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of close corporations
to those which comply with the requisites laid down by section 96, it is entirely
possible that a corporation which is in fact a close corporation will not come within
the definition. In such case, its stockholders should not be precluded from entering
into contracts like voting agreements if these are otherwise valid. (Campos & LopezCampos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include appellants. (Rollo No. 75951, pp.
90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a) hereof
says that three of the nine directors shall be designated by ASI and the remaining six
by the other stockholders, i.e., the Filipino stockholders. This allocation of board
seats is obviously in consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the
parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as
in joint venture relationships between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the
particular contractual rights and obligations which the parties have assumed for
themselves.
On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the
first. Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize
and uphold the division of the stockholders into two groups, and at the same time
uphold the right of the stockholders within each group to cumulative voting in the
process of determining who the group's nominees would be. In practical terms, as
suggested by appellant Luciano E. Salazar himself, this means that if the Filipino

stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should not be allowed to interfere
in the voting within the Filipino group. Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the Agreement, and
may even be able to get a majority of the board seats, a result which is clearly
contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to
vote their additional equity pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner Salazar
adds that this right if granted to the ASI Group would not necessarily mean a violation of the AntiDummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors
or governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section
1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The
point of query, however, is whether or not that provision is applicable to a joint venture with clearly
defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.
Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d.,
1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242
[1955]). The main distinction cited by most opinions in common law jurisdictions is
that the partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction, and is thus
of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon
v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811
[1920]). This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular partnership
may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem

therefore that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906
[1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to
a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members
of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would
be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly
stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act.
In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in the capital of the entity. It is to be noted, however, that

the same law also limits the election of aliens as members of the board of directors in proportion to
their allowance participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in future
dealings, this limitation of six to three board seats should always be maintained as long as the joint
venture agreement exists considering that in limiting 3 board seats in the 9-man board of directors
there are provisions already agreed upon and embodied in the parties' Agreement to protect the
interests arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined
by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot
now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent
on the directors thus elected being genuine members of the Filipino group, not voters whose interest
is to increase the ASI share in the management of Saniwares. The joint venture character of the
enterprise must always be taken into account, so long as the company exists under its original
agreement. Cumulative voting may not be used as a device to enable ASI to achieve stealthily or
indirectly what they cannot accomplish openly. There are substantial safeguards in the Agreement
which are intended to preserve the majority status of the Filipino investors as well as to maintain the
minority status of the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee
are declared as the duly elected directors of Saniwares at the March 8,1983 annual stockholders'

meeting. In all other respects, the questioned decision is AFFIRMED. Costs against the petitioners in
G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.

FIRST DIVISION
J. TIOSEJO INVESTMENT CORP.,
Petitioner,

G.R. No. 174149

Present:

- versus -

CORONA, C.J.,
Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
PEREZ, and
MENDOZA,* JJ.
Promulgated:

SPOUSES
BENJAMIN
ELEANOR ANG,
Respondents.

AND September 8, 2010

x--------------------------------------------------x
DECISION

PEREZ, J.:

Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure, the petition for
review at bench seeks the reversal of the Resolutions dated 23 May 2006 and 9
August 2006 issued by the Third Division of the Court of Appeals (CA) in CAG.R. SP No. 93841 which, respectively, dismissed the petition for review of

petitioner J. Tiosejo Investment Corp. (JTIC) for having been filed out of
time[1] and denied the motion for reconsideration of said dismissal.[2]

The Facts

On 28 December 1995 petitioner entered into a Joint Venture Agreement (JVA)

with Primetown Property Group, Inc. (PPGI) for the development of a residential
condominium project to be known as The Meditel on the formers 9,502 square
meter property alongSamat St., Highway Hills, Mandaluyong City.[3] With
petitioner contributing the same property to the joint venture and PPGI undertaking
to develop the condominium, the JVA provided, among other terms and conditions,
that the developed units shall be shared by the former and the latter at a ratio of
17%-83%, respectively.[4] While both parties were allowed, at their own individual
responsibility, to pre-sell the units pertaining to them, [5] PPGI further undertook to
use all proceeds from the pre-selling of its saleable units for the completion of the
Condominium Project. [6]

On 17 June 1996, the Housing and Land Use Regulatory Board (HLURB) issued
License to Sell No. 96-06-2854 in favor of petitioner and PPGI as project owners.
[7]
By virtue of said license, PPGI executed Contract to Sell No. 0212 with Spouses
Benjamin and Eleanor Ang on 5 February 1997, over the 35.45-square meter
condominium unit denominated as Unit A-1006, for the agreed contract price
of P52,597.88 per square meter or a total P2,077,334.25.[8] On the same date PPGI
and respondents also executed Contract to Sell No. 0214 over the 12.50 square
meter parking space identified as Parking Slot No. 0405, for the stipulated
consideration of P26,400.00 square meters or a total of P313,500.00.[9]

On 21 July 1999, respondents filed against petitioner and PPGI the complaint for
the rescission of the aforesaid Contracts to Sell docketed before the HLURB as

HLURB Case No. REM 072199-10567. Contending that they were assured by
petitioner and PPGI that the subject condominium unit and parking space would be
available for turn-over and occupancy in December 1998, respondents averred,
among other matters, that in view of the non-completion of the project according to
said representation, respondents instructed petitioner and PPGI to stop depositing
the post-dated checks they issued and to cancel said Contracts to Sell;and, that
despite several demands, petitioner and PPGI have failed and refused to refund
the P611,519.52 they already paid under the circumstances. Together with the
refund of said amount and interests thereon at the rate of 12% per annum,
respondents prayed for the grant of their claims for moral and exemplary damages
as well as attorneys fees and the costs.[10]

Specifically denying the material allegations of the foregoing complaint, PPGI

filed its 7 September 1999 answer alleging that the delay in the completion of the
project was attributable to the economic crisis which affected the country at the
time; that the unexpected and unforeseen inflation as well as increase in interest
rates and cost of building materials constitute force majeure and were beyond its
control; that aware of its responsibilities, it offered several alternatives to its buyers
like respondents for a transfer of their investment to its other feasible projects and
for the amounts they already paid to be considered as partial payment for the
replacement unit/s; and, that the complaint was prematurely filed in view of the ongoing negotiations it is undertaking with its buyers and prospective joint venture
partners. Aside from the dismissal of the complaint, PPGI sought the readjustment
of the contract price and the grant of its counterclaims for attorneys fees and
litigation expenses.[11]

Petitioner also specifically denied the material allegations of the complaint in

separate answer dated 5 February 2002[12] which it amended on 20 May
2002. Calling attention to the fact that its prestation under the JVA consisted in
contributing the property on which The Meditel was to be constructed, petitioner
asseverated that, by the terms of the JVA, each party was individually responsible
for the marketing and sale of the units pertaining to its share; that not being privy

to the Contracts to Sell executed by PPGI and respondents, it did not receive any
portion of the payments made by the latter; and, that without any contributory fault
and negligence on its part, PPGI breached its undertakings under the JVA by failing
to complete the condominium project. In addition to the dismissal of the complaint
and the grant of its counterclaims for exemplary damages, attorneys fees, litigation
expenses and the costs, petitioner interposed a cross-claim against PPGI for full
reimbursement of any sum it may be adjudged liable to pay respondents.[13]

Acting on the position papers and draft decisions subsequently submitted by the
parties,[14] Housing and Land Use (HLU) Arbiter Dunstan T. San Vicente went on
to render the 30 July 2003 decision declaring the subject Contracts to Sell
cancelled and rescinded on account of the non-completion of the condominium
project. On the ground that the JVA created a partnership liability on their part,
petitioner and PPGI, as co-owners of the condominium project, were ordered to
pay: (a) respondents claim for refund of theP611,519.52 they paid, with interest at
the rate of 12% per annum from 5 February 1997; (b) damages in the sum
of P75,000.00; (c) attorneys fees in the sum of P30,000.00; (d) the costs; and, (e)
an administrative fine in the sum of P10,000.00 for violation of Sec. 20 in relation
to Sec. 38 of Presidential Decree No. 957. [15] Elevated to the HLURB Board of
Commissioners via the petition for review filed by petitioner,[16] the foregoing
decision was modified to grant the latters cross-claim in the 14 September 2004
decision rendered by said administrative bodys Second Division in HLURB Case
No. REM-A-031007-0240,[17] to wit:

Wherefore, the petition for review of the respondent Corporation is

dismissed. However, the decision of the Office below dated July 30, 2003 is
modified, hence, its dispositive portion shall read:
1. Declaring the contracts to sell, both dated February 5, 1997, as
cancelled and rescinded, and ordering the respondents to
immediately pay the complainants the following:
a.

The amount of P611,519.52, with interest at the legal

rate reckoned from February 5, 1997 until fully paid;
b. Damages of P75,000.00;

c. Attorneys fees equivalent to P30,000.00; and

d. The Cost of suit;
2. Ordering respondents to pay this Office administrative fine
of P10,000.00 for violation of Section 20 in relation to Section
38 of P.D. 957; and
3. Ordering respondent Primetown to reimburse the entire amount
which the respondent Corporation will be constrained to pay
the complainants.
So ordered.[18]

With the denial of its motion for reconsideration of the foregoing decision,
[19]
petitioner filed a Notice of Appeal dated 28 February 2005 which was docketed
before the Office of the President (OP) as O.P. Case No. 05-B-072. [20] On 3 March
2005, the OP issued an order directing petitioner to submit its appeal memorandum
within 15 days from receipt thereof.[21] Acting on the motion therefor filed, the OP
also issued another order on the same date, granting petitioner a period of 15 days
from 28 February 2005 or until 15 March 2005 within which to file its appeal
memorandum.[22] In view of petitioners filing of a second motion for extension
dated 15 March 2005,[23] the OP issued the 18 March 2005 order granting the
former an additional 10 days from 15 March 2005 or until 25 March 2005 within
which to file its appeal memorandum, provided no further extension shall be
allowed.[24] Claiming to have received the aforesaid 3 March 2005 order only on 16
March 2005, however, petitioner filed its 31 March 2005 motion seeking yet
another extension of 10 days or until 10 April 2005 within which to file its appeal
memorandum.[25]

On 7 April 2005, respondents filed their opposition to the 31 March 2005 motion
for extension of petitioner[26] which eventually filed its appeal memorandum by
registered mail on 11 April 2005 in view of the fact that 10 April 2005 fell on a
Sunday.[27] On 25 October 2005, the OP rendered a decision dismissing petitioners
appeal on the ground that the latters appeal memorandum was filed out of time and
that the HLURB Board committed no grave abuse of discretion in rendering the
appealed decision.[28] Aggrieved by the denial of its motion for reconsideration of

the foregoing decision in the 3 March 2006 order issued by the OP,[29] petitioner
filed before the CA its 29 March 2006 motion for an extension of 15 days from 31
March 2006 or until 15 April 2006 within which to file its petition for review.
[30]
Accordingly, a non-extendible period of 15 days to file its petition for review
was granted petitioner in the 31 March 2006 resolution issued by the CA Third
Division in CA-G.R, SP No. 93841.[31]

Maintaining that 15 April 2006 fell on a Saturday and that pressures of work
prevented its counsel from finalizing its petition for review, petitioner filed a
motion on 17 April 2006, seeking for an additional time of 10 days or until 27
April 2006 within which to file said pleading. [32] Although petitioner filed by
registered mail a motion to admit its attached petition for review on 19 April 2006,
[33]
the CA issued the herein assailed 23 May 2006 resolution,[34] disposing of the
formers pending motion for extension as well as the petition itself in the following
wise:
We resolve to DENY the second
to DISMISS the petition for being filed late.

extension

motion

and

rule

Settled is that heavy workload is by no means excusable (Land Bank of

the Philippines vs. Natividad, 458 SCRA 441 [2005]). If the failure of the
petitioners counsel to cope up with heavy workload should be considered a valid
justification to sidestep the reglementary period, there would be no end to
litigations so long as counsel had not been sufficiently diligent or experienced
(LTS Philippine Corporation vs. Maliwat, 448 SCRA 254, 259-260 [2005], citing
Sublay vs. National Labor Relations Commission, 324 SCRA 188 [2000]).
Moreover, lawyers should not assume that their motion for extension or
postponement will be granted the length of time they pray for (Ramos vs.
Dajoyag, 378 SCRA 229 [2002]).
SO ORDERED.[35]

Petitioners motion for reconsideration of the foregoing resolution[36] was

denied for lack of merit in the CAs second assailed 9 August 2006 resolution,
[37]
hence, this petition.

The Issues

Petitioner seeks the reversal of the assailed resolutions on the following

grounds, to wit:
I. THE COURT OF APPEALS ERRED IN DISMISSING THE
PETITION ON MERE TECHNICALITY;
II. THE COURT OF APPEALS ERRED IN REFUSING TO
RESOLVE THE PETITION ON THE MERITS THEREBY
AFFIRMING THE OFFICE OF THE PRESIDENTS
DECISION (A) DISMISSING JTICS APPEAL ON A
MERE TECHNICALITY; (B) AFFIRMING THE HLURB
BOARDS DECISION INSOFAR AS IT FOUND JTIC
SOLIDARILY LIABLE WITH PRIMETOWN TO PAY
SPOUSES ANG DAMAGES, ATTORNEYS FEES AND
THE COST OF THE SUIT; AND (C) AFFIRMING THE
HLURB BOARDS DECISION INSOFAR AS IT FAILED
TO AWARD JITC ITS COUNTERCLAIMS AGAINST
SPOUSES ANG.[38]

The Courts Ruling

We find the petition bereft of merit.

While the dismissal of an appeal on purely technical grounds is concededly

frowned upon,[39] it bears emphasizing that the procedural requirements of the rules
on appeal are not harmless and trivial technicalities that litigants can just discard
and disregard at will.[40] Neither being a natural right nor a part of due process, the
rule is settled that the right to appeal is merely a statutory privilege which may be
exercised only in the manner and in accordance with the provisions of the law.

[41]

The perfection of an appeal in the manner and within the period prescribed by
law is, in fact, not only mandatory but jurisdictional.[42] Considering that they are
requirements which cannot be trifled with as mere technicality to suit the interest
of a party,[43] failure to perfect an appeal in the prescribed manner has the effect of
rendering the judgment final and executory.[44]

Fealty to the foregoing principles impels us to discount the error petitioner imputes
against the CA for denying its second motion for extension of time for lack of
merit and dismissing its petition for review for having been filed out of
time. Acting on the 29 March 2006 motion filed for the purpose, after all, the CA
had already granted petitioner an inextendible period of 15 days from 31 March
2006 or until 15 April 2006 within which to file its petition for review. Sec. 4, Rule
43 of the 1997 Rules of Civil Procedureprovides as follows:
Sec. 4. Period of appeal. The appeal shall be taken within fifteen (15) days from
notice of the award, judgment, final order or resolution, or from the date of its last
publication, if publication is required by law for its effectivity, or of the denial of
petitioners motion for new trial or reconsideration duly filed in accordance with
the governing law of the court or agency a quo. Only one (1) motion for
reconsideration shall be allowed. Upon proper motion and payment of the full
amount of the docket fee before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days only within
which to file the petition for review. No further extension shall be granted except
for the most compelling reason and in no case to exceed fifteen (15) days.
(Underscoring supplied)

The record shows that, having been granted the 15-day extension sought in its first
motion, petitioner filed a second motion for extension praying for an additional 10
days from 17 April 2006 within which to file its petition for review, on the ground
that pressures of work and the demands posed by equally important cases
prevented its counsel from finalizing the same. As correctly ruled by the CA,
however, heavy workload cannot be considered as a valid justification to sidestep
the reglementary period[45] since to do so would only serve to encourage needless
delays and interminable litigations. Indeed, rules prescribing the time for doing
specific acts or for taking certain proceedings are considered absolutely

indispensable to prevent needless delays and to orderly and promptly discharge

judicial business.[46] Corollary to the principle that the allowance or denial of a
motion for extension of time is addressed to the sound discretion of the court,
[47]
moreover, lawyers cannot expect that their motions for extension or
postponement will be granted[48] as a matter of course.

Although technical rules of procedure are not ends in themselves, they are
necessary for an effective and expeditious administration of justice and cannot, for
said reason, be discarded with the mere expediency of claiming substantial merit.
[49]
This holds particularly true in the case at bench where, prior to the filing of its
petition for review before the CA, petitioners appeal before the OP was likewise
dismissed in view of its failure to file its appeal memorandum within the
extensions of time it had been granted by said office. After being granted an initial
extension of 15 days to do the same, the records disclose that petitioner was
granted by the OP a second extension of 10 days from 15 March 2005 or until 25
March 2005 within which to file its appeal memorandum, on the condition that no
further extensions shall be allowed. Aside from not heeding said proviso, petitioner
had, consequently, no more time to extend when it filed its 31 March 2005 motion
seeking yet another extension of 10 days or until 10 April 2005 within which to file
its appeal memorandum.

With the foregoing procedural antecedents, the initial 15-day extension granted by
the CA and the injunction under Sec. 4, Rule 43 of the 1997 Rules of Civil
Procedure against further extensions except for the most compelling reason, it was
clearly inexcusable for petitioner to expediently plead its counsels heavy workload
as ground for seeking an additional extension of 10 days within which to file its
petition for review. To our mind, petitioner would do well to remember that, rather
than the low gate to which parties are unreasonably required to stoop, procedural
rules are designed for the orderly conduct of proceedings and expeditious
settlement of cases in the courts of law. Like all rules, they are required to be
followed[50] and utter disregard of the same cannot be expediently rationalized by
harping on the policy of liberal construction [51] which was never intended as an

unfettered license to disregard the letter of the law or, for that matter, a convenient
excuse to substitute substantial compliance for regular adherence thereto. When it
comes to compliance with time rules, the Court cannot afford inexcusable delay.[52]

Even prescinding from the foregoing procedural considerations, we also find that
the HLURB Arbiter and Board correctly held petitioner liable alongside PPGI for
respondents claims and the P10,000.00 administrative fine imposed pursuant
to Section 20 in relation to Section 38 of P.D. 957. By the express terms of the
JVA, it appears that petitioner not only retained ownership of the property pending
completion of the condominium project [53] but had also bound itself to answer
liabilities proceeding from contracts entered into by PPGI with third
parties. Article VIII, Section 1 of the JVA distinctly provides as follows:
Sec. 1. Rescission and damages. Non-performance by either party of its
obligations under this Agreement shall be excused when the same is due to Force
Majeure. In such cases, the defaulting party must exercise due diligence to
minimize the breach and to remedy the same at the soonest possible time. In the
event that either party defaults or breaches any of the provisions of this
Agreement other than by reason of Force Majeure, the other party shall have the
right to terminate this Agreement by giving notice to the defaulting party, without
prejudice to the filing of a civil case for damages arising from the breach of the
defaulting party.
In the event that the Developer shall be rendered unable to complete the
Condominium Project, and such failure is directly and solely attributable to the
Developer, the Owner shall send written notice to the Developer to cause the
completion of the Condominium Project.If the developer fails to comply within
One Hundred Eighty (180) days from such notice or, within such time, indicates
its incapacity to complete the Project, the Owner shall have the right to take over
the construction and cause the completion thereof. If the Owner exercises its right
to complete the Condominium Project under these circumstances, this Agreement
shall be automatically rescinded upon written notice to the Developer and the
latter shall hold the former free and harmless from any and all liabilities to third
persons arising from such rescission. In any case, the Owner shall respect and
strictly comply with any covenant entered into by the Developer and third parties
with respect to any of its units in the Condominium Project. To enable the owner
to comply with this contingent liability, the Developer shall furnish the Owner
with a copy of its contracts with the said buyers on a month-to-month
basis. Finally, in case the Owner would be constrained to assume the obligations
of the Developer to its own buyers, the Developer shall lose its right to ask for
indemnity for whatever it may have spent in the Development of the Project.

Nevertheless, with respect to the buyers of the Developer for the First Phase, the
area intended for the Second Phase shall not be bound and/or subjected to the said
covenants and/or any other liability incurred by the Developer in connection with
the development of the first phase. (Underscoring supplied)

Viewed in the light of the foregoing provision of the JVA, petitioner cannot avoid
liability by claiming that it was not in any way privy to the Contracts to Sell
executed by PPGI and respondents. As correctly argued by the latter, moreover, a
joint venture is considered in this jurisdiction as a form of partnership and is,
accordingly, governed by the law of partnerships. [54] Under Article 1824 of
the Civil Code of the Philippines, all partners are solidarily liable with the
partnership for everything chargeable to the partnership, including loss or injury
caused to a third person or penalties incurred due to any wrongful act or omission
of any partner acting in the ordinary course of the business of the partnership or
with the authority of his co-partners. [55] Whether innocent or guilty, all the partners
are solidarily liable with the partnership itself.[56]

WHEREFORE, premises considered, the petition for review is DENIED for lack
of merit.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum
of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They

appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance
of the City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned
attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the
following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is
the Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:
1. Jose Gatchalian ....................................................................................................

P0.18

2. Gregoria Cristobal ...............................................................................................

.18

3. Saturnina Silva ....................................................................................................

.08

4. Guillermo Tapia ...................................................................................................

.13

5. Jesus Legaspi ......................................................................................................

.15

6. Jose Silva .............................................................................................................

.07

7. Tomasa Mercado ................................................................................................

.08

8. Julio Gatchalian ...................................................................................................

.13

9. Emiliana Santiago ................................................................................................

.13

10. Maria C. Legaspi ...............................................................................................

.16

11. Francisco Cabral ...............................................................................................

.13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

14. Buenaventura Guzman ......................................................................................

.13

15. Mariano Santos .................................................................................................

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that
the said ticket was registered in the name of Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the abovementioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000
and that the corresponding check covering the above-mentioned prize of P50,000 was

drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company
against the Philippine National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by Jose
Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose
Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &
Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer
of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within
which to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is
enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a
copy of which marked Exhibit C is attached and made a part hereof, requesting exemption
from payment of the income tax to which reply there were enclosed fifteen (15) separate
individual income tax returns filed separately by each one of the plaintiffs, copies of which
returns are attached and marked Exhibit D-1 to D-15, respectively, in order of their names
listed in the caption of this case and made parts hereof; a statement of sale signed by Jose
Gatchalian showing the amount put up by each of the plaintiffs to cover up the attached and
marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose
Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part
thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G
is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment
of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and
gave plaintiffs until February 10, 1935 within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed,
defendant on May 13, 1935 issued a warrant of distraint and levy against the property of the
plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs,
the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus
Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is
attached and marked Exhibit J and made a part hereof, and requested defendant that
plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly
installments;
11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two solvent
persons to guarantee prompt payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed
and made a part hereof, to guarantee the payment of the balance of the alleged tax liability

by monthly installments at the rate of P118.70 a month, the first payment under protest to be
effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the
sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935 overruled the protest and denied the request for
refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance
with the terms and conditions of bond filed by them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of
Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against
the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria
Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan,
Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and
penalties demanded by defendant as evidenced by income tax receipt No. 35811 which is
attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the
plaintiffs formally protested to the defendant against the payment of said amount and
requested the refund thereof, copy of which is attached and marked Exhibit O and made part
hereof; but that on September 4, 1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand
eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest
by them but that defendant refused and still refuses to refund the said amount
notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if
necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the
11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and
for the amount indicated below and the part of may share remaining is also shown to wit:
Purchaser

Amount

Address

1. Mariano Santos ...........................................

P0.14

Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever
prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
Name

Exhibit
No.

1. Jose
Gatchalian ....................................... D-1
...

Purchase
Price

Price
Won

Net
prize

Expenses

P0.18

P4,425

P 480

3,945

2. Gregoria
Cristobal ......................................

D-2

.18

4,575

2,000

2,575

3. Saturnina
Silva .............................................

D-3

.08

1,875

360

1,515

4. Guillermo
Tapia ..........................................

D-4

.13

3,325

360

2,965

5. Jesus Legaspi by Maria Cristobal

D-5
.........

.15

3,825

720

3,105

6. Jose
Silva ................................................ D-6
....

.08

1,875

360

1,515

7. Tomasa
Mercado .......................................

D-7

.07

1,875

360

1,515

8. Julio Gatchalian by Beatriz

Guzman .......

D-8

.13

3,150

240

2,910

9. Emiliana
Santiago ......................................

D-9

.13

3,325

360

2,965

10. Maria C.
Legaspi ......................................

D-10

.16

4,100

960

3,140

11. Francisco
Cabral ......................................

D-11

.13

3,325

360

2,965

12. Gonzalo
Javier ..........................................

D-12

.14

3,325

360

2,965

13. Maria
D-13
Santiago ..........................................

.17

4,350

360

3,990

14. Buenaventura
Guzman ...........................

D-14

.13

3,325

360

2,965

15. Mariano
Santos ........................................

D-15

.14

3,325

360

2,965

2.00

<="" td=""
style="font-size:
14px; textdecoration: none;
50,000
color: rgb(0, 0,
128); font-family:
arial, verdana;">

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to
the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own; in the first case it is admitted that the partnership thus formed is
liable for the payment of income tax, whereas if there was merely a community of property, they are
exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every corporation, jointstock company, partnership, joint account (cuenta en participacion), association or insurance
company, organized in the Philippine Islands, no matter how created or organized, but not
including duly registered general copartnership (compaias colectivas), a tax of three per
centum upon such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar year from all sources
within the Philippine Islands by every corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance company organized, authorized,

or existing under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however, That
nothing in this section shall be construed as permitting the taxation of the income derived
from dividends or net profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation, jointstock company, partnership, joint account (cuenta en participacion), association, or
insurance company, or property, real, personal, or mixed, shall be ascertained in accordance
with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred
and thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
insurance company in the calendar year nineteen hundred and twenty and in each year
thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt
from the payment of income tax under the law. But according to the stipulation facts the plaintiffs
organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the
amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office
of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize,
the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-12541

August 28, 1959

ROSARIO U. YULO, assisted by her husband JOSE C. YULO, plaintiffs-appellants,

vs.
YANG CHIAO SENG, defendant-appellee.

Punzalan, Yabut, Eusebio & Tiburcio for appellants.

Augusto Francisco and Julian T. Ocampo for appellee.
LABRADOR, J.:
Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan, presiding,
dismissing plaintiff's complaint as well as defendant's counterclaim. The appeal is prosecuted by
plaintiff.
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the palintiff
Mrs. Rosario U. Yulo, proposing the formation of a partnership between them to run and operate a
theatre on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila. The principal
conditions of the offer are (1) that Yang Chiao Seng guarantees Mrs. Yulo a monthly participation of
P3,000 payable quarterly in advance within the first 15 days of each quarter, (2) that the partnership
shall be for a period of two years and six months, starting from July 1, 1945 to December 31, 1947,
with the condition that if the land is expropriated or rendered impracticable for the business, or if the
owner constructs a permanent building thereon, or Mrs. Yulo's right of lease is terminated by the
owner, then the partnership shall be terminated even if the period for which the partnership was
agreed to be established has not yet expired; (3) that Mrs. Yulo is authorized personally to conduct
such business in the lobby of the building as is ordinarily carried on in lobbies of theatres in
operation, provided the said business may not obstruct the free ingress and agrees of patrons of the
theatre; (4) that after December 31, 1947, all improvements placed by the partnership shall belong to
Mrs. Yulo, but if the partnership agreement is terminated before the lapse of one and a half years
period under any of the causes mentioned in paragraph (2), then Yang Chiao Seng shall have the
right to remove and take away all improvements that the partnership may place in the premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a partnership
agreement establishing the "Yang & Company, Limited," which was to exist from July 1, 1945 to
December 31, 1947. It states that it will conduct and carry on the business of operating a theatre for
the exhibition of motion and talking pictures. The capital is fixed at P100,000, P80,000 of which is to
be furnished by Yang Chiao Seng and P20,000, by Mrs. Yulo. All gains and profits are to be
distributed among the partners in the same proportion as their capital contribution and the liability of
Mrs. Yulo, in case of loss, shall be limited to her capital contribution (Exh. "B").
In June , 1946, they executed a supplementary agreement, extending the partnership for a period of
three years beginning January 1, 1948 to December 31, 1950. The benefits are to be divided
between them at the rate of 50-50 and after December 31, 1950, the showhouse building shall
belong exclusively to the second party, Mrs. Yulo.
The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia Carrion
Santa Marina and Maria Carrion Santa Marina. In the contract of lease it was stipulated that the
lease shall continue for an indefinite period of time, but that after one year the lease may be
cancelled by either party by written notice to the other party at least 90 days before the date of
cancellation. The last contract was executed between the owners and Mrs. Yulo on April 5, 1948. But
on April 12, 1949, the attorney for the owners notified Mrs. Yulo of the owner's desire to cancel the
contract of lease on July 31, 1949. In view of the above notice, Mrs. Yulo and her husband brought a

civil action to the Court of First Instance of Manila on July 3, 1949 to declare the lease of the
premises. On February 9, 1950, the Municipal Court of Manila rendered judgment ordering the
ejectment of Mrs. Yulo and Mr. Yang. The judgment was appealed. In the Court of First Instance, the
two cases were afterwards heard jointly, and judgment was rendered dismissing the complaint of
Mrs. Yulo and her husband, and declaring the contract of lease of the premises terminated as of July
31, 1949, and fixing the reasonable monthly rentals of said premises at P100. Both parties appealed
from said decision and the Court of Appeals, on April 30, 1955, affirmed the judgment.
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of the
business. Yang answered the letter saying that upon the advice of his counsel he had to suspend the
payment (of the rentals) because of the pendency of the ejectment suit by the owners of the land
against Mrs. Yulo. In this letter Yang alleges that inasmuch as he is a sublessee and inasmuch as
Mrs. Yulo has not paid to the lessors the rentals from August, 1949, he was retaining the rentals to
make good to the landowners the rentals due from Mrs. Yulo in arrears (Exh. "E").
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this action on
May 26, 1954, alleging the existence of a partnership between them and that the defendant Yang
Chiao Seng has refused to pay her share from December, 1949 to December, 1950; that after
December 31, 1950 the partnership between Mrs. Yulo and Yang terminated, as a result of which,
plaintiff became the absolute owner of the building occupied by the Cine Astor; that the reasonable
rental that the defendant should pay therefor from January, 1951 is P5,000; that the defendant has
acted maliciously and refuses to pay the participation of the plaintiff in the profits of the business
amounting to P35,000 from November, 1949 to October, 1950, and that as a result of such bad faith
and malice on the part of the defendant, Mrs. Yulo has suffered damages in the amount of P160,000
and exemplary damages to the extent of P5,000. The prayer includes a demand for the payment of
the above sums plus the sum of P10,000 for the attorney's fees.
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and the
defendant was one of lease and not of partnership; that the partnership was adopted as a subterfuge
to get around the prohibition contained in the contract of lease between the owners and the plaintiff
against the sublease of the said property. As to the other claims, he denies the same and alleges
that the fair rental value of the land is only P1,100. By way of counterclaim he alleges that by reason
of an attachment issued against the properties of the defendant the latter has suffered damages
amounting to P100,000.
The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The court
heard evidence of the plaintiff in the absence of the defendant and thereafter rendered judgment
ordering the defendant to pay to the plaintiff P41,000 for her participation in the business up to
December, 1950; P5,000 as monthly rental for the use and occupation of the building from January
1, 1951 until defendant vacates the same, and P3,000 for the use and occupation of the lobby from
July 1, 1945 until defendant vacates the property. This decision, however, was set aside on a motion
for reconsideration. In said motion it is claimed that defendant failed to appear at the hearing
because of his honest belief that a joint petition for postponement filed by both parties, in view of a
possible amicable settlement, would be granted; that in view of the decision of the Court of Appeals
in two previous cases between the owners of the land and the plaintiff Rosario Yulo, the plaintiff has
no right to claim the alleged participation in the profit of the business, etc. The court, finding the

above motion, well-founded, set aside its decision and a new trial was held. After trial the court
rendered the decision making the following findings: that it is not true that a partnership was created
between the plaintiff and the defendant because defendant has not actually contributed the sum
mentioned in the Articles of Partnership, or any other amount; that the real agreement between the
plaintiff and the defendant is not of the partnership but one of the lease for the reason that under the
agreement the plaintiff did not share either in the profits or in the losses of the business as required
by Article 1769 of the Civil Code; and that the fact that plaintiff was granted a "guaranteed
participation" in the profits also belies the supposed existence of a partnership between them. It.
therefore, denied plaintiff's claim for damages or supposed participation in the profits.
As to her claim for damages for the refusal of the defendant to allow the use of the supposed lobby
of the theatre, the court after ocular inspection found that the said lobby was very narrow space
leading to the balcony of the theatre which could not be used for business purposes under existing
ordinances of the City of Manila because it would constitute a hazard and danger to the patrons of
the theatre. The court, therefore, dismissed the complaint; so did it dismiss the defendant's
counterclaim, on the ground that the defendant failed to present sufficient evidence to sustain the
same. It is against this decision that the appeal has been prosecuted by plaintiff to this Court.
The first assignment of error imputed to the trial court is its order setting aside its former decision
and allowing a new trial. This assignment of error is without merit. As that parties agreed to postpone
the trial because of a probable amicable settlement, the plaintiff could not take advantage of
defendant's absence at the time fixed for the hearing. The lower court, therefore, did not err in
setting aside its former judgment. The final result of the hearing shown by the decision indicates that
the setting aside of the previous decision was in the interest of justice.
In the second assignment of error plaintiff-appellant claims that the lower court erred in not striking
out the evidence offered by the defendant-appellee to prove that the relation between him and the
plaintiff is one of the sublease and not of partnership. The action of the lower court in admitting
evidence is justified by the express allegation in the defendant's answer that the agreement set forth
in the complaint was one of lease and not of partnership, and that the partnership formed was
adopted in view of a prohibition contained in plaintiff's lease against a sublease of the property.
The most important issue raised in the appeal is that contained in the fourth assignment of error, to
the effect that the lower court erred in holding that the written contracts, Exhs. "A", "B", and "C,
between plaintiff and defendant, are one of lease and not of partnership. We have gone over the
evidence and we fully agree with the conclusion of the trial court that the agreement was a sublease,
not a partnership. The following are the requisites of partnership: (1) two or more persons who bind
themselves to contribute money, property, or industry to a common fund; (2) intention on the part of
the partners to divide the profits among themselves. (Art. 1767, Civil Code.).
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did
not furnish any help or intervention in the management of the theatre. In the third place, it does not
appear that she has ever demanded from defendant any accounting of the expenses and earnings
of the business. Were she really a partner, her first concern should have been to find out how the
business was progressing, whether the expenses were legitimate, whether the earnings were
correct, etc. She was absolutely silent with respect to any of the acts that a partner should have

done; all that she did was to receive her share of P3,000 a month, which can not be interpreted in
any manner than a payment for the use of the premises which she had leased from the owners.
Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945
(Exh. "A"), which shows that both parties considered this offer as the real contract between them.
Plaintiff claims the sum of P41,000 as representing her share or participation in the business from
December, 1949. But the original letter of the defendant, Exh. "A", expressly states that the
agreement between the plaintiff and the defendant was to end upon the termination of the right of
the plaintiff to the lease. Plaintiff's right having terminated in July, 1949 as found by the Court of
Appeals, the partnership agreement or the agreement for her to receive a participation of P3,000
automatically ceased as of said date.
We find no error in the judgment of the court below and we affirm it in toto, with costs against
plaintiff-appellant.
Paras C.J., Padilla, Bautista Angelo, Endencia, and Barrera, JJ., concur.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES
and CONSTANCIO MAGLANA,respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R.
CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case
No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim
to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,
and another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of
P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed
in good faith. The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it,
in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party

defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or against anybody is
declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owneroperator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and
one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while
the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit
D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that
they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R.
No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had
reinsured its risk of liability under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action
as it does not stand to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the
amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the latter.
To qualify a person to be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be

enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has
been held that the real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00
the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from
its reinsurer, the former was able to foreclose extra-judicially one of the subject
airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount it had paid to JDA totals
to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has
already been paid by the reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4)
the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to recover the
amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is
suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the principal will not prosper, and
this is so even where the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a
real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to
JDA is the difference between the two amounts, or P3,666.28. This is the amount for
which Pioneer may sue defendants, assuming that the indemnity agreement is still
valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or

a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has

no more claim against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made
by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as insured and the
reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation
as are acquired in similar cases where the original insurer pays a loss (Universal Ins.
Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general
applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania
Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co.
(101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover
the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured.
(Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not
have been dismissed on the premise that the evidence on record shows that it is entitled to recover
from the counter indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan and could not be mortgaged
here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other
security for the claim sought to be enforced by this action, which necessarily means
that the indemnity agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on
the planes and spare parts, no longer has any further action against the defendants
as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of
foreclosure precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA
and Pioneer as surety having made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the New Civil Code, known as
the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by
extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is void.'
Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by
SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the last installment
being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of and consented to
the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence
of this was the extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru
the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer
and its surety by reason of the filing of the instant case against them and the
attachment and garnishment of their properties. The instant action is clearly
unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was
to do business through the corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings ordering him to reimburse certain amounts given
by the respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims
in the total amount of P184,878.74 as correctly found by the trial court, with interest
from the filing of the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the records that defendant
Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter
and the laws of the state relating thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the

corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well as
the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, crossclaim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as
their lawful contribution and participation in the proposed corporation to be known as
SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 97212 June 30, 1993

BENJAMIN YU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY
LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HOFU, respondents.
Jose C. Guico for petitioner.

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.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and 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 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
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
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
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.
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 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.
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.
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)

Article 1830 of the same Code must also be noted:

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
undertaking is specified;
xxx xxx xxx
(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;
xxx xxx xxx
(Emphasis supplied)
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.
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:
[o]n dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.
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.
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
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:
Art. 1840. In the following cases creditors of the dissolved partnership
are also creditors of the person or partnership continuing the business:
(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;
(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;
(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;
(5) When any partner wrongfully causes a dissolution and remaining partners
continue the business under the provisions of article 1837, second paragraph, No.
2, either alone or with others,and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;
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.

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.
Nothing in this article shall be held to modify any right of creditors to set assignment
on the ground of fraud.
xxx xxx xxx
(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 vis-a-visany claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It 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.
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 non-retention
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 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.
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 value-added 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 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.
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.
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:
(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;
(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;
(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.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.