Primelink Properties and Development Corporation vs

Ma. Clarita Lazatin-Magat

August 30, 2012
FACTS:

Business Organization Partnership, Agency, Trust Dissolution and Winding Up Joint Venture
Agreement Rights of Innocent Party

In 1994, Primelink Properties and the Lazatin siblings entered into a joint venture agreement
whereby the Lazatins shall contribute a huge parcel of land and Primelink shall develop the same
into a subdivision. For 4 years however, Primelink failed to develop the said land. So in 1998, the
Lazatins filed a complaint to rescind the joint venture agreement with prayer for preliminary
injunction. In said case, Primelink was declared in default or failing to file an answer and for asking
multiple motions for extension. The trial court eventually ruled in favor of the Lazatins and it
ordered Primelink to return the possession of said land to the Lazatins as well as some
improvements which Primelink had so far over the property without the Lazatins paying for said
improvements. This decision was affirmed by the Court of Appeals. Primelink is now assailing the
order; that turning over improvements to the Lazatins without reimbursement is unjust; that the
Lazatins did not ask the properties to be placed under their possession but they merely asked for
rescission.

ISSUE: Whether or not the improvements made by Primelink should also be turned over under the
possession of the Lazatins.

HELD: Yes. In the first place, even though the Lazatins did specifically pray for possession the
same (placing of improvements under their possession) is incidental in the relief they prayed for.
They are therefore entitled possession over the parcel of land plus the improvements made
thereon made by Primelink.

In this jurisdiction, joint ventures are governed by the laws of partnership. Under the laws of
partnership, when a partnership is dissolved, as in this case when the trial court rescinded the joint
venture agreement, the innocent party has the right to wind up the partnership affairs.

With the rescission of the JVA on account of petitioners fraudulent acts, all authority of any partner
to act for the partnership is terminated except so far as may be necessary to wind up the
partnership affairs or to complete transactions begun but not yet finished. On dissolution, the
partnership is not terminated but continues until the winding up of partnership affairs is
completed. Winding up means the administration of the assets of the partnership for the purpose
of terminating the business and discharging the obligations of the partnership.

It must be stressed, too, that although the Lazatins acquired possession of the lands and the
improvements thereon, the said lands and improvements remained partnership property, subject
to the rights and obligations of the parties, inter se, of the creditors and of third parties and subject
to the outcome of the settlement of the accounts between the parties, absent any agreement of
the parties in their JVA to the contrary (here no agreement in the JVA as to winding up). Until the
partnership accounts are determined, it cannot be ascertained how much any of the parties is
entitled to, if at all.
Philex Mining Corp. v. Commissioner of Internal
Revenue
G.R. No. 148187 April 16, 2008 Ynares-Santiago, J.

FACTS:

Philex Mining Corp. entered into an agreement with Baguio Gold Mining Co. for the former to
manageand operate the latters mining claim, known as the Sto. Nino Mine. The
parties agreement wasdenominated as Power of Attorney which provides inter
alia:4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available
tothe MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such
amounts asfrom time to time may be required by the MANAGERS within the said 3-year
period, for use in theMANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION
PESOS (P11,000,000.00) shall bedeemed, for internal audit purposes, as the owners account in
the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO
MINE, which is left with the Sto. Nino PROJECT,shall be added to such owners
account.5. Whenever the MANAGERS shall deem it necessary and convenient in connection with
theMANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the
Sto. NinoPROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto.Nino
PROJECT as a special fund to be known as the MANAGERS account.
(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with priorappro
val of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
hereinprovided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in
cash shall beadded to the MANAGERS account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT untilter
mination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL toe
xtend to the MANAGERS the benefit of subsequent appreciation of property, upon
a projectedtermination of this Agency, the ratio which the MANAGERS account has to the
owners account willbe determined, and the corresponding proportion of the entire assets
of the STO. NINO MINE,excluding the claims, shall be transferred to the MANAGERS,
except that such transferred assetsshall not include mine development, roads, buildings, and
similar property which will be valueless, orof slight value, to the MANAGERS. The
MANAGERS can, on the other hand, require at their option that property originally
transferred by them to the Sto. Nino PROJECT be re-transferred to them. Untilsuch assets
are transferred to the MANAGERS, this Agency shall remain subsisting.x x x
x12. The compensation of the MANAGER shall be fifty per cent (50%) of the net
profit of the Sto.Nino PROJECT before income tax. It is understood that the MANAGERS shall pay
income tax on theircompensation, while the PRINCIPAL shall pay income tax on the net profit of
the Sto. Nino PROJECTafter deduction therefrom of the MANAGERS compensation.

Philex Mining
made advances of cash and property in accordance with paragraph 5 of thea
greement. However, the mine suffered continuing losses over the years which resulted to
PhilexMinings withdrawal as manager of the mine and in the eventual cessation of
mine operations.

The parties executed a Compromise with Dation in Payment wherein Baguio Gold
admitted anindebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the
same in threesegments by first assigning Baguio Golds tangible assets to Philex Mining,
transferring to the latterBaguio Golds equitable title in its Philodrill assets and finally settling the
remaining liability throughproperties that Baguio Gold may acquire in the future.

The parties executed an Amendment to Compromise with Dation in Payment where

the partiesdetermined that Baguio Golds indebtedness to petitioner actually amounted
to P259,137,245.00,which sum included liabilities of Baguio Gold to other creditors
that petitioner had assumed asguarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted

b y B a g u i o G o l d f r o m t h e B a n k o f Am e r i c a N T & S A a n d C i t i b a n k N . A . T h i s
time, Baguio
Goldu n d e r t o o k t o p a y p e t i t i o n e r i n t w o s e g m e n t s b y f i r s t a s s i g n i
n g i t s t a n g i b l e a s s e t s f o r P127,838,051.00 and then transferring its equitable title in
its Philodrill assets for
P16,302,426.00. T h e p a r t i e s t h e n a s c e r t a i n e d t h a t B a g u i o G o l d h a d a r e m a i n i n g
o u t s t a n d i n g i n d e b t e d n e s s t o petitioner in the amount of P114,996,768.00.

Philex Mining wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that
were set up in 1981 andP2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount
of P112,136,000.00 as loss on settlement of receivables from Baguio Gold against
reserves andallowances. However, the BIR disallowed the amount as deduction for
bad debt and assessedpetitioner a deficiency income tax of P62,811,161.39. Philex Mining
protested before the BIR arguingthat the deduction must be allowed since all requisites for a bad
debt deduction were satisfied, towit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) itw a s c h a r g e d o f f
w i t h i n t h e t a x a b l e ye a r w h e n i t w a s d e t e r m i n e d t o b e w o r t h l e s s . B I R
d e n i e d petitioners protest. It held that the alleged debt was not ascertained to be worthless since
BaguioGold remained existing and had not filed a petition for bankruptcy; and that the deduction
did notconsist of a valid and subsisting debt considering that, under the management contract,
petitionerwas to be paid 50% of the projects net profit.
ISSUE:

WON the parties entered into a contract of agency coupled with an interest which is
notrevocable at will

HELD:

No. An examination of the Power of Attorney reveals that a partnership or joint venture
wasindeed intended by the parties.

In an agency coupled with interest, it is the agency that cannot be revoked or

withdrawn by theprincipal due to an interest of a third party that depends upon it, or
the mutual interest of bothprincipal and agent. In this case, the non-revocation or non-
withdrawal under paragraph 5(c) appliesto the advances made by petitioner who is
supposedly the agent and not the principal under
thec o n t r a c t . T h u s , i t c a n n o t b e i n f e r r e d f r o m t h e s t i p u l a t i o n t h a t t h e p a r t i e s r
e l a t i o n u n d e r t h e agreement is one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of theparties was one of agency and not a partnership. Although the
said provision states that thisAgency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS isoutstanding, inclusive of the MANAGERS
account, it does not necessarily follow that the parties entered into an agency contract
coupled with an interest that cannot be withdrawn by Baguio Gold.

The main object of the Power of Attorney was not to confer a power in favor of
petitioner tocontract with third persons on behalf of Baguio Gold but to create a business
relationship betweenpetitioner and Baguio Gold, in which the former was to manage
and operate the latters minethrough the parties mutual contribution of material
resources and industry. The essence of anagency, even one that is coupled with interest, is
the agents ability to represent his principal andbring about business relations between the
latter and third persons.

The strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it
wouldreceive 50% of the net profits as compensation under paragraph 12 of the
agreement. Thee n t i r e t y o f t h e p a r t i e s c o n t r a c t u a l s t i p u l a t i o n s s i m p l y l e a d s t o
n o o t h e r c o n c l u s i o n t h a n t h a t petitioners compensation is actually its share in the
income of the joint venture. Article 1769 (4) of the Civil Code explicitly provides that the receipt by
a person of a share in the profits of a businessis prima facie evidence that he is a partner in the
business.
HEIRS OF JOSE LIM, represented by ELENITO
LIM, Petitioners,
vs.
JULIET VILLA LIM, Respondent.
G.R. No. 172690
March 3, 2010

FACTS:

Business Organization Partnership, Agency, Trust Partner Periodic Accounting Profit Sharing

In 1980, the heirs of Jose Lim alleged that Jose Lim entered into a partnership agreement with Jimmy Yu
and Norberto Uy. The three contributed P50,000.00 each and used the funds to purchase a truck to start
their trucking business. A year later however, Jose Lim died. The eldest son of Jose Lim, Elfledo Lim, took
over the trucking business and under his management, the trucking business prospered. Elfledo was able
to but real properties in his name. From one truck, he increased it to 9 trucks, all trucks were in his name
however. He also acquired other motor vehicles in his name.

In 1993, Norberto Uy was killed. In 1995, Elfledo Lim died of a heart attack. Elfledos wife, Juliet Lim, took
over the properties but she intimated to Jimmy and the heirs of Norberto that she could not go on with the
business. So the properties in the partnership were divided among them.

Now the other heirs of Jose Lim, represented by Elenito Lim, required Juliet to do an accounting of all
income, profits, and properties from the estate of Elfledo Lim as they claimed that they are co-owners
thereof. Juliet refused hence they sued her.

The heirs of Jose Lim argued that Elfledo Lim acquired his properties from the partnership that Jose Lim
formed with Norberto and Jimmy. In court, Jimmy Yu testified that Jose Lim was the partner and not Elfledo
Lim. The heirs testified that Elfledo was merely the driver of Jose Lim.

ISSUE: Who is the partner between Jose Lim and Elfledo Lim?

HELD: It is Elfledo Lim based on the evidence presented regardless of Jimmy Yus testimony in court that
Jose Lim was the partner. If Jose Lim was the partner, then the partnership would have been dissolved
upon his death (in fact, though the SC did not say so, I believe it should have been dissolved upon
Norbertos death in 1993). A partnership is dissolved upon the death of the partner. Further, no evidence
was presented as to the articles of partnership or contract of partnership between Jose, Norberto and
Jimmy. Unfortunately, there is none in this case, because the alleged partnership was never formally
organized.

But at any rate, the Supreme Court noted that based on the functions performed by Elfledo, he is the actual
partner.
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;

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;

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; and

5.) none of the heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his
lifetime. As repeatedly stressed in the case of Heirs of Tan Eng Kee, 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 Juliet formed part of the estate of Jose, having been
derived from Joses alleged partnership with Jimmy and Norberto.

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.
Primelink Properties and Development Corporation vs Ma. Clarita Lazatin-Magat

FIRST DIVISION

PRIMELINK PROPERTIES G.R. No. 167379

AND DEVELOPMENT

CORPORATION and

RAFAELITO W. LOPEZ, Present:

Petitioners,

PANGANIBAN, C.J., Chairperson,

YNARES-SANTIAGO,

- versus - AUSTRIA-MARTINEZ,

CALLEJO, SR., and

CHICO-NAZARIO, JJ.

MA. CLARITA T. LAZATIN-

MAGAT, JOSE SERAFIN T.

LAZATIN, JAIME TEODORO

T. LAZATIN and JOSE Promulgated:

MARCOS T. LAZATIN,

Respondents. June 27, 2006

x--------------------------------------------------x

DECISION
CALLEJO, SR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure of the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 69200 and its
Resolution[2] denying petitioners motion for reconsideration thereof.

The factual and procedural antecedents are as follows:

Primelink Properties and Development Corporation (Primelink for brevity) is a domestic

corporation engaged in real estate development. Rafaelito W. Lopez is its President and Chief
Executive Officer.[3]

Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose
Marcos T. Lazatin (the Lazatins for brevity), are co-owners of two (2) adjoining parcels of land, with
a combined area of 30,000 square meters, located in Tagaytay City and covered by Transfer
Certificate of Title (TCT) No. T-10848[4] of the Register of Deeds of Tagaytay City.

On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as
President, entered into a Joint Venture Agreement [5] (JVA) for the development of the
aforementioned property into a residential subdivision to be known as Tagaytay Garden
Villas. Under the JVA, the Lazatin siblings obliged themselves to contribute the two parcels of land
as their share in the joint venture. For its part, Primelink undertook to contribute money, labor,
personnel, machineries, equipment, contractors pool, marketing activities, managerial expertise
and other needed resources to develop the property and construct therein the units for sale to the
public. Specifically, Primelink bound itself to accomplish the following, upon the execution of the
deed:

a.) Survey the land, and prepare the projects master plans, engineering designs,
structural and architectural plans, site development plans, and such other need
plans in accordance with existing laws and the rules and regulations of
appropriate government institutions, firms or agencies;
 b.) Secure and pay for all the licenses, permits and clearances needed for the
projects;

c.) Furnish all materials, equipment, labor and services for the development of the
land in preparation for the construction and sale of the different types of units
(single-detached, duplex/twin, cluster and row house);

d.) Guarantee completion of the land development work if not prevented by force
majeure or fortuitous event or by competent authority, or other unavoidable
circumstances beyond the DEVELOPERS control, not to exceed three years
from the date of the signing of this Joint Venture Agreement, except the
installation of the electrical facilities which is solely MERALCOS responsibility;

e.) Provide necessary manpower resources, like executive and managerial officers,
support personnel and marketing staff, to handle all services related to land and
housing development (administrative and construction) and marketing (sales,
advertising and promotions).[6]

The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as
follows:

1. During the first two years of the Project, the DEVELOPER and the LANDOWNER
can draw allowances or make advances not exceeding a total of twenty percent
(20%) of the net revenue for that period, on the basis of sixty percent (60%) for
the DEVELOPER and forty percent (40%) for the LANDOWNERS.

The drawing allowances/advances are limited to twenty percent (20%) of

the net revenue for the first two years, in order to have sufficient reserves or
funds to protect and/or guarantee the construction and completion of the
different types of units mentioned above.

2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to
drawing allowances and/or advances equivalent to sixty percent (60%) and forty
percent (40%), respectively, of the total net revenue or income of the sale of the
units.[7]
They also agreed to share in the profits from the joint venture, thus:

1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or
income of the Joint Venture project, after deducting all expenses incurred in
connection with the land development (such as administrative management and
construction expenses), and marketing (such as sales, advertising and
promotions), and

2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or
income of the Joint Venture project, after deducting all the above-mentioned
expenses.[8]

Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:

SALES-INCOME-COST PROJECTION

SELLING PRICE COST PRICE DIFFERENCE INCOME

CLUSTER:

A1 3,200,000 - A2 1,260,000 = 1,940,000 x 24 = P 46,560,000.00

TWIN:

B1 2,500,000 - B2 960,000 = 1,540,000 x 24 = 36,960,000.00

SINGLE:

C1 3,500,000 - C2 1,400,000 = 2,100,000 x 16 = 33,600,000.00

ROW-TYPE TOWNHOMES:

D1 1,600,000 - D2 700,000 = 900,000 x 24 = 21,600,000.00

P138,720,000.00

(GROSS) Total Cash Price (A1+B1+C1+D1) = P231,200,000.00

Total Building Expense (A2+B2+C2+D2) = 92,480,000.00

COMPUTATION OF ADDL. INCOME ON INTEREST

 TCP x 30% D/P = P 69,360,000 P 69,360,000.00

Balance = 70% = 161,840,000

x .03069 x 48 = P238,409,740 238,409,740.00

Total Amount (TCP + int. earn.) P307,769,740.00

EXPENSES:

less: A Building expenses P 92,480,000.00

B Commission (8% of TCP) 18,496,000.00

C Admin. & Mgmt. expenses (2% of TCP) 4,624,000.00

D Advertising & Promo exp. (2% of TCP) 4,624,000.00

E Building expenses for the open spaces

and Amenities (Development cost not incl.

Housing) 400 x 30,000 sqms. 12,000,000.00

TOTAL EXPENSES (A+B+C+D+E) P132,224,000.00

RECONCILIATION OF INCOME VS. EXPENSES

Total Projected Income (incl. income

from interest earn.) P307,769,740.00

less: 132,224,000.00

Total Expenses P175,545,740.00[9]

The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions
between the parties relative to the interpretation, scope and reach, and the
enforcement/implementation of any provision of the agreement shall be referred to Voluntary
Arbitration in accordance with the Arbitration Law.[10]

The Lazatins agreed to subject the title over the subject property to an escrow
agreement. Conformably with the escrow agreement, the owners duplicate of the title was
deposited with the China Banking Corporation. [11] However, Primelink failed to immediately secure
a Development Permit from Tagaytay City, and applied the permit only on August 30,
1995. On October 12, 1995, the City issued a Development Permit to Primelink. [12]

In a Letter[13] dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply
with its obligations under the JVA, otherwise the appropriate action would be filed against it to
protect their rights and interests. This impelled the officers of Primelink to meet with the Lazatins
and enabled the latter to review its business records/papers.In another Letter [14] dated October 22,
1997, the Lazatins informed Primelink that they had decided to rescind the JVA effective upon its
receipt of the said letter. The Lazatins demanded that Primelink cease and desist from further
developing the property.

Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC)
of Tagaytay City, Branch 18, a complaint for rescission accounting and damages, with prayer for
temporary restraining order and/or preliminary injunction against Primelink and Lopez. The case
was docketed as Civil Case No. TG-1776. Plaintiffs alleged, among others, that, despite the lapse
of almost four (4) years from the execution of the JVA and the delivery of the title and possession
of the land to defendants, the land development aspect of the project had not yet been completed,
and the construction of the housing units had not yet made any headway, based on the following
facts, namely: (a) of the 50 housing units programmed for Phase I, only the following types of
houses appear on the site in these condition: (aa) single detached, one completed and two units
uncompleted; (bb) cluster houses, one unit nearing completion; (cc) duplex, two units completed
and two units unfinished; and (dd) row houses, two units, completed; (b) in Phase II thereof, all
that was done by the defendants was to grade the area; the units so far constructed had been the
object of numerous complaints by their owners/purchasers for poor workmanship and the use of
sub-standard materials in their construction, thus, undermining the projects marketability. Plaintiffs
also alleged that defendants had, without justifiable reason, completely disregarded previously
agreed accounting and auditing procedures, checks and balances system installed for the mutual
protection of both parties, and the scheduled regular meetings were seldom held to the detriment
and disadvantage of plaintiffs. They averred that they sent a letter through counsel, demanding
compliance of what was agreed upon under the agreement but defendants refused to heed said
demand. After a succession of letters with still no action from defendants, plaintiffs sent a letter
on October 22, 1997, a letter formally rescinding the JVA.

Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by

defendants, they (plaintiffs) stood to receive the amount of P70,218,296.00 as their net share in
the joint venture project; to date, however, after almost four (4) years and despite the undertaking
in the JVA that plaintiffs shall initially get 20% of the agreed net revenue during the first two (2)
years (on the basis of the 60%-40% sharing) and their full 40% share thereafter, defendants had
yet to deliver these shares to plaintiffs which by conservative estimates would amount to no less
than P40,000,000.00.[15]

Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:

WHEREFORE, it is respectfully prayed of this Honorable Court that a

temporary restraining order be forthwith issued enjoining the defendants to
immediately stop their land development, construction and marketing of the housing
units in the aforesaid project; after due proceedings, to issue a writ of preliminary
injunction enjoining and prohibiting said land development, construction and
marketing of housing units, pending the disposition of the instant case.

After trial, a decision be rendered:

1. Rescinding the Joint Venture Agreement executed between the plaintiffs

and the defendants;

2. Immediately restoring to the plaintiffs possession of the subject parcels of

land;

3. Ordering the defendants to render an accounting of all income generated

as well as expenses incurred and disbursement made in connection with the project;

4. Making the Writ of Preliminary Injunction permanent;

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the
amount Forty Million Pesos (P40,000,000.00) in actual and/or compensatory
damages;

6. Ordering the defendants, jointly and severally, to pay the plaintiffs the
amount of Two Million Pesos (P2,000,000.00) in exemplary damages;
 7. Ordering the defendants, jointly and severally, to pay the plaintiffs the
amount equivalent to ten percent (10%) of the total amount due as and for attorneys
fees; and

8. To pay the costs of this suit.

Other reliefs and remedies as are just and equitable are likewise being prayed
for.[16]

Defendants opposed plaintiffs plea for a writ of preliminary injunction on the ground that
plaintiffs complaint was premature, due to their failure to refer their complaint to a Voluntary
Arbitrator pursuant to the JVA in relation to Section 2 of Republic Act No. 876 before filing their
complaint in the RTC. They prayed for the dismissal of the complaint under Section 1(j), Rule 16 of
the Rules of Court:

WHEREFORE, it is respectfully prayed that an Order be issued:

a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited
Rules of Court, or, in the alternative,

b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to
arbitrate, and then asking the parties to resolve their controversies, pursuant to the
Arbitration Law, or in the alternative;

c) staying or suspending the proceedings in captioned case until the completion of

the arbitration, and

d) denying the plaintiffs prayer for the issuance of a temporary restraining order or
writ of preliminary injunction.

Other reliefs and remedies just and equitable in the premises are prayed for.[17]

In the meantime, before the expiration of the reglementary period to answer the complaint,
defendants, invoking their counsels heavy workload, prayed for a 15-day extension [18] within which
to file their answer. The additional time prayed for was granted by the RTC.[19] However, instead of
filing their answer, defendants prayed for a series of 15-day extensions in eight (8) successive
motions for extensions on the same justification. [20] The RTC again granted the additional time
prayed for, but in granting the last extension, it warned against further extension. [21] Despite the
admonition, defendants again moved for another 15-day extension, [22] which, this time, the RTC
denied. No answer having been filed, plaintiffs moved to declare the defendants in default,
[23]
which the RTC granted in its Order[24] dated June 24, 1998.

On June 25, 1998, defendants filed, via registered mail, their Answer with Counterclaim and
Opposition to the Prayer for the Issuance of a Writ of Preliminary Injunction. [25] On July 8, 1998,
defendants filed a Motion to Set Aside the Order of Default. [26] This was opposed by plaintiffs. [27] In
an Order[28] dated July 14, 1998, the RTC denied defendants motion to set aside the order of
default and ordered the reception of plaintiffs evidence ex parte. Defendants filed a motion for
reconsideration[29] of the July 14, 1998Order, which the RTC denied in its Order[30] dated October
21, 1998.

Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in
default, as well as the Order denying their motion to set aside the order of default, alleging that
these were contrary to facts of the case, the law and jurisprudence. [31]On September 16, 1999, the
appellate court issued a Resolution [32] dismissing the appeal on the ground that the Orders
appealed from were interlocutory in character and, therefore, not appealable. No motion for
reconsideration of the Order of the dismissal was filed by defendants.

In the meantime, plaintiffs adduced ex parte their testimonial and documentary

evidence. On April 17, 2000, the RTC rendered a Decision, the dispositive part of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

against the defendants as follows:

1. Ordering the rescission of the Joint Venture Agreement as of the

date of filing of this complaint;

2. Ordering the defendants to return possession, including all

improvements therein, of the real estate property belonging to the
plaintiffs which is described in, and covered by Transfer Certificate
of Title No. T-10848 of the Register of Deeds of Tagaytay City, and
located in Barangay Anulin, City of Tagaytay;
 3. Ordering the defendants to turn over all documents, records or
papers that have been executed, prepared and retained in
connection with any contract to sell or deed of sale of all lots/units
sold during the effectivity of the joint venture agreement;

4. Ordering the defendants to pay the plaintiffs the sum

of P1,041,524.26 representing their share of the net income of
the P2,603,810.64 as of September 30, 1995, as stipulated in the
joint venture agreement;

5. Ordering the defendants to pay the plaintiffs attorneys fees in the

amount of P104,152.40;

6. Ordering the defendants to pay the costs.

SO ORDERED.[33]

The trial court anchored its decision on the following findings:

x x x Evidence on record have shown patent violations by the defendants of

the stipulations particularly paragraph II covering Developers (defendant)
undertakings, as well as paragraph III and paragraph V of the JVA. These violations
are not limited to those made against the plaintiffs alone as it appears that some of
the unit buyers themselves have their own separate gripes against the defendants as
typified by the letters (Exhibits G and H) of Mr. Emmanuel Enciso.

xxxx

Rummaging through the evidence presented in the course of the testimony of

Mrs. Maminta on August 6, 1998 (Exhibits N, O, P, Q and R as well as submarkings,
pp. 60 to 62, TSNAugust 6, 1998) this court has observed, and is thus convinced,
that a pattern of what appears to be a scheme or plot to reduce and eventually blot
out the net income generated from sales of housing units by defendants, has been
established. Exhibit P-2 is explicit in declaring that, as of September 30, 1995, the
joint venture project earned a net income of about P2,603,810.64. This amount,
however, was drastically reduced in a subsequent financial report submitted by the
defendants to P1,954,216.39. Shortly thereafter, and to the dismay of the plaintiffs,
 the defendants submitted an income statement and a balance sheet (Exhibits R
and R-1) indicating a net loss of P5,122,906.39 as of June 30, 1997.

Of the reported net income of P2,603,810.64 (Exhibit P-2) the plaintiffs should
have received the sum of P1,041,524.26 representing their 40% share under
paragraph II and V of the JVA. But this was not to be so. Even before the plaintiffs
could get hold of their share as indicated above, the defendants closed the chance
altogether by declaring a net loss. The court perceives this to be one
calculated coup-de-grace that would put to thin air plaintiffs hope of getting their
share in the profit under the JVA.

That this matter had reached the court is no longer a cause for speculation.
The way the defendants treated the JVA and the manner by which they handled the
project itself vis--vis their partners, the plaintiffs herein, there is bound to be certain
conflict as the latter repeatedly would received the losing end of the bargain.

Under the intolerable circumstances, the plaintiffs could not have opted for
some other recourse but to file the present action to enforce their rights. x x x[34]

On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal[35] alleging defendants
dilatory tactics for its allowance. This was opposed by defendants.[36]

On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of
plaintiffs.[37] Upon posting a bond of P1,000,000.00 by plaintiffs, a writ of execution pending appeal
was issued on June 20, 2000.[38]

Defendants appealed the decision to the CA on the following assignment of errors:

THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST

REFERRING THE COMPLAINT FOR VOLUNTARY ARBITRATION (RA NO. 876),
CONTRARY TO THE MANDATED VOLUNTARY ARBITRATION CLAUSE UNDER
THE JOINT VENTURE AGREEMENT, AND THE DOCTRINE IN MINDANAO
PORTLAND CEMENT CORPORATION V. MCDONOUGH CONSTRUCTION
COMPANY OF FLORIDA (19 SCRA 814-815).
 II

THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING

APPEAL EVEN IN THE ABSENCE OF GOOD AND COMPELLING REASONS TO
JUSTIFY SAID ISSUANCE, AND DESPITE PRIMELINKS STRONG OPPOSITION
THERETO.

III

THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINKS MOTION TO

QUASH THE WRIT OF EXECUTION PENDING APPEAL AND THE MOTION FOR
RECONSIDERATION, ALTHOUGH THE COURT HAS RETAINED ITS
JURISDICTION TO RULE ON ALL QUESTIONS RELATED TO EXECUTION.

IV

THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT

ALTHOUGH PRIMELINK HAS SUBSTANTIALLY DEVELOPED THE PROJECT AND
HAS SPENT MORE OR LESS FORTY MILLION PESOS, AND DESPITE
APPELLEES FAILURE TO PRESENT SUFFICIENT EVIDENCE JUSTIFYING THE
SAID RESCISSION.

THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE
RIGHT TO TAKE OVER THE SUBDIVISION AND TO APPROPRIATE FOR
THEMSELVES ALL THE EXISTING IMPROVEMENTS INTRODUCED THEREIN BY
PRIMELINK, ALTHOUGH SAID RIGHT WAS NEITHER ALLEGED NOR PRAYED
FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING THE EX
PARTE HEARING, AND EVEN WITHOUT ORDERING APPELLEES TO FIRST
REIMBURSE PRIMELINK OF THE SUBSTANTIAL DIFFERENCE BETWEEN THE
MARKET VALUE OF APPELLEES RAW, UNDEVELOPED AND UNPRODUCTIVE
LAND (CONTRIBUTED TO THE PROJECT) AND THE SUM OF MORE OR LESS
FORTY MILLION PESOS WHICH PRIMELINK HAD SPENT FOR THE
HORIZONTAL AND VERTICAL DEVELOPMENT OF THE PROJECT, THEREBY
ALLOWING APPELLEES TO UNJUSTLY ENRICH THEMSELVES AT THE
EXPENSE OF PRIMELINK.[39]

The appeal was docketed in the CA as CA-G.R. CV No. 69200.

On August 9, 2004, the appellate court rendered a decision affirming, with modification, the
appealed decision. The fallo of the decision reads:
 WHEREFORE, in view of the foregoing, the assailed decision of
the Regional Trial Court of Tagaytay City, Branch 18, promulgated on April 17,
2000 in Civil Case No. TG-1776, is hereby AFFIRMED. Accordingly, Transfer
Certificate of Title No. T-10848 held for safekeeping by Chinabank pursuant to the
Escrow Agreement is ordered released for return to the plaintiffs-appellees and
conformably with the affirmed decision, the cancellation by the Register of Deeds of
Tagaytay City of whatever annotation in TCT No. 10848 by virtue of the Joint Venture
Agreement, is now proper.

SO ORDERED.[40]

Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation,
[41]
the appellate court ruled that, under Philippine law, a joint venture is a form of partnership and
is to be governed by the laws of partnership. The aggrieved parties filed a motion for
reconsideration,[42] which the CA denied in its Resolution[43] dated March 7, 2005.

Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:

1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND

REVERSIBLE LEGAL ERROR AND/OR GRAVE ABUSE OF DISCRETION IN
ORDERING THE RETURN TO THE RESPONDENTS OF THE
PROPERTY WITH ALL IMPROVEMENTS THEREON, EVEN WITHOUT
ORDERING/REQUIRING THE RESPONDENTS TO FIRST PAY OR
REIMBURSE PRIMELINK OF ALL EXPENSES INCURRED IN DEVELOPING
AND MARKETING THE PROJECT, LESS THE ORIGINAL VALUE OF THE
PROPERTY, AND THE SHARE DUE RESPONDENTS FROM THE PROFITS
(IF ANY) OF THE JOINT VENTURE PROJECT?

2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE

AND UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD HUMAN
RELATIONS AND VIOLATIVE OF EXISTING LAWS AND JURISPRUDENCE
ON JUDICIAL NOTICE, DEFAULT, UNJUST ENRICHMENT AND RESCISSION
OF CONTRACT WHICH REQUIRES MUTUAL RESTITUTION, NOT
UNILATERAL APPROPRIATION, OF PROPERTY BELONGING TO ANOTHER?
[44]
 Petitioners maintain that the aforesaid portion of the decision which unconditionally awards
to respondents all improvements on the project without requiring them to pay the value thereof or
to reimburse Primelink for all expenses incurred therefore is inherently and essentially illegal and
confiscatory, oppressive and unconscionable, contrary to the tenets of good human relations, and
will allow respondents to unjustly enrich themselves at Primelinks expense. At the time
respondents contributed the two parcels of land, consisting of 30,000 square meters to the joint
venture project when the JVA was signed on March 10, 1994, the said properties were worth not
more than P500.00 per square meter, the price tag agreed upon the parties for the purpose of the
JVA. Moreover, before respondents rescinded the JVA sometime in October/November 1997, the
property had already been substantially developed as improvements had already been introduced
thereon; petitioners had likewise incurred administrative and marketing expenses, among others,
amounting to more or less P40,000,000.00.[45]

Petitioners point out that respondents did not pray in their complaint that they be declared the
owners and entitled to the possession of the improvements made by petitioner Primelink on the
property; neither did they adduce evidence to prove their entitlement to said improvements. It
follows, petitioners argue, that respondents were not entitled to the improvements although
petitioner Primelink was declared in default.

They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to
the extent necessary to cover the damages caused and that, under Article 1385 of the same Code,
rescission creates the obligation to return the things which were not object of the contract, together
with their fruits, and the price with its interest; consequently, it can be effected only when
respondents can return whatever they may be obliged to return. Respondents who sought the
rescission of the JVA must place petitioner Primelink in the status quo. They insist that
respondents cannot rescind and, at the same time, retain the consideration, or part of the
consideration received under the JVA. They cannot have the benefits of rescission without
assuming its burden. All parties must be restored to their original positions as nearly as possible
upon the rescission of a contract. In the event that restoration to the status quo is impossible,
rescission may be granted if the Court can balance the equities and fashion an appropriate
remedy that would be equitable to both parties and afford complete relief.

Petitioners insist that being defaulted in the court a quo would in no way defeat their claim
for reimbursement because [w]hat matters is that the improvements exist and they cannot be
denied.[46] Moreover, they point out, the ruling of this Court in Aurbach v. Sanitary Wares
Manufacturing Corporation[47] cited by the CA is not in point.
On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not
specifically pray for their takeover of the property and for the possession of the improvements on
the parcels of land, nevertheless, respondents were entitled to said relief as a necessary
consequence of the ruling of the trial court ordering the rescission of the JVA. The appellate court
cited the ruling of this Court in the Aurbach case and Article 1838 of the New Civil Code, to wit:

As a general rule, the relation of the parties in joint ventures is governed by their
agreement. When the agreement is silent on any particular issue, the general
principles of partnership may be resorted to.[48]

Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with
rescissible contracts. What applies is Article 1191 of the New Civil Code, which reads:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.

They insist that petitioners are not entitled to rescission for the improvements because, as found
by the RTC and the CA, it was petitioner Primelink that enriched itself at the expense of
respondents. Respondents reiterate the ruling of the CA, and argue as follows:

PRIMELINK argued that the LAZATINs in their complaint did not allege, did not
prove and did not pray that they are and should be entitled to take over the
development of the project, and that the improvements and existing structures which
were introduced by PRIMELINK after spending more or less Forty Million Pesos be
awarded to them. They merely asked in the complaint that the joint venture
agreement be rescinded, and that the parcels of land they contributed to the project
be returned to them.

PRIMELINKs argument lacks merit. The order of the court for PRIMELINK to return
possession of the real estate property belonging to the LAZATINs including all
improvements thereon was not a judgment that was different in kind than what was
prayed for by the LAZATINs. The order to return the property with all the
improvements thereon is just a necessary consequence to the order of rescission.

As a general rule, the relation of the parties in joint ventures is governed by their
agreement. When the agreement is silent on any particular issue, the general
principles of partnership may be resorted to. In Aurbach v. Sanitary Wares
Manufacturing Corporation, the Supreme Court discussed the following points
regarding joint ventures and partnership:

The legal concept of a joint venture is of common law origin. It has no

precise legal definition, but it has been generally understood to mean
an organization formed for some temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is, in fact, hardly distinguishable
from the partnership, since elements are similar community of
interest in the business, sharing of profits and losses, and a
mutual right of control. (Blackner v. McDermott, 176 F.2d 498
[1949]; Carboneau v. Peterson, 95 P.2d 1043 [1939]; Buckley v.
Chadwick, 45 Cal.2d 183, 288 P.2d 12, 289 P.2d 242 [1955]) The main
distinction cited by most opinions in common law 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. (Tuffs v. Mann, 116
Cal.App. 170, 2 P.2d 500 [1931]; Harmon v. Martin, 395 III. 595, 71
N.E.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 laws of partnership. 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) (Emphasis Supplied)
 The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the
words of the court a quo, was a pattern of what appears to be a scheme or plot to
reduce and eventually blot out the net incomes generated from sales of housing
units by the defendants. Under Article 1838 of the Civil Code, where the partnership
contract is rescinded on the ground of the fraud or misrepresentation of one of the
parties thereto, the party entitled to rescind is, without prejudice to any other right is
entitled to a lien on, or right of retention of, the surplus of the partnership
property after satisfying the partnership liabilities to third persons for any sum of
money paid by him for the purchase of an interest in the partnership and for any
capital or advance contributed by him. In the instant case, the joint venture still has
outstanding liabilities to third parties or the buyers of the property.

It is not amiss to state that title to the land or TCT No. T-10848 which is now held by
Chinabank for safekeeping pursuant to the Escrow Agreement executed between
Primelink Properties and Development Corporation and Ma. Clara T. Lazatin-Magat
should also be returned to the LAZATINs as a necessary consequence of the order
of rescission of contract. The reason for the existence of the Escrow Agreement has
ceased to exist when the joint venture agreement was rescinded. [49]

Respondents stress that petitioners must bear any damages or losses they may have
suffered. They likewise stress that they did not enrich themselves at the expense of petitioners.

In reply, petitioners assert that it is unjust and inequitable for respondents to retain the
improvements even if their share in the P1,041,524.26 of the net income of the property and the
sale of the land were to be deducted from the value of the improvements, plus administrative and
marketing expenses in the total amount of P40,000,000.00. Petitioners will still be entitled to an
accounting from respondents. Respondents cannot deny the existence and nature of said
improvements as they are visible to the naked eye.

The threshold issues are the following: (1) whether respondents are entitled to the possession of
the parcels of land covered by the JVA and the improvements thereon introduced by petitioners as
their contribution to the JVA; (2) whether petitioners are entitled to reimbursement for the value of
the improvements on the parcels of land.

The petition has no merit.

On the first issue, we agree with petitioners that respondents did not specifically pray in their
complaint below that possession of the improvements on the parcels of land which they
contributed to the JVA be transferred to them. Respondents made a specific prayer in their
complaint that, upon the rescission of the JVA, they be placed in possession of the parcels of land
subject of the agreement, and for other reliefs and such other remedies as are just and equitable
in the premises. However, the trial court was not precluded from awarding possession of the
improvements on the parcels of land to respondents in its decision. Section 2(c), Rule 7 of the
Rules of Court provides that a pleading shall specify the relief sought but it may add as general
prayer for such further or other relief as may be deemed just and equitable. Even without the
prayer for a specific remedy, proper relief may be granted by the court if the facts alleged in the
complaint and the evidence introduced so warrant. [50] The court shall grant relief warranted by the
allegations and the proof even if no such relief is prayed for. [51] The prayer in the complaint for
other reliefs equitable and just in the premises justifies the grant of a relief not otherwise
specifically prayed for.[52]

The trial court was not proscribed from placing respondents in possession of the parcels of land
and the improvements on the said parcels of land. It bears stressing that the parcels of land, as
well as the improvements made thereon, were contributed by the parties to the joint venture under
the JVA, hence, formed part of the assets of the joint venture. [53] The trial court declared that
respondents were entitled to the possession not only of the parcels of land but also of the
improvements thereon as a consequence of its finding that petitioners breached their agreement
and defrauded respondents of the net income under the JVA.

On the second issue, we agree with the CA ruling that petitioner Primelink and respondents
entered into a joint venture as evidenced by their JVA which, under the Courts ruling in Aurbach, is
a form of partnership, and as such is to be governed by the laws on partnership.

When the RTC rescinded the JVA on complaint of respondents based on the evidence on
record that petitioners willfully and persistently committed a breach of the JVA, the court thereby
dissolved/cancelled the partnership. [54] With the rescission of the JVA on account of petitioners
fraudulent acts, all authority of any partner to act for the partnership is terminated except so far as
may be necessary to wind up the partnership affairs or to complete transactions begun but not yet
finished.[55] On dissolution, the partnership is not terminated but continues until the winding up of
partnership affairs is completed. [56] Winding up means the administration of the assets of the
partnership for the purpose of terminating the business and discharging the obligations of the
partnership.
 The transfer of the possession of the parcels of land and the improvements thereon to
respondents was only for a specific purpose: the winding up of partnership affairs, and the partition
and distribution of the net partnership assets as provided by law. [57] After all, Article 1836 of the
New Civil Code provides that unless otherwise agreed by the parties in their JVA, respondents
have the right to wind up the partnership affairs:

Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved
the partnership or the legal representative of the last surviving partner, not insolvent,
has the right to wind up the partnership affairs, provided, however, that any partner,
his legal representative or his assignee, upon cause shown, may obtain winding up
by the court.

It must be stressed, too, that although respondents acquired possession of the lands and
the improvements thereon, the said lands and improvements remained partnership property,
subject to the rights and obligations of the parties, inter se, of the creditors and of third parties
under Articles 1837 and 1838 of the New Civil Code, and subject to the outcome of the settlement
of the accounts between the parties as provided in Article 1839 of the New Civil Code, absent any
agreement of the parties in their JVA to the contrary. [58] Until the partnership accounts are
determined, it cannot be ascertained how much any of the parties is entitled to, if at all.

It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value
of the improvements on the parcels of land owned by the joint venture/partnership. Notably, the
JVA of the parties does not contain any provision designating any party to wind up the affairs of the
partnership.

Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is
caused in contravention of the partnership agreement are as follows:

(1) Each partner who has not caused dissolution wrongfully shall have:

(a) All the rights specified in the first paragraph of this article, and

(b) The right, as against each partner who has caused the dissolution
wrongfully, to damages for breach of the agreement.
 (2) The partners who have not caused the dissolution wrongfully, if they all desire to
continue the business in the same name either by themselves or jointly with others,
may do so, during the agreed term for the partnership and for that purpose may
possess the partnership property, provided they secure the payment by bond
approved by the court, or pay to any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership at the dissolution, less any
damages recoverable under the second paragraph, No. 1(b) of this article, and in like
manner indemnify him against all present or future partnership liabilities.

(3) A partner who has caused the dissolution wrongfully shall have:

(a) If the business is not continued under the provisions of the second
paragraph, No. 2, all the rights of a partner under the first
paragraph, subject to liability for damages in the second
paragraph, No. 1(b), of this article.

(b) If the business is continued under the second paragraph, No. 2, of

this article, the right as against his co-partners and all claiming
through them in respect of their interests in the partnership, to
have the value of his interest in the partnership, less any
damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by
a bond approved by the court, and to be released from all
existing liabilities of the partnership; but in ascertaining the value
of the partners interest the value of the good-will of the business
shall not be considered.

And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to
any other right, entitled:

(1) To a lien on, or right of retention of, the surplus of the partnership property after
satisfying the partnership liabilities to third persons for any sum of money paid by
him for the purchase of an interest in the partnership and for any capital or advances
contributed by him;

(2) To stand, after all liabilities to third persons have been satisfied, in the place of
the creditors of the partnership for any payments made by him in respect of the
partnership liabilities; and

(3) To be indemnified by the person guilty of the fraud or making the representation
against all debts and liabilities of the partnership.
The accounts between the parties after dissolution have to be settled as provided in Article 1839 of
the New Civil Code:

Art. 1839. In settling accounts between the partners after dissolution, the following
rules shall be observed, subject to any agreement to the contrary:

(1) The assets of the partnership are:

(a) The partnership property,

(b) The contributions of the partners necessary for the payment of all
the liabilities specified in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:

(a) Those owing to creditors other than partners,

(b) Those owing to partners other than for capital and profits,

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in No. 1 of this article
to the satisfaction of the liabilities.

(4) The partners shall contribute, as provided by article 1797, the amount necessary
to satisfy the liabilities.

(5) An assignee for the benefit of creditors or any person appointed by the court shall
have the right to enforce the contributions specified in the preceding number.
 (6) Any partner or his legal representative shall have the right to enforce the
contributions specified in No. 4, to the extent of the amount which he has paid in
excess of his share of the liability.

(7) The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.

(8) When partnership property and the individual properties of the partners are in
possession of a court for distribution, partnership creditors shall have priority on
partnership property and separate creditors on individual property, saving the rights
of lien or secured creditors.

(9) Where a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 69200 are AFFIRMEDinsofar as they
conform to this Decision of the Court.

Costs against petitioners.

SO ORDERED.

ROMEO J. CALLEJO, SR.

Associate Justice
WE CONCUR:

ARTEMIO V. PANGANIBAN

Chief Justice

Chairperson

CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice
 C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN

Chief Justice
Philex Mining Corp. v. Commissioner of Internal Revenue

G.R. No. 148187 April 16, 2008 Ynares-Santiago, J.

THIRD DIVISION

PHILEX MINING G.R. No. 148187

CORPORATION,

Petitioner, Present:

Ynares-Santiago, J. (Chairperson),

- versus - Carpio Morales, *

Chico-Nazario,

Nachura, and,

Reyes, JJ.

COMMISSIONER OF

INTERNAL REVENUE, Promulgated:

Respondent.

April 16, 2008

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision [1] of the Court of Appeals in
CA-G.R. SP No. 49385, which affirmed the Decision [2] of the Court of Tax Appeals in C.T.A. Case
No. 5200. Also assailed is the April 3, 2001 Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining Company (Baguio Gold) for the former to manage and
operate the latters mining claim, known as the Sto. Nino mine, located in Atok and
Tublay, Benguet Province. The parties agreement was denominated as Power of Attorney and
provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the
STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE,
which is left with the Sto. Nino PROJECT, shall be added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection

with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds
or property to the Sto. Nino PROJECT, in accordance with the following
arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by
the Sto. Nino PROJECT as a special fund to be known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be added to the MANAGERS
account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
(d) The MANAGERS account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the
MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will
be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property originally transferred by them to the
Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to
the MANAGERS, this Agency shall remain subsisting.

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit
of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS
shall pay income tax on their compensation, while the PRINCIPAL shall pay income
tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS
and, in the future, may incur other obligations in favor of the MANAGERS. This
Power of Attorney has been executed as security for the payment and satisfaction of
all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to
fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of
the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the
MANAGERS account. After all obligations of the PRINCIPAL in favor of the
MANAGERS have been paid and satisfied in full, this Agency shall be revocable by
the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and

the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by
giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner
be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d)
hereof shall be operative in case of the MANAGERS withdrawal.

x x x x[5]
In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing
losses over the years which resulted to petitioners withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations onFebruary 20, 1982. [6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in
Payment[7] wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Golds
tangible assets to petitioner, transferring to the latter Baguio Golds equitable title in its Philodrill
assets and finally settling the remaining liability through properties that Baguio Gold may acquire
in the future.

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in
Payment[8] where the parties determined that Baguio Golds indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank
N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets
for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were
set up in 1981 and P2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as loss on settlement of receivables from Baguio Gold against reserves and
allowances.[9] However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction
for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites
for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within the taxable year when it was
determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with
Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant
to the management contract, formed part of Baguio Golds pecuniary obligations to petitioner. It
also included payments made by petitioner as guarantor of Baguio Golds long-term loans which
legally entitled petitioner to be subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that
it would not be able to recover the advances and payments it had made in behalf of Baguio
Gold. For a debt to be considered worthless, petitioner claimed that it was neither required to
institute a judicial action for collection against the debtor nor to sell or dispose of collateral assets
in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection
and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual
basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold
remained existing and had not filed a petition for bankruptcy; and that the deduction did not consist
of a valid and subsisting debt considering that, under the management contract, petitioner was to
be paid fifty percent (50%) of the projects net profit. [10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as
follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is

hereby DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-
003067 for deficiency income tax in the amount of P62,811,161.39 is hereby
AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to

PAY respondent Commissioner of Internal Revenue the amount of P62,811,161.39,
plus, 20% delinquency interest due computed from February 10, 1995, which is the
date after the 20-day grace period given by the respondent within which petitioner
has to pay the deficiency amount x x x up to actual date of payment.
 SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine
were in the nature of a loan. It instead characterized the advances as petitioners investment in a
partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA
held that the Power of Attorney executed by petitioner and Baguio Gold was actually a partnership
agreement. Since the advanced amount partook of the nature of an investment, it could not be
deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations
of Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were
made, Baguio Gold was not in default since its loans were not yet due and demandable. What
petitioner did was to pre-pay the loans as evidenced by the notice sent by Bank of America
showing that it was merely demanding payment of the installment and interests due. Moreover,
Citibank imposed and collected a pre-termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of the CTA. [12] Hence, upon denial of its motion
for reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules of Court, alleging
that:

I.

The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan.

II.

The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of
the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the
development of the Sto. Nino Mine notwithstanding the clear absence of any intent
on the part of Philex and Baguio Gold to form a partnership.
 III.

The Court of Appeals erred in relying only on the Power of Attorney and in
completely disregarding the Compromise Agreement and the Amended Compromise
Agreement when it construed the nature of the advances made by Philex.

IV.

The Court of Appeals erred in refusing to delve upon the issue of the propriety of the
bad debts write-off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio
Gold, we should not only rely on the Power of Attorney, but also on the subsequent Compromise
with Dation in Payment and Amended Compromise with Dation in Payment that the parties
executed in 1982. These documents, allegedly evinced the parties intent to treat the advances and
payments as a loan and establish a creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is material
in determining the true nature of the business relationship between petitioner and Baguio
Gold. Before resort may be had to the two compromise agreements, the parties contractual intent
must first be discovered from the expressed language of the primary contract under which the
parties business relations were founded. It should be noted that the compromise agreements were
mere collateral documents executed by the parties pursuant to the termination of their business
relationship created under the Power of Attorney. On the other hand, it is the latter which
established the juridical relation of the parties and defined the parameters of their dealings with
one another.

The execution of the two compromise agreements can hardly be considered as a

subsequent or contemporaneous act that is reflective of the parties true intent. The compromise
agreements were executed eleven years after the Power of Attorney and merely laid out a plan or
procedure by which petitioner could recover the advances and payments it made under the Power
of Attorney. The parties entered into the compromise agreements as a consequence of the
dissolution of their business relationship. It did not define that relationship or indicate its real
character.
 An examination of the Power of Attorney reveals that a partnership or joint venture was
indeed intended by the parties. Under 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. [15] While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its charter, it has been held that it
may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise
legal definition, but it has been generally understood to mean an organization formed
for some temporary purpose. x x x 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. x x x 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. x x x 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. x x x It would seem
therefore that under Philippine law, a joint venture is a form of partnership and
should 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. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the parties
had intended to create a partnership and establish a common fund for the purpose. They also had
a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the
mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money,
property and industry to the common fund known as the Sto. Nio mine. [17] In this regard, we note
that there is a substantive equivalence in the respective contributions of the parties to the
development and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contribute P11Munder its owners account plus any of
its income that is left in the project, in addition to its actual mining claim. Meanwhile, petitioners
contribution would consist of its expertise in the management and operation of mines, as well as
the managers account which is comprised of P11M in funds and property and
petitioners compensation as manager that cannot be paid in cash.
 However, petitioner asserts that it could not have entered into a partnership agreement with
Baguio Gold because it did not bind itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
Sto. Nio project (w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIO MINE. [18]

The wording of the parties agreement as to petitioners contribution to the common fund
does not detract from the fact that petitioner transferred its funds and property to the project as
specified in paragraph 5, thus rendering effective the other stipulations of the contract, particularly
paragraph 5(c) which prohibits petitioner from withdrawing the advances until termination of the
parties business relations. As can be seen, petitioner became bound by its contributions once the
transfers were made. The contributions acquired an obligatory nature as soon as petitioner had
chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against
withdrawal of advances should not be taken as an indication that it had entered into a partnership
with Baguio Gold; that the stipulation only showed that what the parties entered into was actually a
contract of agency coupled with an interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by
the principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent.[19] In this case, the non-revocation or non-withdrawal under paragraph 5(c)
applies to the advances made by petitioner who is supposedly the agent and not the principal
under the contract. Thus, it cannot be inferred from the stipulation that the parties relation under
the agreement is one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship
of the parties was one of agency and not a partnership. Although the said provision states that this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS account, it does not necessarily follow that the parties
entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
 It should be stressed that the main object of the Power of Attorney was not to confer a
power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a
business relationship between petitioner and Baguio Gold, in which the former was to manage and
operate the latters mine through the parties mutual contribution of material resources and
industry. The essence of an agency, even one that is coupled with interest, is the agents ability
to represent his principal and bring about business relations between the latter and third persons.
[20]
Where representation for and in behalf of the principal is merely incidental or necessary for the
proper discharge of ones paramount undertaking under a contract, the latter may not necessarily
be a contract of agency, but some other agreement depending on the ultimate undertaking of the
parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the
advances made by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon
termination of the parties business relations, the ratio which the MANAGERS account has to the
owners account will be determined, and the corresponding proportion of the entire assets of the
STO. NINO MINE, excluding the claims shall be transferred to petitioner. [22] As pointed out by the
Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines assets
upon dissolution of the parties business relations. There was nothing in the agreement that would
require Baguio Gold to make payments of the advances to petitioner as would be recognized as
an item of obligation or accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of
assets of the Sto. Nio mine upon termination, a provision that is more consistent with a partnership
than a creditor-debtor relationship. It should be pointed out that in a contract of loan, a person who
receives a loan or money or any fungible thing acquires ownership thereof and is bound to pay
the creditor an equal amount of the same kind and quality. [23] In this case, however, there was no
stipulation for Baguio Gold to actually repay petitioner the cash and property that it had advanced,
but only the return of an amount pegged at a ratio which the managers account had to the owners
account.

In this connection, we find no contractual basis for the execution of the two compromise
agreements in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose
from the termination of their business relations over the Sto. Nino mine. The Power of Attorney
clearly provides that petitioner would only be entitled to the return of a proportionate share of the
mine assets to be computed at a ratio that the managers account had to the owners
account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any
amount over and above the proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it was unlikely for a business corporation to lend
hundreds of millions of pesos to another corporation with neither security, or collateral, nor a
specific deed evidencing the terms and conditions of such loans. The parties also did not provide a
specific maturity date for the advances to become due and demandable, and the manner of
payment was unclear. All these point to the inevitable conclusion that the advances were not loans
but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it
would receive 50% of the net profits as compensation under paragraph 12 of the agreement. The
entirety of the parties contractual stipulations simply leads to no other conclusion than that
petitioners compensation is actually its share in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share
in the profits of a business is prima facie evidence that he is a partner in the business. Petitioner
asserts, however, that no such inference can be drawn against it since its share in the profits of
the Sto Nio project was in the nature of compensation or wages of an employee, under the
exception provided in Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an employee of Baguio
Gold who will be paid wages pursuant to an employer-employee relationship. To begin with,
petitioner was the manager of the project and had put substantial sums into the venture in order to
ensure its viability and profitability. By pegging its compensation to profits, petitioner also stood not
to be remunerated in case the mine had no income. It is hard to believe that petitioner would take
the risk of not being paid at all for its services, if it were truly just an ordinary employee.

Consequently, we find that petitioners compensation under paragraph 12 of the agreement

actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not be
entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold. [25] It
is not surprising that petitioner was to receive a 50% share in the net profits, considering that the
Power of Attorney also provided for an almost equal contribution of the parties to the St. Nino
mine. The compensation agreed upon only serves to reinforce the notion that the parties relations
were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a
partnership known as the Sto. Nino mine. The advances were not debts of Baguio Gold to
petitioner inasmuch as the latter was under no unconditional obligation to return the same to the
former under the Power of Attorney. As for the amounts that petitioner paid as guarantor to Baguio
Golds creditors, we find no reason to depart from the tax courts factual finding that Baguio Golds
debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner
pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by
the evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income. Deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled
to the deduction claimed.[27] In this case, petitioner failed to substantiate its assertion that the
advances were subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No.
49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A.
Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the
deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20% delinquency interest
computed from February 10, 1995, which is the due date given for the payment of the deficiency
income tax, up to the actual date of payment.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice

MINITA V. CHICO-NAZARIO ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

RUBEN T. REYES

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.
CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, it
is hereby certified that the conclusions in the above Decision were reached in consultation before
the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO

Chief Justice

HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,

vs.
JULIET VILLA LIM, Respondent.

G.R. No. 172690

March 3, 2010

Republic of the Philippines

 Supreme Court
Manila

THIRD DIVISION

HEIRS OF JOSE LIM, G.R. No. 172690

represented by ELENITO LIM,

Petitioners, Present:

CORONA, J.,

Chairperson,

VELASCO, JR.,

- versus - 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) of Lucena 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 certiorariunder
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 parti