G.R. No.

L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which
they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124
and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his
four children, the petitioners, to enable them to build their residences. The company sold the two lots to
petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued
to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled
City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived
from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital
gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336
in addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable
in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76
on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue
vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the
Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership. The
petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated
sooner or later. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

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

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y
aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an unmistakable intention to form a partnership
or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax
as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit.
Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the
'hacienda' in question pro-indiviso from their deceased parents; they did not contribute or
invest additional ' capital to increase or expand the inherited properties; they merely
continued dedicating the property to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding shares in the income and
expenses of the 'hacienda', and they continued for many years the status of co-ownership in
order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the
existing contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own

properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property
does not produce an income at all, it is not subject to any kind of income tax, whether the
income tax on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No.
738, September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp.
77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce
profits for themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and
son purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the
three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived
rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the
two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not
prejudging this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No
costs. SO ORDERED.

G.R. No. L-4935 May 28, 1954

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

INC., plaintiff-appellee, vs. QUIRINO BOLAÑOS, defendant-appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover
possesion of registered land situated in barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and description of the land sought
to be recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name
under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area
of 13 hectares more or less. But the complaint was amended by reducing the area of 6 hectares, more or
less, after the defendant had indicated the plaintiff's surveyors the portion of land claimed and occupied by
him. The second amendment became necessary and was allowed following the testimony of plaintiff's
surveyors that a portion of the area was embraced in another certificate of title, which was plaintiff's Transfer
Certificate of Title No. 37677. And still later, in the course of trial, after defendant's surveyor and witness,
Quirino Feria, had testified that the area occupied and claimed by defendant was about 13 hectares, as
shown in his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to make its allegations
conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and
public and notorious possession (of land in dispute) under claim of ownership, adverse to the entire world
by defendant and his predecessor in interest" from "time in-memorial". The answer further alleges that
registration of the land in dispute was obtained by plaintiff or its predecessors in interest thru "fraud or error
and without knowledge (of) or interest either personal or thru publication to defendant and/or predecessors
in interest." The answer therefore prays that the complaint be dismissed with costs and plaintiff required to
reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to
the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a
monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes the following
assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case was not brought by
the real property in interest.

II. The trial court erred in admitting the third amended complaint.

III. The trial court erred in denying defendant's motion to strike.

 IV. The trial court erred in including in its decision land not involved in the litigation.

V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title
Nos. 37686 and 37677.

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of
P132.62 monthly from January, 1940, until he vacates the premises.

VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant.

As to the first assigned error, there is nothing to the contention that the present action is not brought by
the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an
action be brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In
fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in the name of
the plaintiff. That practice appears to have been followed in this case, since the complaint is signed by the
law firm of Araneta and Araneta, "counsel for plaintiff" and commences with the statement "comes now
plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is
"represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is
nothing against one corporation being represented by another person, natural or juridical, in a suit in court.
The contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the theory that
it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though
a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by its charter." (Wyoming-
Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing
in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere
reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be treated in all respects, as if they had been
raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any party at my
time, even of the trial of these issues. If evidence is objected to at the trial on the ground that it is
not within the issues made by the pleadings, the court may allow the pleadings to be amended and
shall be so freely when the presentation of the merits of the action will be subserved thereby and
the objecting party fails to satisfy the court that the admission of such evidence would prejudice him
in maintaining his action or defense upon the merits. The court may grant a continuance to enable
the objecting party to meet such evidence.

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues
proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of
Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that
where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself raised the point on which recovery
is based, and that the appellate court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed., 389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that
the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with
the name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried to prove that
the land in dispute was not covered by plaintiff's certificate of title. The evidence, however, is against
defendant, for it clearly establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio
Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or less, covered by transfer
certificate of title No. 37686 of the land records of Rizal province, and of lot No. 4-B-4, situated in the same
barrio, having an area of 74,789 square meters, more or less, covered by transfer certificate of title No.
37677 of the land records of the same province, both lots having been originally registered on July 8, 1914
under original certificate of title No. 735. The identity of the lots was established by the testimony of Antonio
Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the portion thereof claimed by
defendant was established by the testimony of his own witness, Quirico Feria. The combined testimony of
these three witnesses clearly shows that the portion claimed by defendant is made up of a part of lot 4-B-
3-C and major on portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of
title already mentioned. This fact also appears admitted in defendant's answer to the third amended
complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the
decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant,
as more than one year has already elapsed from the issuance and entry of the decree. Neither court the
decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration
proceedings. (Soroñgon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of
that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act
No. 496.) Adverse, notorious and continuous possession under claim of ownership for the period fixed by
law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p.
43.) And it is likewise settled that the right to secure possession under a decree of registration does not
prescribed. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point
is that rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the
alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be
sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it
appears from the record that that reasonable compensation for the use and occupation of the premises, as
stipulated at the hearing was P10 a month for each hectare and that the area occupied by defendant was
13.2619 hectares. The total rent to be paid for the area occupied should therefore be P132.62 a month. It
is appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an
action of ejectment had already been filed against defendant. And it cannot be supposed that defendant has
been paying rents, for he has been asserting all along that the premises in question 'have always been since
time immemorial in open, continuous, exclusive and public and notorious possession and under claim of
ownership adverse to the entire world by defendant and his predecessors in interest.' This assignment of
error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss
alleging that there is pending before the Court of First Instance of Rizal another action between the same
parties and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in
said action. But an examination of that complaint reveals that appellant's allegation is not correct, for the
pretended identity of parties and cause of action in the two suits does not appear. That other case is one
for recovery of ownership, while the present one is for recovery of possession. And while appellant claims
that he is also involved in that order action because it is a class suit, the complaint does not show that such
is really the case. On the contrary, it appears that the action seeks relief for each individual plaintiff and not
relief for and on behalf of others. The motion for dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

G.R. No. 126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners, vs. COURT OF APPEALS and BENGUET LUMBER COMPANY,
represented by its President TAN ENG LAY, respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision 1 dated March 13,
1996 of the former Fifth Division 2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion
of which states:

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint
dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the
decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as
herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on
February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio
City was for accounting, liquidation and winding up of the alleged partnership formed after World War II
between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended
complaint4 impleading private respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng
Lay. The amended complaint was admitted by the trial court in its Order dated May 3, 1991. 5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay,
pooling their resources and industry together, entered into a partnership engaged in the business of selling
lumber and hardware and construction supplies. They named their enterprise "Benguet Lumber" which they
jointly managed until Tan Eng Kee's death. Petitioners herein averred that the business prospered due to
the hard work and thrift of the alleged partners. However, they claimed that in 1981, Tan Eng Lay and his
children caused the conversion of the partnership "Benguet Lumber" into a corporation called "Benguet
Lumber Company." The incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their
rightful participation in the profits of the business. Petitioners prayed for accounting of the partnership
assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of
Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment 6 on April 12, 1995, to wit:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners
in a business venture and/or particular partnership called Benguet Lumber and as such should share
in the profits and/or losses of the business venture or particular partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber
Co. Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal
right to share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner
in a particular partnership have descended to the plaintiffs who are his legal heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet
Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc.
so the plaintiffs know their proper share in the business;

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

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the
instant case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

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

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn
Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits
"4" to "4-U" offered by the defendants before the trial court, consisting of payrolls indicating that Tan Eng
Kee was a mere employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of Tan
Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo,
Jean, Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a private
individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges were
filed, rendered judgment9 dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

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

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING

TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP
AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH
WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A
PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE
THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE
BENGUET LUMBER COMPOUND;

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

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

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE
SUPPLIERS (PAGE 18, DECISION).

IV

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

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

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be
disturbed on appeal if such are supported by the evidence. 10 Our jurisdiction, it must be emphasized, does
not include review of factual issues. Thus:

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

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the
evidentiary basis on which the lower court rendered judgment. Review of factual issues is therefore
warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

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

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

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such
findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will
justify a different conclusion;
 (8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they
are based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but
such findings are contradicted by the evidence on record.12

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

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only
the existence of a partnership, the Court in turn went beyond that by justifying the existence of a
joint venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties,
equal proprietary interest and the exercise by the parties equally of the conduct of the business,
thus:

xxx xxx xxx

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

xxx xxx xxx

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

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

xxx xxx xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any
form, but when an immovable is constituted, the execution of a public instrument becomes
necessary. This is equally true if the capitalization exceeds P3,000.00, in which case a public
 instrument is also necessary, and which is to be recorded with the Securities and Exchange
Commission. In this case at bar, we can easily assume that the business establishment, which from
the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in
addition to the accumulation of real properties and to the fact that it is now a compound. The
execution of a public instrument, on the other hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the
members of his family. There is no proof either that the capital assets of the partnership, assuming
them to be in existence, were maliciously assigned or transferred by Lay, supposedly to the
corporation and since then have been treated as a part of the latter's capital assets, contrary to the
allegations in pars. 6, 7 and 8 of the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk
house in Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc;
2) that both Lay and Kee were seated on a table and were "commanding people" as testified to by
the son, Elpidio Tan; 3) that both were supervising the laborers, as testified to by Victoria Choi; and
4) that Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80 pieces of the
G.I. sheets were added to the business.

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

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN
ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that
whether a partnership exists is a factual matter; consequently, since the appeal is brought to us under Rule
45, we cannot entertain inquiries relative to the correctness of the assessment of the evidence by the court
a quo.13 Inasmuch as the Court of Appeals and the trial court had reached conflicting conclusions, perforce
we must examine the record to determine if the reversal was justified.

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

. . . 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.

Two or more persons may also form a partnership for the exercise of a profession. 14

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

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said
is akin to a particular partnership.20 A particular partnership is distinguished from a joint adventure, to wit:
 (a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination may continue for a number of years; a partnership
generally relates to a continuing business of various transactions of a certain kind. 21

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

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it
has been generally understood to mean an organization formed for some temporary purpose. (Gates
v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable from the partnership, since their
elements are similar — community of interest in the business, sharing of profits and losses, and a
mutual right of control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95
P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The
main distinction cited by most opinions in common law jurisdiction is that the partnership
contemplates a general business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal.
App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be particular or universal, and a particular partnership may
have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).

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

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have
expounded on the precise nature of the business relationship between them. In the absence of evidence,
we cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a common
fund for the purpose of establishing a partnership. The testimonies to that effect of petitioners' witnesses is
directly controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses wherein
preponderance lies;24 the quality of their testimonies is to be considered. None of petitioners' witnesses
could suitably account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta
whose deceased wife was related to Matilde Abubo.25 He stated that when he met Tan Eng Kee after the
liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned
by both brothers.26 Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between
Peralta and his brother.27 Tan Eng Lay consistently testified that he had his business and his brother had
his, that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as it may,
co-ownership or co-possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a
partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in
existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners
share in the profits and losses.29 Each has the right to demand an accounting as long as the partnership
exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the partners at the start
of the business and all the partners are more interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible." 31 But in the situation in the case at bar,
the deferment, if any, had gone on too long to be plausible. A person is presumed to take ordinary care of
his concerns.32 As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she
did not furnish any help or intervention in the management of the theatre. In the third place, it does
not appear that she has even demanded from defendant any accounting of the expenses and earnings
of the business. Were she really a partner, her first concern should have been to find out how the
business was progressing, whether the expenses were legitimate, whether the earnings were correct,
etc. She was absolutely silent with respect to any of the acts that a partner should have done; all
that she did was to receive her share of P3,000.00 a month, which cannot be interpreted in any
manner than a payment for the use of the premises which she had leased from the owners. Clearly,
plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh.
"A"), which shows that both parties considered this offer as the real contract between
them.33 [emphasis supplied]

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

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

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

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

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and
privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber
for the following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his
subordinates. So long, therefore, that an employee's position is higher in rank, it is not unusual that
he orders around those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner,
can order materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner
does not necessarily have to perform this particular task. It is, thus, not an indication that Tan Eng
Kee was a partner.

(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege
was not accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother
of Tan Eng Lay. Naturally, close personal relations existed between them. Whatever privileges Tan
Eng Lay gave his brother, and which were not given the other employees, only proves the kindness
and generosity of Tan Eng Lay towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with
the pricing of stocks, this does not adequately prove the existence of a partnership relation between
them. Even highly confidential employees and the owners of a company sometimes argue with
respect to certain matters which, in no way indicates that they are partners as to each other.35

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken
singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of
these circumstances may be such as to support a finding of the existence of the parties' intent. 36 Yet, in the
case at bench, even the aforesaid circumstances when taken together are not persuasive indicia of a
partnership. They only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber,
but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he
occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable
were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral,
if not actual, superiority over his fellow employees, thereby entitling him to exercise powers of supervision.
It may even be that among his duties is to place orders with suppliers. Again, the circumstances proffered
by petitioners do not provide a logical nexus to the conclusion desired; these are not inconsistent with the
powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber
Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of.
Hence, the petition must fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is
hereby AFFIRMED in toto. No pronouncement as to costs. SO ORDERED.

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES

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

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.

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

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

LUCIANO E. SALAZAR, petitioner, vs. SANITARY WARES MANUFACTURING CORPORATION,

ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE,
RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP
Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate
Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing
Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors;
that the Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on
the six (6) nominees, they shall vote only among themselves to determine who the six (6) nominees will
be, with cumulative voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign
corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some
Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here
and abroad vitreous china and sanitary wares. The parties agreed that the business operations in the
Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall
initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide
for

(1) Cumulative voting for directors:

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which shall
consist of nine individuals. As long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine directors shall be designated by
American-Standard, and the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain officers,
such as a member of the Executive Committee whose vote was required for important corporate
transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock of
the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it apparently had other subsidiaries
of joint joint venture groups in the countries where Philippine exports were contemplated. On March 8,
1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes
were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the
stockholders then proceeded to the election of the members of the board of directors. The ASI group
nominated three persons namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine
investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George
F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order
on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during the past annual
stockholders' meetings to nominate only nine persons as nominees for the nine-member board of directors,
and the legal advice of Saniwares' legal counsel. The following events then, transpired:

... There were protests against the action of the Chairman and heated arguments ensued. An
appeal was made by the ASI representative to the body of stockholders present that a vote
be taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal
out of order and no vote on the ruling was taken. The Chairman then instructed the Corporate
Secretary to cast all the votes present and represented by proxy equally for the 6 nominees
of the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2
additional persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of the Chairman and announced that all votes
accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed the
Secretary to so vote. Luciano E. Salazar and other proxy holders announced that all the votes
owned by and or represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in favor of the three ASI
nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary
then certified for the election of the following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then moved to recess the
meeting which was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R.
SP No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests against
the adjournment were registered and having been ignored, Mr. Jaqua the ASI representative,
stated that the meeting was not adjourned but only recessed and that the meeting would be
 reconvened in the next room. The Chairman then threatened to have the stockholders who
did not agree to the decision of the Chairman on the casting of votes bodily thrown out. The
ASI Group, Luciano E. Salazar and other stockholders, allegedly representing 53 or 54% of
the shares of Saniwares, decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided by Luciano E. Salazar, while
Andres Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the
meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five
directors were certified as elected directors by the Acting Secretary, Andres Gatmaitan, with
the explanation that there was a tie among the other six (6) nominees for the four (4)
remaining positions of directors and that the body decided not to break the tie. (pp. 37-39,
Rollo of 75975-76)

These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second
petition was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both
sets of parties except for Avelino Cruz claimed to be the legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding
the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The
ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's
decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and
by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the
appellate court in its decision ordered the remand of the case to the Securities and Exchange Commission
with the directive that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible,
under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P.
Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

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

RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT
THERE WAS NO ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS
DEPRIVING PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE
AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY
DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual

agreements entered into by stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders but merely dictated by the
CA .
 11.2. The Amended decision would likewise sanction the deprivation of the property rights of
stockholders without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp.
14-15, Rollo-75975-76)

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

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY
ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS
HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)

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

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors should
be determined: (1) the nature of the business established by the parties whether it was a joint venture or
a corporation and (2) whether or not the ASI Group may vote their additional 10% equity during elections
of Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among themselves a
joint venture or some other relation depends upon their actual intention which is determined in accordance
with the rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago,
B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751,
128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the
parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto partners
or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)

They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes
the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the
Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to express the true
intent of the parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced to

writing, it is to be considered as containing all such terms, and therefore, there can be,
between the parties and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the following cases:
 (a) Where a mistake or imperfection of the writing, or its failure to express the true intent
and agreement of the parties or the validity of the agreement is put in issue by the pleadings.

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

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to
wit:

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is
not inconsistent with, and does not preclude, the existence of two distinct groups of
stockholders in Saniwares one of which (the Philippine Investors) shall constitute the majority,
and the other ASI shall constitute the minority stockholder. In any event, the evident intention
of the Philippine Investors and ASI in entering into the Agreement is to enter into ajoint
venture enterprise, and if some words in the Agreement appear to be contrary to the evident
intention of the parties, the latter shall prevail over the former (Art. 1370, New Civil Code).
The various stipulations of a contract shall be interpreted together attributing to the doubtful
ones that sense which may result from all of them taken jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered. (Art. 1371, New Civil Code). (Part I,
Original Records, SEC Case No. 2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined their
efforts in furtherance of an enterprise for their joint profit, the question whether they intended
by their agreement to create a joint adventure, or to assume some other relation is a question
of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield
(Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements
which govern its policy making body are all consistent with a joint venture and not with an ordinary
corporation. As stated by the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement
with ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role
of minority vis-a-vis the Philippine National group of investors, on the condition that the
Agreement should contain provisions to protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in
certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually
entitled to designate a member of the Executive Committee and the vote of this member is
required for certain transactions [Sec. 3 (b) (i)].

The Agreement also requires a 75% super-majority vote for the amendment of the articles
and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate
the president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales
policy of Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that
Saniwares should not export "Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology
and know-how to Saniwares and the latter paid royalties for the same. (At p. 2).
 xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the
board of directors for certain actions, in effect gave ASI (which designates 3 directors under
the Agreement) an effective veto power. Furthermore, the grant to ASI of the right to
designate certain officers of the corporation; the super-majority voting requirements for
amendments of the articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other stockholders shall
designate the other 6, clearly indicate that there are two distinct groups in Saniwares, namely
ASI, which owns 40% of the capital stock and the Philippine National stockholders who own
the balance of 60%, and that 2) ASI is given certain protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection
of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the
board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified
that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of
the parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate
the possibility of the enterprise being treated as partnership for tax purposes and liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of
a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may, from
the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come
later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group undermines
the local majority ownership and actively tries to completely or predominantly take over the entire company.
This undermining of joint ventures is not consistent with fair dealing to say the least. To the extent that
such subversive actions can be lawfully prevented, the courts should extend protection especially in
industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens.

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

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter
into agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a close corporation because it has 95
stockholders. Firstly, although Saniwares had 95 stockholders at the time of the disputed
stockholders meeting, these 95 stockholders are not separate from each other but are
divisible into groups representing a single Identifiable interest. For example, ASI, its nominees
and lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for another
13 stockholders, the Chamsay family for 8 stockholders, the Santos family for 9 stockholders,
the Dy family for 7 stockholders, etc. If the members of one family and/or business or interest
group are considered as one (which, it is respectfully submitted, they should be for purposes
of determining how closely held Saniwares is there were as of 8 March 1983, practically only
17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).

Secondly, even assuming that Saniwares is technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.

In the United States, many courts have taken a realistic approach to joint venture corporations
and have not rigidly applied principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express arrangements between corporate joint
ventures should be construed with less emphasis on the ordinary rules of law usually applied
to corporate entities and with more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F
2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard
Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11
Vand Law Rev. p. 680,1958). These American cases dealt with legal questions as to the extent
to which the requirements arising from the corporate form of joint venture corporations should
control, and the courts ruled that substantial justice lay with those litigants who relied on the
joint venture agreement rather than the litigants who relied on the orthodox principles of
corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just as
in close corporations, shareholders' agreements in joint venture corporations often contain
provisions which do one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of shareholders power
to select a specified number of directors; (3) give to the shareholders control over the
selection and retention of employees; and (4) set up a procedure for the settlement of
disputes by arbitration (See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-
16) (Decision of SEC Hearing Officer, P. 16)

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

Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as defined by
the Code? Suppose that a corporation has twenty five stockholders, and therefore cannot
qualify as a close corporation under section 96, can some of them enter into an agreement to
vote as a unit in the election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not voting or pooling
agreements to protect their interests, as long as they do not intend to commit any wrong, or
fraud on the other stockholders not parties to the agreement. Of course, voting or pooling
agreements are perhaps more useful and more often resorted to in close corporations. But
they may also be found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which is in fact a close corporation
will not come within the definition. In such case, its stockholders should not be precluded
 from entering into contracts like voting agreements if these are otherwise valid. (Campos &
Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for directors,
such contractual provision, as correctly held by the SEC, is valid and binding upon the
signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during elections
of Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management of
the corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the
nine directors shall be designated by ASI and the remaining six by the other stockholders,
i.e., the Filipino stockholders. This allocation of board seats is obviously in consonance with
the minority position of ASI.

Having entered into a well-defined contractual relationship, it is imperative that the parties
should honor and adhere to their respective rights and obligations thereunder. Appellants
seem to contend that any allocation of board seats, even in joint venture corporations, are
null and void to the extent that such may interfere with the stockholder's rights to cumulative
voting as provided in Section 24 of the Corporation Code. This Court should not be prepared
to hold that any agreement which curtails in any way cumulative voting should be struck
down, even if such agreement has been freely entered into by experienced businessmen and
do not prejudice those who are not parties thereto. It may well be that it would be more
cogent to hold, as the Securities and Exchange Commission has held in the decision appealed
from, that cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as in joint
venture relationships between foreign and local stockholders, so long as such agreements do
not adversely affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual allocation
of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
further reflection, we feel that the proper and just solution to give due consideration to both
factors suggests itself quite clearly. This Court should recognize and uphold the division of
the stockholders into two groups, and at the same time uphold the right of the stockholders
within each group to cumulative voting in the process of determining who the group's
nominees would be. In practical terms, as suggested by appellant Luciano E. Salazar himself,
this means that if the Filipino stockholders cannot agree who their six nominees will be, a
vote would have to be taken among the Filipino stockholders only. During this voting, each
Filipino stockholder can cumulate his votes. ASI, however, should not be allowed to interfere
in the voting within the Filipino group. Otherwise, ASI would be able to designate more than
the three directors it is allowed to designate under the Agreement, and may even be able to
get a majority of the board seats, a result which is clearly contrary to the contractual intent
of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's
right to cumulative voting. Moreover, this ruling will also give due consideration to the issue
raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com.
Act No. 108, as amended) and the nationalization requirements of the Constitution and the
laws if ASI is allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth
Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized activities
shall be allowed in proportion to their allowable participation or share in the capital of such
entities. (amendments introduced by Presidential Decree 715, section 1, promulgated May
28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of
query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:

The legal concept of ajoint venture is of common law origin. It has no precise legal definition
but it has been generally understood to mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from
the partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F.
2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45
Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions
in common law jurisdictions is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d.
500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266
Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular partnership may
have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore
that under Philippine law, a joint venture is a form of partnership and should thus be governed
by the law of partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. (At p. 12, Tuazon
v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected
Cases, Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of whether
or not the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be under
Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the
manner of nominating the members of the board of directors while Section 3 (a) (1) relates to the manner
of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of the
board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by
the appellate court:
 ... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats,
a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's
right to cumulative voting. Moreover, this ruling will also give due consideration to the issue
raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com.
Act No. 108, as amended) and the nationalization requirements of the Constitution and the
laws if ASI is allowed to nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as regards
the possible domination by the foreign investors of the enterprise in violation of the nationalization
requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard,
petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board directors in
proportion to their share in the capital of the entity. It is to be noted, however, that the same law also limits
the election of aliens as members of the board of directors in proportion to their allowance participation of
said entity. In the instant case, the foreign Group ASI was limited to designate three directors. This is the
allowable participation of the ASI Group. Hence, in future dealings, this limitation of six to three board seats
should always be maintained as long as the joint venture agreement exists considering that in limiting 3
board seats in the 9-man board of directors there are provisions already agreed upon and embodied in the
parties' Agreement to protect the interests arising from the minority status of the foreign investors.

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

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the enterprise as ruled by the appellate court and
submits that the six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant
to section 5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by the
majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should
not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement.
As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the members of the board of directors. The
petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on
the directors thus elected being genuine members of the Filipino group, not voters whose interest is to
increase the ASI share in the management of Saniwares. The joint venture character of the enterprise must
always be taken into account, so long as the company exists under its original agreement. Cumulative voting
may not be used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish
openly. There are substantial safeguards in the Agreement which are intended to preserve the majority
status of the Filipino investors as well as to maintain the minority status of the foreign investors group as
earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.

G.R. No. L-2880 December 4, 1906

FRANK S. BOURNS, plaintiff-appellee, vs. D. M. CARMAN, ET AL., defendants-appellants.

MAPA, J.:

The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a
contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said work
was entered into by the said Lo-Chim-Lim, acting as in his own name with the plaintiff, and it appears that
the said Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff, however, has brought this
action against Lo-Chim-Lim and his codefendants jointly, alleging that, at the time the contract was made,
they were the joint proprietors and operators of the said lumber yard engaged in the purchase and sale of
lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by the words above
italicized that the other defendants were the partners of Lo-Chim-Lim in the said lumber-yard
business.lawphil.net

The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on the
ground that they were not the partners of Lo-Chim-Lim, and rendered judgment against the other
defendants for the amount claimed in the complaint with the costs of proceedings. Vicente Palanca and Go-
Tauco only excepted to the said judgment, moved for a new trial, and have brought the case to this court
by bill of exceptions.

The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain
lumber yard in Calle Lemery of the city of Manila, and that he was the manager of the same, having ordered
the plaintiff to do some work for him at his sawmill in the city of Manila; and that Vicente Palanca was his
partner, and had an interest in the said business as well as in the profits and losses thereof . . .," and that
Go-Tuaco received part of the earnings of the lumber yard in the management of which he was interested.

The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in Calle
Lemmery of the city of Manila in the year 1904, and participated in the profits and losses of business and
that Lo-Chim-Lim was managing partner of the said lumber yard." In other words, coparticipants with the
said Lo-Chim-Lim in the business in question.

Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in
conflict with the above finding of that court. Such finding should therefore be sustained. lawphil.net

The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal
nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard, and consequently their
liability toward the plaintiff, in connection with the transaction which gave rise to the present suit.

It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal
agreement only. At least there is no evidence tending to show that the said agreement was reduced to
writing, or that it was ever recorded in a public instrument.

Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the
partnership was engaged in business under the name and style of Lo-Chim-Lim only, which according to the
evidence was the name of one of the defendants. On the other hand, and this is very important, it does not
appear that there was any mutual agreement, between the parties, and if there were any, it has not been
shown what the agreement was. As far as the evidence shows it seems that the business was conducted by
Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been shown with
certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim individually in his own name,
and there is no evidence that the partnership over contracted in any other form. Under such circumstances
we find nothing upon which to consider this partnership other than as a partnership of cuentas en
participacion. It may be that, as a matter of fact, it is something different, but a simple business and scant
evidence introduced by the partnership We see nothing, according to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons interested in the profits
and losses of the business nowhere appearing. A partnership constituted in such a manner, the existence
of which was only known to those who had an interest in the same, being no mutual agreements between
the partners and without a corporate name indicating to the public in some way that there were other people
besides the one who ostensibly managed and conducted the business, is exactly the accidental partnership
of cuentas en participacion defined in article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en
participacion is conducted, shall have only a right of action against such person and not against the other
persons interested, and the latter, on the other hand, shall have no right of action against the third person
who contracted with the manager unless such manager formally transfers his right to them. (Art 242 of the
code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants the
payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with
him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly dismissed.

The judgment appealed from this hereby reversed and the appellants are absolved of the complaint without
express provisions as to the costs of both instances. After the expiration of twenty days let judgment be
entered in accordance herewith, and ten days thereafter the cause be remanded to the court below for
execution. So ordered.

G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.

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 Resolution3 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 latter’s 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 owner’s 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 owner’s 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
owner’s 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 x5

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 petitioner’s withdrawal as manager of the mine on January 28, 1982 and in the eventual
cessation of mine operations on February 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 Gold’s tangible assets to petitioner, transferring to the
latter Baguio Gold’s 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 Gold’s 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 Gold’s "pecuniary obligations" to petitioner. It also included payments made
by petitioner as guarantor of Baguio Gold’s long-term loans which legally entitled petitioner to be subrogated
to the rights of the original creditor.

Petitioner also asserted that due to Baguio Gold’s 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 petitioner’s 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 project’s 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 petitioner’s assertion that the advances it made for the Sto. Nino mine were in the nature
of a loan. It instead characterized the advances as petitioner’s 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 petitioner’s 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. Niño 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 P11M under its owner’s account plus any of its income that is left in the project, in addition to
its actual mining claim. Meanwhile, petitioner’s contribution would consist of its expertise in the
management and operation of mines, as well as the manager’s account which is comprised of P11M in funds
and property and petitioner’s "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. Niño project
"(w)henever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT
of the STO. NIÑO MINE."18

The wording of the parties’ agreement as to petitioner’s 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 petitioner’s 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 latter’s 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 agent’s 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 one’s 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 MANAGER’S account has to the owner’s 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 mine’s 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.
Niño 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 manager’s account had to the owner’s 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 manager’s account had to the owner’s 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 Niño 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 petitioner’s "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 Niño 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 petitioner’s "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 petitioner’s 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 Gold’s creditors, we find no reason to depart
from the tax court’s factual finding that Baguio Gold’s debts were not yet due and demandable at the time
that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s 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.

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION vs. COURT OF APPEALS, COURT OF TAX APPEALS and
COMISSIONER OF INTERNAL REVENUE, respondent.

PANGANIBAN, J.:

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

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October
11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners' appeal of the
October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously sustained petitioners'
liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioner 5

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

The Facts

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

The petitioners are 41 non-life insurance corporations, organized and existing under the laws
of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion
and Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a
Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed
an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975,
on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency
corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered
the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax,
interest, and with [h]olding tax, itemized as follows:

Net income per information return P3,737,370.00

===========

Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

——————

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE

Dividend paid to Munich

Reinsurance Company P3,728,412.00

——————

35% withholding tax at

 source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P655,636.00

===========

10% withholding tax at

source due thereon P65,563.60

Add: 25% surcharge 16,390.90

14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE =========== 8

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

The Issues

Before this Court, petitioners raise the following issues:

 1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;

2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance,
were "dividends" subject to tax; and

3. Whether or not the respondent Commissioner's right to assess the Clearing House had
already prescribed. 10

The Court's Ruling

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

First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies
were written by them "individually and separately," and that their liability was limited to the extent of their
allocated share in the original risk thus reinsured. 11 Hence, the pool did not act or earn income as a
reinsurer. 12 Its role was limited to its principal function of "allocating and distributing the risk(s) arising
from the original insurance among the signatories to the treaty or the members of the pool based on their
ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc." 13

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share
the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive board of the pool
did not exercise control and management of its funds, unlike the board of directors of a corporation; 16 and
(4) the pool or clearing house "was not and could not possibly have engaged in the business of reinsurance
from which it could have derived income for itself." 17

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked
with the enforcement of tax law, is accorded much weight and even finality, when there is no showing. that
it is patently wrong, 18 particularly in this case where the findings and conclusions of the internal revenue
commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose
of reviewing tax cases, and the Court of Appeals. 19 Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions,
is dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority. 20

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal
revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending
1975, provides:

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

Sec. 27. Rates of Income Tax on Domestic Corporations. —

(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in Section
22 (B) of this Code, and taxable under this Title as a corporation . . . .

Sec. 22. — Definition. — When used in this Title:

xxx xxx xxx

(B) The term "corporation" shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. "General
professional partnerships" are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.

xxx xxx xxx

Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities apart
from their individual members. 23 The Court of Appeals astutely applied Evangelista. 24

. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:

The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on. *** (8 Merten's Law of Federal
Income Taxation, p. 562 Note 63)

Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more persons
bind themselves to contribute money, property, or Industry to a common fund, with the intention of dividing
the profits among themselves." 25 Its requisites are: "(1) mutual contribution to a common stock, and (2)
a joint interest in the profits." 26 In other words, a partnership is formed when persons contract "to devote
to a common purpose either money, property, or labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the
transaction of business." 28

In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that
would handle all the insurance businesses covered under their quota-share reinsurance treaty 31 and surplus
reinsurance treaty32 with Munich. The following unmistakably indicates a partnership or an association
covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. 33 This common fund pays for the administration and operation expenses of the
pool. 24
(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies. 35

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool
Agreement. 36 Profit motive or business is, therefore, the primordial reason for the pool's formation. As aptly
found by the CTA:

. . . The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to] the
transaction of the business, . . . If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was apportioned among the
members, this is only a matter of consequence, as it implies that profit actually resulted. 37

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts obtaining therein
are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a
co-ownership which took up only two isolated transactions. 39 The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more
than ten years, as in the case before us.

Second Issue:

Pool's Remittances are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the
1977 NIRC and "would be tantamount to an illegal double taxation as it would result in taxing the same
taxpayer" 40 Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed dividends. 41 They add that even if such remittances
were treated as dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC, 42 as well as Article 7 of paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German
Tax Treaty. 45

Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should
be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same
thing" 46 In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from the tax on the dividends received by
the said companies. Clearly, there is no double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must
be able to justify his claim or right." 47 Petitioners have failed to discharge this burden of proof. The sections
of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year ending 1975 was filed.

Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the
exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company
that has already paid the tax . . ." This cannot be applied to the present case because, as previously
discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot
individually claim the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it cannot be claimed
by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool
Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is
manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and
10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed
must be expressed in a language too plain to be mistaken. 53

Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis
of the information return it had submitted for the year ending 1975, a taxable year when said treaty was
not yet in effect. 54 Although petitioners omitted in their pleadings the date of effectivity of the treaty, the
Court takes judicial notice that it took effect only later, on December 14, 1984. 55

Third Issue:

Prescription

Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They
claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this return,
the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated
March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations then provided in the
NIRC had already lapsed, and that the internal revenue commissioner was already barred by prescription
from making an assessment. 56

We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was
tolled under then Section 333 of the NIRC, 57 because "the taxpayer cannot be located at the address given
in the information return filed and for which reason there was delay in sending the assessment." 58 Indeed,
whether the government's right to collect and assess the tax has prescribed involves facts which have been
ruled upon by the lower courts. It is axiomatic that in the absence of a clear showing of palpable error or
grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA and
the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the
pool changed its address, for they stated that the pool's information return filed in 1980 indicated therein
its "present address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for
the suspension of the prescriptive period. The law clearly states that the said period will be suspended only
"if the taxpayer informs the Commissioner of Internal Revenue of any change in the address."

WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Cost against petitioners.1âwphi1.nêt SO ORDERED.

G.R. No. L-40098 August 29, 1975

ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and CO OYO, petitioners, vs. HON.
JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu and TAN PUT, respondents.

BARREDO, J.:

Petition for (1) certiorari to annul and set aside certain actuations of respondent Court of First Instance of
Cebu Branch III in its Civil Case No. 12328, an action for accounting of properties and money totalling
allegedly about P15 million pesos filed with a common cause of action against six defendants, in which after
declaring four of the said defendants herein petitioners, in default and while the trial as against the two
defendants not declared in default was in progress, said court granted plaintiff's motion to dismiss the case
in so far as the non-defaulted defendants were concerned and thereafter proceeded to hear ex-parte the
rest of the plaintiffs evidence and subsequently rendered judgment by default against the defaulted
defendants, with the particularities that notice of the motion to dismiss was not duly served on any of the
defendants, who had alleged a compulsory counterclaim against plaintiff in their joint answer, and the
judgment so rendered granted reliefs not prayed for in the complaint, and (2) prohibition to enjoin further
proceedings relative to the motion for immediate execution of the said judgment.

Originally, this litigation was a complaint filed on February 9, 1971 by respondent Tan Put only against the
spouses-petitioners Antonio Lim Tanhu and Dy Ochay. Subsequently, in an amended complaint dated
September 26, 1972, their son Lim Teck Chuan and the other spouses-petitioners Alfonso Leonardo Ng Sua
and Co Oyo and their son Eng Chong Leonardo were included as defendants. In said amended complaint,
respondent Tan alleged that she "is the widow of Tee Hoon Lim Po Chuan, who was a partner in the
commercial partnership, Glory Commercial Company ... with Antonio Lim Tanhu and Alfonso Ng Sua that
"defendant Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo,
through fraud and machination, took actual and active management of the partnership and although Tee
Hoon Lim Po Chuan was the manager of Glory Commercial Company, defendants managed to use the funds
of the partnership to purchase lands and building's in the cities of Cebu, Lapulapu, Mandaue, and the
municipalities of Talisay and Minglanilla, some of which were hidden, but the description of those already
discovered were as follows: (list of properties) ...;" and that:

13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without liquidation continued
the business of Glory Commercial Company by purportedly organizing a corporation known
as the Glory Commercial Company, Incorporated, with paid up capital in the sum of
P125,000.00, which money and other assets of the said Glory Commercial Company,
Incorporated are actually the assets of the defunct Glory Commercial Company partnership,
of which the plaintiff has a share equivalent to one third (¹/3 ) thereof;

14. (P)laintiff, on several occasions after the death of her husband, has asked defendants of
the above-mentioned properties and for the liquidation of the business of the defunct
partnership, including investments on real estate in Hong Kong, but defendants kept on
promising to liquidate said properties and just told plaintiff to

15. (S)ometime in the month of November, 1967, defendants, Antonio Lim Tanhu, by means
of fraud deceit and misrepresentations did then and there, induce and convince the plaintiff
to execute a quitclaim of all her rights and interests, in the assets of the partnership of Glory
Commercial Company, which is null and void, executed through fraud and without any legal
effect. The original of said quitclaim is in the possession of the adverse party defendant
Antonio Lim Tanhu.

16. (A)s a matter of fact, after the execution of said quitclaim, defendant Antonio Lim Tanhu
offered to pay the plaintiff the amount P65,000.00 within a period of one (1) month, for which
plaintiff was made to sign a receipt for the amount of P65,000.00 although no such amount
was given and plaintiff was not even given a copy of said document;

17. (T)hereafter, in the year 1968-69, the defendants who had earlier promised to liquidate
the aforesaid properties and assets in favor among others of plaintiff and until the middle of
the year 1970 when the plaintiff formally demanded from the defendants the accounting of
real and personal properties of the Glory Commercial Company, defendants refused and
stated that they would not give the share of the plaintiff. (Pp. 36-37, Record.)

She prayed as follows:

WHEREFORE, it is most respectfully prayed that judgment be rendered:

a) Ordering the defendants to render an accounting of the real and personal properties of the
Glory Commercial Company including those registered in the names of the defendants and
other persons, which properties are located in the Philippines and in Hong Kong;
 b) Ordering the defendants to deliver to the plaintiff after accounting, one third (¹/ 3 ) of the
total value of all the properties which is approximately P5,000,000.00 representing the just
share of the plaintiff;

c) Ordering the defendants to pay the attorney of the plaintiff the sum of Two Hundred Fifty
Thousand Pesos (P250,000.00) by way of attorney's fees and damages in the sum of One
Million Pesos (P1,000,000.00).

This Honorable Court is prayed for other remedies and reliefs consistent with law and equity
and order the defendants to pay the costs. (Page 38, Record.)

The admission of said amended complaint was opposed by defendants upon the ground that there were
material modifications of the causes of action previously alleged, but respondent judge nevertheless allowed
the amendment reasoning that:

The present action is for accounting of real and personal properties as well as for the recovery
of the same with damages.

An objective consideration of pars. 13 and 15 of the amended complaint pointed out by the
defendants to sustain their opposition will show that the allegations of facts therein are merely
to amplify material averments constituting the cause of action in the original complaint. It
likewise include necessary and indispensable defendants without whom no final determination
can be had in the action and in order that complete relief is to be accorded as between those
already parties.

Considering that the amendments sought to be introduced do not change the main causes of
action in the original complaint and the reliefs demanded and to allow amendments is the
rule, and to refuse them the exception and in order that the real question between the parties
may be properly and justly threshed out in a single proceeding to avoid multiplicity of actions.
(Page 40, Record.)

In a single answer with counterclaim, over the signature of their common counsel, defendants denied
specifically not only the allegation that respondent Tan is the widow of Tee Hoon because, according to
them, his legitimate wife was Ang Siok Tin still living and with whom he had four (4) legitimate children, a
twin born in 1942, and two others born in 1949 and 1965, all presently residing in Hongkong, but also all
the allegations of fraud and conversion quoted above, the truth being, according to them, that proper
liquidation had been regularly made of the business of the partnership and Tee Hoon used to receive his
just share until his death, as a result of which the partnership was dissolved and what corresponded to him
were all given to his wife and children. To quote the pertinent portions of said answer:

AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES,

defendants hereby incorporate all facts averred and alleged in the answer, and further most
respectfully declare:

1. That in the event that plaintiff is filing the present complaint as an heir of Tee Hoon Lim Po
Chuan, then, she has no legal capacity to sue as such, considering that the legitimate wife,
namely: Ang Siok Tin, together with their children are still alive. Under Sec. 1, (d), Rule 16
of the Revised Rules of Court, lack of legal capacity to sue is one of the grounds for a motion
to dismiss and so defendants prays that a preliminary hearing be conducted as provided for
in Sec. 5, of the same rule;

2. That in the alternative case or event that plaintiff is filing the present case under Art. 144
of the Civil Code, then, her claim or demand has been paid, waived abandoned or otherwise
extinguished as evidenced by the 'quitclaim' Annex 'A' hereof, the ground cited is another
ground for a motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a
preliminary hearing be made in connection therewith pursuant to Section 5 of the
aforementioned rule;

3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and were blessed with
the following children, to wit: Ching Siong Lim and Ching Hing Lim (twins) born on February
16, 1942; Lim Shing Ping born on March 3, 1949 and Lim Eng Lu born on June 25, 1965 and
presently residing in Hongkong;

4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was no longer his
common law wife and even though she was not entitled to anything left by Tee Hoon Lim Po
Chuan, yet, out of the kindness and generosity on the part of the defendants, particularly
Antonio Lain Tanhu, who, was inspiring to be monk and in fact he is now a monk, plaintiff was
given a substantial amount evidenced by the 'quitclaim' (Annex 'A');

5. That the defendants have acquired properties out of their own personal fund and certainly
not from the funds belonging to the partnership, just as Tee Hoon Lim Po Chuan had acquired
properties out of his personal fund and which are now in the possession of the widow and
neither the defendants nor the partnership have anything to do about said properties;

6. That it would have been impossible to buy properties from funds belonging to the
partnership without the other partners knowing about it considering that the amount taken
allegedly is quite big and with such big amount withdrawn the partnership would have been
insolvent;

7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with children who would have
been lawfully entitled to succeed to the properties left by the latter together with the widow
and legitimate children;

8. That despite the fact that plaintiff knew that she was no longer entitled to anything of the
shares of the late Tee Hoon Lim Po Chuan, yet, this suit was filed against the defendant who
have to interpose the following —

COUNTERCLAIM

A. That the defendants hereby reproduced, by way of reference, all the allegations and
foregoing averments as part of this counterclaim; .

B. That plaintiff knew and was aware she was merely the common-law wife of Tee Hoon Lim
Po Chuan and that the lawful and legal is still living, together with the legitimate children, and
yet she deliberately suppressed this fact, thus showing her bad faith and is therefore liable
for exemplary damages in an amount which the Honorable Court may determine in the
exercise of its sound judicial discretion. In the event that plaintiff is married to Tee Hoon Lim
Po Chuan, then, her marriage is bigamous and should suffer the consequences thereof;

C. That plaintiff was aware and had knowledge about the 'quitclaim', even though she was
not entitled to it, and yet she falsely claimed that defendants refused even to see her and for
filing this unfounded, baseless, futile and puerile complaint, defendants suffered mental
anguish and torture conservatively estimated to be not less than P3,000.00;

D. That in order to defend their rights in court, defendants were constrained to engage the
services of the undersigned counsel, obligating themselves to pay P500,000.00 as attorney's
fees;

E. That by way of litigation expenses during the time that this case will be before this
Honorable Court and until the same will be finally terminated and adjudicated, defendants will
have to spend at least P5,000.00. (Pp. 44-47. Record.)
After unsuccessfully trying to show that this counterclaim is merely permissive and should be dismissed for
non-payment of the corresponding filing fee, and after being overruled by the court, in due time, plaintiff
answered the same, denying its material allegations.

On February 3, 1973, however, the date set for the pre-trial, both of the two defendants-spouses the Lim
Tanhus and Ng Suas, did not appear, for which reason, upon motion of plaintiff dated February 16, 1973,
in an order of March 12, 1973, they were all "declared in DEFAULT as of February 3, 1973 when they failed
to appear at the pre-trial." They sought to hive this order lifted thru a motion for reconsideration, but the
effort failed when the court denied it. Thereafter, the trial started, but at the stage thereof where the first
witness of the plaintiff by the name of Antonio Nuñez who testified that he is her adopted son, was up for
re-cross-examination, said plaintiff unexpectedly filed on October 19, 1974 the following simple and
unreasoned

MOTION TO DROP DEFENDANTS LIM TECK

CHUAN AND ENG CHONG LEONARDO

COMES now plaintiff, through her undersigned counsel, unto the Honorable Court most
respectfully moves to drop from the complaint the defendants Lim Teck Chuan and Eng Chong
Leonardo and to consider the case dismissed insofar as said defendants Lim Teck Chuan and
Eng Chong Leonardo are concerned.

WHEREFORE, it is most respectfully prayed of the Honorable Court to drop from the complaint
the defendants Lim Teck Chuan and Eng Chong Leonardo and to dismiss the case against
them without pronouncement as to costs. (Page 50, Record.)

which she set for hearing on December 21, 1974. According to petitioners, none of the
defendants declared in default were notified of said motion, in violation of Section 9 of Rule
13, since they had asked for the lifting of the order of default, albeit unsuccessfully, and as
regards the defendants not declared in default, the setting of the hearing of said motion on
October 21, 1974 infringed the three-day requirement of Section 4 of Rule 15, inasmuch as
Atty. Adelino Sitoy of Lim Teck Chuan was served with a copy of the motion personally only
on October 19, 1974, while Atty. Benjamin Alcudia of Eng Chong Leonardo was served by
registered mail sent only on the same date.

Evidently without even verifying the notices of service, just as simply as plaintiff had couched
her motion, and also without any legal grounds stated, respondent court granted the prayer
of the above motion thus:

ORDER

Acting on the motion of the plaintiff praying for the dismissal of the complaint as against
defendants Lim Teck Chuan and Eng Chong Leonardo. —

The same is hereby GRANTED. The complaint as against defendant Lim Teck Chuan and Eng
Chong Leonardo is hereby ordered DISMISSED without pronouncement as to costs.

Simultaneously, the following order was also issued:

Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay as well as
defendants Alfonso Ng Sua and his spouse Co Oyo have been declared in default for failure
to appear during the pre-trial and as to the other defendants the complaint had already been
ordered dismissed as against them.

Let the hearing of the plaintiff's evidence ex-parte be set on November 20, 1974, at 8:30
A.M. before the Branch Clerk of Court who is deputized for the purpose, to swear in witnesses
and to submit her report within ten (10) days thereafter. Notify the plaintiff.
 SO ORDERED.

Cebu City, Philippines, October 21, 1974. (Page 52, Record.)

But, in connection with this last order, the scheduled ex-parte reception of evidence did not take place on
November 20, 1974, for on October 28, 1974, upon verbal motion of plaintiff, the court issued the following
self-explanatory order: .

Acting favorably on the motion of the plaintiff dated October 18, 1974, the Court deputized
the Branch Clerk of Court to receive the evidence of the plaintiff ex-parte to be made on
November 20, 1974. However, on October 28, 1974, the plaintiff, together with her witnesses,
appeared in court and asked, thru counsel, that she be allowed to present her evidence.

Considering the time and expenses incurred by the plaintiff in bringing her witnesses to the
court, the Branch Clerk of Court is hereby authorized to receive immediately the evidence of
the plaintiff ex-parte.

SO ORDERED.

Cebu City, Philippines, October 28, 1974. (Page 53. Record.)

Upon learning of these orders on October 23, 1973, the defendant Lim Teck Cheng, thru counsel, Atty.
Sitoy, filed a motion for reconsideration thereof, and on November 1, 1974, defendant Eng Chong Leonardo,
thru counsel Atty. Alcudia, filed also his own motion for reconsideration and clarification of the same orders.
These motions were denied in an order dated December 6, 1974 but received by the movants only on
December 23, 1974. Meanwhile, respondent court rendered the impugned decision on December 20, 1974.
It does not appear when the parties were served copies of this decision.

Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a motion to quash the order of
October 28, 1974. Without waiting however for the resolution thereof, on January 13, 1974, Lim Teck Chuan
and Eng Chong Leonardo went to the Court of Appeals with a petition for certiorari seeking the annulment
of the above-mentioned orders of October 21, 1974 and October 28, 1974 and decision of December 20,
1974. By resolution of January 24, 1975, the Court of Appeals dismissed said petition, holding that its filing
was premature, considering that the motion to quash the order of October 28, 1974 was still unresolved by
the trial court. This holding was reiterated in the subsequent resolution of February 5, 1975 denying the
motion for reconsideration of the previous dismissal.

On the other hand, on January 20, 1975, the other defendants, petitioners herein, filed their notice of
appeal, appeal bond and motion for extension to file their record on appeal, which was granted, the
extension to expire after fifteen (15) days from January 26 and 27, 1975, for defendants Lim Tanhu and Ng
Suas, respectively. But on February 7, 1975, before the perfection of their appeal, petitioners filed the
present petition with this Court. And with the evident intent to make their procedural position clear, counsel
for defendants, Atty. Manuel Zosa, filed with respondent court a manifestation dated February 14, 1975
stating that "when the non-defaulted defendants Eng Chong Leonardo and Lim Teck Chuan filed their petition
in the Court of Appeals, they in effect abandoned their motion to quash the order of October 28, 1974," and
that similarly "when Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed their petition
for certiorari and prohibition ... in the Supreme Court, they likewise abandoned their motion to quash." This
manifestation was acted upon by respondent court together with plaintiffs motion for execution pending
appeal in its order of the same date February 14, 1975 this wise:

ORDER

When these incidents, the motion to quash the order of October 28, 1974 and the motion for
execution pending appeal were called for hearing today, counsel for the defendants-movants
submitted their manifestation inviting the attention of this Court that by their filing for
certiorari and prohibition with preliminary injunction in the Court of Appeals which was
 dismissed and later the defaulted defendants filed with the Supreme Court certiorari with
prohibition they in effect abandoned their motion to quash.

IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The resolution of the motion
for execution pending appeal shall be resolved after the petition for certiorari and prohibition
shall have been resolved by the Supreme Court.

SO ORDERED.

Cebu City, Philippines, February 14, 1975. (Page 216, Record.)

Upon these premises, it is the position of petitioners that respondent court acted illegally, in violation of the
rules or with grave abuse of discretion in acting on respondent's motion to dismiss of October 18, 1974
without previously ascertaining whether or not due notice thereof had been served on the adverse parties,
as, in fact, no such notice was timely served on the non-defaulted defendants Lim Teck Chuan and Eng
Chong Leonardo and no notice at all was ever sent to the other defendants, herein petitioners, and more
so, in actually ordering the dismissal of the case by its order of October 21, 1974 and at the same time
setting the case for further hearing as against the defaulted defendants, herein petitioners, actually hearing
the same ex-parte and thereafter rendering the decision of December 20, 1974 granting respondent Tan
even reliefs not prayed for in the complaint. According to the petitioners, to begin with, there was
compulsory counterclaim in the common answer of the defendants the nature of which is such that it cannot
be decided in an independent action and as to which the attention of respondent court was duly called in
the motions for reconsideration. Besides, and more importantly, under Section 4 of Rule 18, respondent
court had no authority to divide the case before it by dismissing the same as against the non-defaulted
defendants and thereafter proceeding to hear it ex-parte and subsequently rendering judgment against the
defaulted defendants, considering that in their view, under the said provision of the rules, when a common
cause of action is alleged against several defendants, the default of any of them is a mere formality by which
those defaulted are not allowed to take part in the proceedings, but otherwise, all the defendants, defaulted
and not defaulted, are supposed to have but a common fate, win or lose. In other words, petitioners posit
that in such a situation, there can only be one common judgment for or against all the defendant, the non-
defaulted and the defaulted. Thus, petitioners contend that the order of dismissal of October 21, 1974 should
be considered also as the final judgment insofar as they are concerned, or, in the alternative, it should be
set aside together with all the proceedings and decision held and rendered subsequent thereto, and that the
trial be resumed as of said date, with the defendants Lim Teck Chuan and Eng Chong Leonardo being allowed
to defend the case for all the defendants.

On the other hand, private respondent maintains the contrary view that inasmuch as petitioners had been
properly declared in default, they have no personality nor interest to question the dismissal of the case as
against their non-defaulted co-defendants and should suffer the consequences of their own default.
Respondent further contends, and this is the only position discussed in the memorandum submitted by her
counsel, that since petitioners have already made or at least started to make their appeal, as they are in
fact entitled to appeal, this special civil action has no reason for being. Additionally, she invokes the point
of prematurity upheld by the Court of Appeals in regard to the above-mentioned petition therein of the non-
defaulted defendants Lim Teck Chuan and Eng Chong Leonardo. Finally, she argues that in any event, the
errors attributed to respondent court are errors of judgment and may be reviewed only in an appeal.

After careful scrutiny of all the above-related proceedings, in the court below and mature deliberation, the
Court has arrived at the conclusion that petitioners should be granted relief, if only to stress emphatically
once more that the rules of procedure may not be misused and abused as instruments for the denial of
substantial justice. A review of the record of this case immediately discloses that here is another
demonstrative instance of how some members of the bar, availing of their proficiency in invoking the letter
of the rules without regard to their real spirit and intent, succeed in inducing courts to act contrary to the
dictates of justice and equity, and, in some instances, to wittingly or unwittingly abet unfair advantage by
ironically camouflaging their actuations as earnest efforts to satisfy the public clamor for speedy disposition
of litigations, forgetting all the while that the plain injunction of Section 2 of Rule 1 is that the "rules shall
be liberally construed in order to promote their object and to assist the parties in obtaining not only 'speedy'
but more imperatively, "just ... and inexpensive determination of every action and proceeding." We cannot
simply pass over the impression that the procedural maneuvers and tactics revealed in the records of the
case at bar were deliberately planned with the calculated end in view of depriving petitioners and their co-
defendants below of every opportunity to properly defend themselves against a claim of more than
substantial character, considering the millions of pesos worth of properties involved as found by respondent
judge himself in the impugned decision, a claim that appears, in the light of the allegations of the answer
and the documents already brought to the attention of the court at the pre-trial, to be rather dubious. What
is most regrettable is that apparently, all of these alarming circumstances have escaped respondent judge
who did not seem to have hesitated in acting favorably on the motions of the plaintiff conducive to the
deplorable objective just mentioned, and which motions, at the very least, appeared to be 'of highly
controversial' merit, considering that their obvious tendency and immediate result would be to convert the
proceedings into a one-sided affair, a situation that should be readily condemnable and intolerable to any
court of justice.

Indeed, a seeming disposition on the part of respondent court to lean more on the contentions of private
respondent may be discerned from the manner it resolved the attempts of defendants Dy Ochay and Antonio
Lim Tanhu to have the earlier order of default against them lifted. Notwithstanding that Dy Ochay's motion
of October 8, 1971, co-signed by her with their counsel, Atty. Jovencio Enjambre (Annex 2 of respondent
answer herein) was over the jurat of the notary public before whom she took her oath, in the order of
November 2, 1971, (Annex 3 id.) it was held that "the oath appearing at the bottom of the motion is not
the one contemplated by the abovequoted pertinent provision (See. 3, Rule 18) of the rules. It is not even
a verification. (See. 6, Rule 7.) What the rule requires as interpreted by the Supreme Court is that the
motion must have to be accompanied by an affidavit of merits that the defendant has a meritorious defense,
thereby ignoring the very simple legal point that the ruling of the Supreme Court in Ong Peng vs. Custodio, 1
SCRA 781, relied upon by His Honor, under which a separate affidavit of merit is required refers obviously
to instances where the motion is not over oath of the party concerned, considering that what the cited
provision literally requires is no more than a "motion under oath." Stated otherwise, when a motion to lift
an order of default contains the reasons for the failure to answer as well as the facts constituting the
prospective defense of the defendant and it is sworn to by said defendant, neither a formal verification nor
a separate affidavit of merit is necessary.

What is worse, the same order further held that the motion to lift the order of default "is an admission that
there was a valid service of summons" and that said motion could not amount to a challenge against the
jurisdiction of the court over the person of the defendant. Such a rationalization is patently specious and
reveals an evident failure to grasp the import of the legal concepts involved. A motion to lift an order of
default on the ground that service of summons has not been made in accordance with the rules is in order
and is in essence verily an attack against the jurisdiction of the court over the person of the defendant, no
less than if it were worded in a manner specifically embodying such a direct challenge.

And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the order of default as against
defendant Lim Tanhu, His Honor posited that said defendant "has a defense (quitclaim) which renders the
claim of the plaintiff contentious." We have read defendants' motion for reconsideration of November 25,
1971 (Annex 5, id.), but We cannot find in it any reference to a "quitclaim". Rather, the allegation of a
quitclaim is in the amended complaint (Pars. 15-16, Annex B of the petition herein) in which plaintiff
maintains that her signature thereto was secured through fraud and deceit. In truth, the motion for
reconsideration just mentioned, Annex 5, merely reiterated the allegation in Dy Ochay's earlier motion of
October 8, 1971, Annex 2, to set aside the order of default, that plaintiff Tan could be but the common law
wife only of Tee Hoon, since his legitimate wife was still alive, which allegation, His Honor held in the order
of November 2, 1971, Annex 3, to be "not good and meritorious defense". To top it all, whereas, as already
stated, the order of February 19, 1972, Annex 6, lifted the default against Lim Tanhu because of the
additional consideration that "he has a defense (quitclaim) which renders the claim of the plaintiff
contentious," the default of Dy Ochay was maintained notwithstanding that exactly the same "contentions"
defense as that of her husband was invoked by her.

Such tenuous, if not altogether erroneous reasonings and manifest inconsistency in the legal postures in the
orders in question can hardly convince Us that the matters here in issue were accorded due and proper
consideration by respondent court. In fact, under the circumstances herein obtaining, it seems appropriate
to stress that, having in view the rather substantial value of the subject matter involved together with the
obviously contentious character of plaintiff's claim, which is discernible even on the face of the complaint
itself, utmost care should have been taken to avoid the slightest suspicion of improper motivations on the
part of anyone concerned. Upon the considerations hereunder to follow, the Court expresses its grave
concern that much has to be done to dispel the impression that herein petitioners and their co-defendants
are being railroaded out of their rights and properties without due process of law, on the strength of
procedural technicalities adroitly planned by counsel and seemingly unnoticed and undetected by respondent
court, whose orders, gauged by their tenor and the citations of supposedly pertinent provisions and
jurisprudence made therein, cannot be said to have proceeded from utter lack of juridical knowledgeability
and competence.

–1–

The first thing that has struck the Court upon reviewing the record is the seeming alacrity with which the
motion to dismiss the case against non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo was
disposed of, which definitely ought not to have been the case. The trial was proceeding with the testimony
of the first witness of plaintiff and he was still under re-cross-examination. Undoubtedly, the motion to
dismiss at that stage and in the light of the declaration of default against the rest of the defendants was a
well calculated surprise move, obviously designed to secure utmost advantage of the situation, regardless
of its apparent unfairness. To say that it must have been entirely unexpected by all the defendants, defaulted
and non-defaulted , is merely to rightly assume that the parties in a judicial proceeding can never be the
victims of any procedural waylaying as long as lawyers and judges are imbued with the requisite sense of
equity and justice.

But the situation here was aggravated by the indisputable fact that the adverse parties who were entitled
to be notified of such unanticipated dismissal motion did not get due notice thereof. Certainly, the non-
defaulted defendants had the right to the three-day prior notice required by Section 4 of Rule 15. How could
they have had such indispensable notice when the motion was set for hearing on Monday, October 21, 1974,
whereas the counsel for Lim Teck Chuan, Atty. Sitoy was personally served with the notice only on Saturday,
October 19, 1974 and the counsel for Eng Chong Leonardo, Atty. Alcudia, was notified by registered mail
which was posted only that same Saturday, October 19, 1974? According to Chief Justice Moran, "three
days at least must intervene between the date of service of notice and the date set for the hearing, otherwise
the court may not validly act on the motion." (Comments on the Rules of Court by Moran, Vol. 1, 1970 ed.
p. 474.) Such is the correct construction of Section 4 of Rule 15. And in the instant case, there can be no
question that the notices to the non-defaulted defendants were short of the requirement of said provision.

We can understand the over-anxiety of counsel for plaintiff, but what is incomprehensible is the seeming
inattention of respondent judge to the explicit mandate of the pertinent rule, not to speak of the imperatives
of fairness, considering he should have realized the far-reaching implications, specially from the point of
view he subsequently adopted, albeit erroneously, of his favorably acting on it. Actually, he was aware of
said consequences, for simultaneously with his order of dismissal, he immediately set the case for the ex-
parte hearing of the evidence against the defaulted defendants, which, incidentally, from the tenor of his
order which We have quoted above, appears to have been done by him motu propio As a matter of fact,
plaintiff's motion also quoted above did not pray for it.

Withal, respondent court's twin actions of October 21, 1974 further ignores or is inconsistent with a number
of known juridical principles concerning defaults, which We will here take occasion to reiterate and further
elucidate on, if only to avoid a repetition of the unfortunate errors committed in this case. Perhaps some of
these principles have not been amply projected and elaborated before, and such paucity of elucidation could
be the reason why respondent judge must have acted as he did. Still, the Court cannot but express its
vehement condemnation of any judicial actuation that unduly deprives any party of the right to be heard
without clear and specific warrant under the terms of existing rules or binding jurisprudence. Extreme care
must be the instant reaction of every judge when confronted with a situation involving risks that the
proceedings may not be fair and square to all the parties concerned. Indeed, a keen sense of fairness, equity
and justice that constantly looks for consistency between the letter of the adjective rules and these basic
principles must be possessed by every judge, If substance is to prevail, as it must, over form in our courts.
Literal observance of the rules, when it is conducive to unfair and undue advantage on the part of any
litigant before it, is unworthy of any court of justice and equity. Withal, only those rules and procedure
informed, with and founded on public policy deserve obedience in accord with their unequivocal language
or words..
Before proceeding to the discussion of the default aspects of this case, however, it should not be amiss to
advert first to the patent incorrectness, apparent on the face of the record, of the aforementioned order of
dismissal of October 21, 1974 of the case below as regards non-defaulted defendants Lim and Leonardo.
While it is true that said defendants are not petitioners herein, the Court deems it necessary for a full view
of the outrageous procedural strategy conceived by respondent's counsel and sanctioned by respondent
court to also make reference to the very evident fact that in ordering said dismissal respondent court
disregarded completely the existence of defendant's counterclaim which it had itself earlier held if indirectly,
to be compulsory in nature when it refused to dismiss the same on the ground alleged by respondent Tan
that he docketing fees for the filing thereof had not been paid by defendants.

Indeed, that said counterclaim is compulsory needs no extended elaboration. As may be noted in the
allegations hereof aforequoted, it arose out of or is necessarily connected with the occurrence that is the
subject matter of the plaintiff's claim, (Section 4, Rule 9) namely, plaintiff's allegedly being the widow of
the deceased Tee Hoon entitled, as such, to demand accounting of and to receive the share of her alleged
late husband as partner of defendants Antonio Lim Tanhu and Alfonso Leonardo Ng Sua in Glory Commercial
Company, the truth of which allegations all the defendants have denied. Defendants maintain in their
counterclaim that plaintiff knew of the falsity of said allegations even before she filed her complaint, for she
had in fact admitted her common-law relationship with said deceased in a document she had jointly executed
with him by way of agreement to terminate their illegitimate relationship, for which she received P40,000
from the deceased, and with respect to her pretended share in the capital and profits in the partnership, it
is also defendants' posture that she had already quitclaimed, with the assistance of able counsel, whatever
rights if any she had thereto in November, 1967, for the sum of P25,000 duly receipted by her, which
quitclaim was, however, executed, according to respondent herself in her amended complaint, through
fraud. And having filed her complaint knowing, according to defendants, as she ought to have known, that
the material allegations thereof are false and baseless, she has caused them to suffer damages.
Undoubtedly, with such allegations, defendants' counterclaim is compulsory, not only because the same
evidence to sustain it will also refute the cause or causes of action alleged in plaintiff's complaint,
(Moran, supra p. 352) but also because from its very nature, it is obvious that the same cannot "remain
pending for independent adjudication by the court." (Section 2, Rule 17.)

The provision of the rules just cited specifically enjoins that "(i)f a counterclaim has been pleaded by a
defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not be dismissed
against the defendant's objection unless the counterclaim can remain pending for independent adjudication
by the court." Defendants Lim and Leonardo had no opportunity to object to the motion to dismiss before
the order granting the same was issued, for the simple reason that they were not opportunity notified of
the motion therefor, but the record shows clearly that at least defendant Lim immediately brought the
matter of their compulsory counterclaim to the attention of the trial court in his motion for reconsideration
of October 23, 1974, even as the counsel for the other defendant, Leonardo, predicated his motion on other
grounds. In its order of December 6, 1974, however, respondent court not only upheld the plaintiffs
supposed absolute right to choose her adversaries but also held that the counterclaim is not compulsory,
thereby virtually making unexplained and inexplicable 180-degree turnabout in that respect.

There is another equally fundamental consideration why the motion to dismiss should not have been
granted. As the plaintiff's complaint has been framed, all the six defendants are charged with having actually
taken part in a conspiracy to misappropriate, conceal and convert to their own benefit the profits, properties
and all other assets of the partnership Glory Commercial Company, to the extent that they have allegedly
organized a corporation, Glory Commercial Company, Inc. with what they had illegally gotten from the
partnership. Upon such allegations, no judgment finding the existence of the alleged conspiracy or holding
the capital of the corporation to be the money of the partnership is legally possible without the presence of
all the defendants. The non-defaulted defendants are alleged to be stockholders of the corporation and any
decision depriving the same of all its assets cannot but prejudice the interests of said defendants.
Accordingly, upon these premises, and even prescinding from the other reasons to be discussed anon it is
clear that all the six defendants below, defaulted and non-defaulted, are indispensable parties. Respondents
could do no less than grant that they are so on page 23 of their answer. Such being the case, the questioned
order of dismissal is exactly the opposite of what ought to have been done. Whenever it appears to the
court in the course of a proceeding that an indispensable party has not been joined, it is the duty of the
court to stop the trial and to order the inclusion of such party. (The Revised Rules of Court, Annotated &
Commented by Senator Vicente J. Francisco, Vol. 1, p. 271, 1973 ed. See also Cortez vs. Avila, 101 Phil.
705.) Such an order is unavoidable, for the "general rule with reference to the making of parties in a civil
action requires the joinder of all necessary parties wherever possible, and the joinder of all indispensable
parties under any and all conditions, the presence of those latter being a sine qua non of the exercise of
judicial power." (Borlasa vs. Polistico, 47 Phil. 345, at p. 347.) It is precisely " when an indispensable party
is not before the court (that) the action should be dismissed." (People v. Rodriguez, 106 Phil. 325, at p.
327.) The absence of an indispensable party renders all subsequent actuations of the court null and void,
for want of authority to act, not only as to the absent parties but even as to those present. In short, what
respondent court did here was exactly the reverse of what the law ordains — it eliminated those who by law
should precisely be joined.

As may he noted from the order of respondent court quoted earlier, which resolved the motions for
reconsideration of the dismissal order filed by the non-defaulted defendants, His Honor rationalized his
position thus:

It is the rule that it is the absolute prerogative of the plaintiff to choose, the theory upon
which he predicates his right of action, or the parties he desires to sue, without dictation or
imposition by the court or the adverse party. If he makes a mistake in the choice of his right
of action, or in that of the parties against whom he seeks to enforce it, that is his own concern
as he alone suffers therefrom. The plaintiff cannot be compelled to choose his defendants, He
may not, at his own expense, be forced to implead anyone who, under the adverse party's
theory, is to answer for defendant's liability. Neither may the Court compel him to furnish the
means by which defendant may avoid or mitigate their liability. (Vaño vs. Alo, 95 Phil. 495-
496.)

This being the rule this court cannot compel the plaintiff to continue prosecuting her cause of
action against the defendants-movants if in the course of the trial she believes she can enforce
it against the remaining defendants subject only to the limitation provided in Section 2, Rule
17 of the Rules of Court. ... (Pages 6263, Record.)

Noticeably, His Honor has employed the same equivocal terminology as in plaintiff's motion of October 18,
1974 by referring to the action he had taken as being "dismissal of the complaint against them or their
being dropped therefrom", without perceiving that the reason for the evidently intentional ambiguity is
transparent. The apparent idea is to rely on the theory that under Section 11 of Rule 3, parties may be
dropped by the court upon motion of any party at any stage of the action, hence "it is the absolute right
prerogative of the plaintiff to choose—the parties he desires to sue, without dictation or imposition by the
court or the adverse party." In other words, the ambivalent pose is suggested that plaintiff's motion of
October 18, 1974 was not predicated on Section 2 of Rule 17 but more on Section 11 of Rule 3. But the
truth is that nothing can be more incorrect. To start with, the latter rule does not comprehend whimsical
and irrational dropping or adding of parties in a complaint. What it really contemplates is erroneous or
mistaken non-joinder and misjoinder of parties. No one is free to join anybody in a complaint in court only
to drop him unceremoniously later at the pleasure of the plaintiff. The rule presupposes that the original
inclusion had been made in the honest conviction that it was proper and the subsequent dropping is
requested because it has turned out that such inclusion was a mistake. And this is the reason why the rule
ordains that the dropping be "on such terms as are just" — just to all the other parties. In the case at bar,
there is nothing in the record to legally justify the dropping of the non-defaulted defendants, Lim and
Leonardo. The motion of October 18, 1974 cites none. From all appearances, plaintiff just decided to ask
for it, without any relevant explanation at all. Usually, the court in granting such a motion inquires for the
reasons and in the appropriate instances directs the granting of some form of compensation for the trouble
undergone by the defendant in answering the complaint, preparing for or proceeding partially to trial, hiring
counsel and making corresponding expenses in the premises. Nothing of these, appears in the order in
question. Most importantly, His Honor ought to have considered that the outright dropping of the non-
defaulted defendants Lim and Leonardo, over their objection at that, would certainly be unjust not only to
the petitioners, their own parents, who would in consequence be entirely defenseless, but also to Lim and
Leonardo themselves who would naturally correspondingly suffer from the eventual judgment against their
parents. Respondent court paid no heed at all to the mandate that such dropping must be on such terms as
are just" — meaning to all concerned with its legal and factual effects.
Thus, it is quite plain that respondent court erred in issuing its order of dismissal of October 21, 1974 as
well as its order of December 6, 1974 denying reconsideration of such dismissal. As We make this ruling,
We are not oblivious of the circumstance that defendants Lim and Leonardo are not parties herein. But such
consideration is inconsequential. The fate of the case of petitioners is inseparably tied up with said order of
dismissal, if only because the order of ex-parte hearing of October 21, 1974 which directly affects and
prejudices said petitioners is predicated thereon. Necessarily, therefore, We have to pass on the legality of
said order, if We are to decide the case of herein petitioners properly and fairly.

The attitude of the non-defaulted defendants of no longer pursuing further their questioning of the dismissal
is from another point of view understandable. On the one hand, why should they insist on being defendants
when plaintiff herself has already release from her claims? On the other hand, as far as their respective
parents-co-defendants are concerned, they must have realized that they (their parents) could even be
benefited by such dismissal because they could question whether or not plaintiff can still prosecute her case
against them after she had secured the order of dismissal in question. And it is in connection with this last
point that the true and correct concept of default becomes relevant.

At this juncture, it may also be stated that the decision of the Court of Appeals of January 24, 1975 in G. R.
No. SP-03066 dismissing the petition for certiorari of non-defaulted defendants Lim and Leonardo impugning
the order of dismissal of October 21, 1974, has no bearing at all in this case, not only because that dismissal
was premised by the appellate court on its holding that the said petition was premature inasmuch as the
trial court had not yet resolved the motion of the defendants of October 28, 1974 praying that said disputed
order be quashed, but principally because herein petitioners were not parties in that proceeding and cannot,
therefore, be bound by its result. In particular, We deem it warranted to draw the attention of private
respondent's counsel to his allegations in paragraphs XI to XIV of his answer, which relate to said decision
of the Court of Appeals and which have the clear tendency to make it appear to the Court that the appeals
court had upheld the legality and validity of the actuations of the trial court being questioned, when as a
matter of indisputable fact, the dismissal of the petition was based solely and exclusively on its being
premature without in any manner delving into its merits. The Court must and does admonish counsel that
such manner of pleading, being deceptive and lacking in candor, has no place in any court, much less in the
Supreme Court, and if We are adopting a passive attitude in the premises, it is due only to the fact that this
is counsel's first offense. But similar conduct on his part in the future will definitely be dealt with more
severely. Parties and counsel would be well advised to avoid such attempts to befuddle the issues as
invariably then will be exposed for what they are, certainly unethical and degrading to the dignity of the law
profession. Moreover, almost always they only betray the inherent weakness of the cause of the party
resorting to them.

–2–

Coming now to the matter itself of default, it is quite apparent that the impugned orders must have
proceeded from inadequate apprehension of the fundamental precepts governing such procedure under the
Rules of Court. It is time indeed that the concept of this procedural device were fully understood by the
bench and bar, instead of being merely taken for granted as being that of a simple expedient of not allowing
the offending party to take part in the proceedings, so that after his adversary shall have presented his
evidence, judgment may be rendered in favor of such opponent, with hardly any chance of said judgment
being reversed or modified.

The Rules of Court contain a separate rule on the subject of default, Rule 18. But said rule is concerned
solely with default resulting from failure of the defendant or defendants to answer within the reglementary
period. Referring to the simplest form of default, that is, where there is only one defendant in the action
and he fails to answer on time, Section 1 of the rule provides that upon "proof of such failure, (the court
shall) declare the defendant in default. Thereupon the court shall proceed to receive the plaintiff's evidence
and render judgment granting him such relief as the complaint and the facts proven may warrant." This last
clause is clarified by Section 5 which says that "a judgment entered against a party in default shall not
exceed the amount or be different in kind from that prayed for."

Unequivocal, in the literal sense, as these provisions are, they do not readily convey the full import of what
they contemplate. To begin with, contrary to the immediate notion that can be drawn from their language,
these provisions are not to be understood as meaning that default or the failure of the defendant to answer
should be "interpreted as an admission by the said defendant that the plaintiff's cause of action find support
in the law or that plaintiff is entitled to the relief prayed for." (Moran, supra, p. 535 citing Macondary & Co.
v. Eustaquio, 64 Phil. 466, citing with approval Chaffin v. McFadden, 41 Ark. 42; Johnson v. Pierce, 12 Ark.
599; Mayden v. Johnson, 59 Ga. 105; People v. Rust, 292 111. 328; Ken v. Leopold 21 111. A. 163; Chicago,
etc. Electric R. Co. v. Krempel 116 111. A. 253.)

Being declared in default does not constitute a waiver of rights except that of being heard and of presenting
evidence in the trial court. According to Section 2, "except as provided in Section 9 of Rule 13, a party
declared in default shall not be entitled to notice of subsequent proceedings, nor to take part in the trial."
That provision referred to reads: "No service of papers other than substantially amended pleadings and final
orders or judgments shall be necessary on a party in default unless he files a motion to set aside the order
of default, in which event he shall be entitled to notice of all further proceedings regardless of whether the
order of default is set aside or not." And pursuant to Section 2 of Rule 41, "a party who has been declared
in default may likewise appeal from the judgment rendered against him as contrary to the evidence or to
the law, even if no petition for relief to set aside the order of default has been presented by him in accordance
with Rule 38.".

In other words, a defaulted defendant is not actually thrown out of court. While in a sense it may be said
that by defaulting he leaves himself at the mercy of the court, the rules see to it that any judgment against
him must be in accordance with law. The evidence to support the plaintiff's cause is, of course, presented
in his absence, but the court is not supposed to admit that which is basically incompetent. Although the
defendant would not be in a position to object, elementary justice requires that, only legal evidence should
be considered against him. If the evidence presented should not be sufficient to justify a judgment for the
plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot
exceed in amount or be different in kind from what is prayed for in the complaint.

Incidentally, these considerations argue against the present widespread practice of trial judges, as was done
by His Honor in this case, of delegating to their clerks of court the reception of the plaintiff's evidence when
the defendant is in default. Such a Practice is wrong in principle and orientation. It has no basis in any rule.
When a defendant allows himself to be declared in default, he relies on the faith that the court would take
care that his rights are not unduly prejudiced. He has a right to presume that the law and the rules will still
be observed. The proceedings are held in his forced absence, and it is but fair that the plaintiff should not
be allowed to take advantage of the situation to win by foul or illegal means or with inherently incompetent
evidence. Thus, in such instances, there is need for more attention from the court, which only the judge
himself can provide. The clerk of court would not be in a position much less have the authority to act in the
premises in the manner demanded by the rules of fair play and as contemplated in the law, considering his
comparably limited area of discretion and his presumably inferior preparation for the functions of a judge.
Besides, the default of the defendant is no excuse for the court to renounce the opportunity to closely
observe the demeanor and conduct of the witnesses of the plaintiff, the better to appreciate their
truthfulness and credibility. We therefore declare as a matter of judicial policy that there being no imperative
reason for judges to do otherwise, the practice should be discontinued.

Another matter of practice worthy of mention at this point is that it is preferable to leave enough opportunity
open for possible lifting of the order of default before proceeding with the reception of the plaintiff's evidence
and the rendition of the decision. "A judgment by default may amount to a positive and considerable injustice
to the defendant; and the possibility of such serious consequences necessitates a careful and liberal
examination of the grounds upon which the defendant may seek to set it aside." (Moran, supra p. 534, citing
Coombs vs. Santos, 24 Phil. 446; 449-450.) The expression, therefore, in Section 1 of Rule 18 aforequoted
which says that "thereupon the court shall proceed to receive the plaintiff's evidence etc." is not to be taken
literally. The gain in time and dispatch should the court immediately try the case on the very day of or
shortly after the declaration of default is far outweighed by the inconvenience and complications involved in
having to undo everything already done in the event the defendant should justify his omission to answer on
time.

The foregoing observations, as may be noted, refer to instances where the only defendant or all the
defendants, there being several, are declared in default. There are additional rules embodying more
considerations of justice and equity in cases where there are several defendants against whom a common
cause of action is averred and not all of them answer opportunely or are in default, particularly in reference
to the power of the court to render judgment in such situations. Thus, in addition to the limitation of Section
5 that the judgment by default should not be more in amount nor different in kind from the reliefs specifically
sought by plaintiff in his complaint, Section 4 restricts the authority of the court in rendering judgment in
the situations just mentioned as follows:

Sec. 4. Judgment when some defendants answer, and other make difficult. — When a
complaint states a common cause of action against several defendant some of whom answer,
and the others fail to do so, the court shall try the case against all upon the answer thus filed
and render judgment upon the evidence presented. The same proceeding applies when a
common cause of action is pleaded in a counterclaim, cross-claim and third-party claim.

Very aptly does Chief Justice Moran elucidate on this provision and the controlling jurisprudence explanatory
thereof this wise:

Where a complaint states a common cause of action against several defendants and some
appear to defend the case on the merits while others make default, the defense interposed
by those who appear to litigate the case inures to the benefit of those who fail to appear, and
if the court finds that a good defense has been made, all of the defendants must be absolved.
In other words, the answer filed by one or some of the defendants inures to the benefit of all
the others, even those who have not seasonably filed their answer. (Bueno v. Ortiz, L-22978,
June 27, 1968, 23 SCRA 1151.) The proper mode of proceeding where a complaint states a
common cause of action against several defendants, and one of them makes default, is simply
to enter a formal default order against him, and proceed with the cause upon the answers of
the others. The defaulting defendant merely loses his standing in court, he not being entitled
to the service of notice in the cause, nor to appear in the suit in any way. He cannot adduce
evidence; nor can he be heard at the final hearing, (Lim Toco v. Go Fay, 80 Phil. 166.)
although he may appeal the judgment rendered against him on the merits. (Rule 41, sec. 2.)
If the case is finally decided in the plaintiff's favor, a final decree is then entered against all
the defendants; but if the suit should be decided against the plaintiff, the action will be
dismissed as to all the defendants alike. (Velez v. Ramas, 40 Phil. 787-792; Frow v. de la
Vega, 15 Wal. 552,21 L. Ed. 60.) In other words the judgment will affect the defaulting
defendants either favorably or adversely. (Castro v. Peña, 80 Phil. 488.)

Defaulting defendant may ask execution if judgment is in his favor. (Castro v. Peña, supra.)
(Moran, Rules of Court, Vol. 1, pp. 538-539.)

In Castro vs. Peña, 80 Phil. 488, one of the numerous cases cited by Moran, this Court
elaborated on the construction of the same rule when it sanctioned the execution, upon
motion and for the benefit of the defendant in default, of a judgment which was adverse to
the plaintiff. The Court held:

As above stated, Emilia Matanguihan, by her counsel, also was a movant in the petition for
execution Annex 1. Did she have a right to be such, having been declared in default? In Frow
vs. De la Vega, supra, cited as authority in Velez vs. Ramas, supra, the Supreme Court of the
United States adopted as ground for its own decision the following ruling of the New York
Court of Errors in Clason vs. Morris, 10 Jons., 524:

It would be unreasonable to hold that because one defendant had made default, the plaintiff
should have a decree even against him, where the court is satisfied from the proofs offered
by the other, that in fact the plaintiff is not entitled to a decree. (21 Law, ed., 61.)

The reason is simple: justice has to be consistent. The complaint stating a common cause of
action against several defendants, the complainant's rights — or lack of them — in the
controversy have to be the same, and not different, as against all the defendant's although
one or some make default and the other or others appear, join issue, and enter into trial. For
instance, in the case of Clason vs. Morris above cited, the New York Court of Errors in effect
held that in such a case if the plaintiff is not entitled to a decree, he will not be entitled to it,
not only as against the defendant appearing and resisting his action but also as against the
 one who made default. In the case at bar, the cause of action in the plaintiff's complaint was
common against the Mayor of Manila, Emilia Matanguihan, and the other defendants in Civil
Case No. 1318 of the lower court. The Court of First Instance in its judgment found and held
upon the evidence adduced by the plaintiff and the defendant mayor that as between said
plaintiff and defendant Matanguihan the latter was the one legally entitled to occupy the stalls;
and it decreed, among other things, that said plaintiff immediately vacate them. Paraphrasing
the New York Court of Errors, it would be unreasonable to hold now that because Matanguihan
had made default, the said plaintiff should be declared, as against her, legally entitled to the
occupancy of the stalls, or to remain therein, although the Court of First Instance was so
firmly satisfied, from the proofs offered by the other defendant, that the same plaintiff was
not entitled to such occupancy that it peremptorily ordered her to vacate the stalls. If in the
cases of Clason vs. Morris, supra, Frow vs. De la Vega, supra, and Velez vs. Ramas, supra the
decrees entered inured to the benefit of the defaulting defendants, there is no reason why
that entered in said case No. 1318 should not be held also to have inured to the benefit of
the defaulting defendant Matanguihan and the doctrine in said three cases plainly implies that
there is nothing in the law governing default which would prohibit the court from rendering
judgment favorable to the defaulting defendant in such cases. If it inured to her benefit, it
stands to reason that she had a right to claim that benefit, for it would not be a benefit if the
supposed beneficiary were barred from claiming it; and if the benefit necessitated the
execution of the decree, she must be possessed of the right to ask for the execution thereof
as she did when she, by counsel, participated in the petition for execution Annex 1.

Section 7 of Rule 35 would seem to afford a solid support to the above considerations. It
provides that when a complaint states a common cause of action against several defendants,
some of whom answer, and the others make default, 'the court shall try the case against all
upon the answer thus filed and render judgment upon the evidence presented by the parties
in court'. It is obvious that under this provision the case is tried jointly not only against the
defendants answering but also against those defaulting, and the trial is held upon the answer
filed by the former; and the judgment, if adverse, will prejudice the defaulting defendants no
less than those who answer. In other words, the defaulting defendants are held bound by the
answer filed by their co-defendants and by the judgment which the court may render against
all of them. By the same token, and by all rules of equity and fair play, if the judgment should
happen to be favorable, totally or partially, to the answering defendants, it must
correspondingly benefit the defaulting ones, for it would not be just to let the judgment
produce effects as to the defaulting defendants only when adverse to them and not when
favorable.

In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under discussion in the following words:

In answer to the charge that respondent Judge had committed a grave abuse of discretion in
rendering a default judgment against the PC, respondents allege that, not having filed its
answer within the reglementary period, the PC was in default, so that it was proper for Patanao
to forthwith present his evidence and for respondent Judge to render said judgment. It should
be noted, however, that in entering the area in question and seeking to prevent Patanao from
continuing his logging operations therein, the PC was merely executing an order of the
Director of Forestry and acting as his agent. Patanao's cause of action against the other
respondents in Case No. 190, namely, the Director of Forestry, the District Forester of Agusan,
the Forest Officer of Bayugan, Agusan, and the Secretary of Agriculture and Natural
Resources. Pursuant to Rule 18, Section 4, of the Rules of Court, 'when a complaint states a
common cause of action against several defendants some of whom answer and the others fail
to do so, the court shall try the case against all upon the answer thus filed (by some) and
render judgment upon the evidence presented.' In other words, the answer filed by one or
some of the defendants inures to the benefit of all the others, even those who have not
seasonably filed their answer.

Indeed, since the petition in Case No. 190 sets forth a common cause of action against all of
the respondents therein, a decision in favor of one of them would necessarily favor the others.
In fact, the main issue, in said case, is whether Patanao has a timber license to undertake
 logging operations in the disputed area. It is not possible to decide such issue in the negative,
insofar as the Director of Forestry, and to settle it otherwise, as regards the PC, which is
merely acting as agent of the Director of Forestry, and is, therefore, his alter ego, with respect
to the disputed forest area.

Stated differently, in all instances where a common cause of action is alleged against several defendants,
some of whom answer and the others do not, the latter or those in default acquire a vested right not only
to own the defense interposed in the answer of their co- defendant or co-defendants not in default but also
to expect a result of the litigation totally common with them in kind and in amount whether favorable or
unfavorable. The substantive unity of the plaintiff's cause against all the defendants is carried through to its
adjective phase as ineluctably demanded by the homogeneity and indivisibility of justice itself. Indeed, since
the singleness of the cause of action also inevitably implies that all the defendants are indispensable parties,
the court's power to act is integral and cannot be split such that it cannot relieve any of them and at the
same time render judgment against the rest. Considering the tenor of the section in question, it is to be
assumed that when any defendant allows himself to be declared in default knowing that his defendant has
already answered, he does so trusting in the assurance implicit in the rule that his default is in essence a
mere formality that deprives him of no more than the right to take part in the trial and that the court would
deem anything done by or for the answering defendant as done by or for him. The presumption is that
otherwise he would not -have seen to that he would not be in default. Of course, he has to suffer the
consequences of whatever the answering defendant may do or fail to do, regardless of possible adverse
consequences, but if the complaint has to be dismissed in so far as the answering defendant is concerned it
becomes his inalienable right that the same be dismissed also as to him. It does not matter that the dismissal
is upon the evidence presented by the plaintiff or upon the latter's mere desistance, for in both
contingencies, the lack of sufficient legal basis must be the cause. The integrity of the common cause of
action against all the defendants and the indispensability of all of them in the proceedings do not permit
any possibility of waiver of the plaintiff's right only as to one or some of them, without including all of them,
and so, as a rule, withdrawal must be deemed to be a confession of weakness as to all. This is not only
elementary justice; it also precludes the concomitant hazard that plaintiff might resort to the kind of
procedural strategem practiced by private respondent herein that resulted in totally depriving petitioners of
every opportunity to defend themselves against her claims which, after all, as will be seen later in this
opinion, the record does not show to be invulnerable, both in their factual and legal aspects, taking into
consideration the tenor of the pleadings and the probative value of the competent evidence which were
before the trial court when it rendered its assailed decision where all the defendants are indispensable
parties, for which reason the absence of any of them in the case would result in the court losing its
competency to act validly, any compromise that the plaintiff might wish to make with any of them must, as
a matter of correct procedure, have to await until after the rendition of the judgment, at which stage the
plaintiff may then treat the matter of its execution and the satisfaction of his claim as variably as he might
please. Accordingly, in the case now before Us together with the dismissal of the complaint against the non-
defaulted defendants, the court should have ordered also the dismissal thereof as to petitioners.

Indeed, there is more reason to apply here the principle of unity and indivisibility of the action just discussed
because all the defendants here have already joined genuine issues with plaintiff. Their default was only at
the pre-trial. And as to such absence of petitioners at the pre-trial, the same could be attributed to the fact
that they might not have considered it necessary anymore to be present, since their respective children Lim
and Leonardo, with whom they have common defenses, could take care of their defenses as well. Anything
that might have had to be done by them at such pre-trial could have been done for them by their children,
at least initially, specially because in the light of the pleadings before the court, the prospects of a
compromise must have appeared to be rather remote. Such attitude of petitioners is neither uncommon nor
totally unjustified. Under the circumstances, to declare them immediately and irrevocably in default was not
an absolute necessity. Practical considerations and reasons of equity should have moved respondent court
to be more understanding in dealing with the situation. After all, declaring them in default as respondent
court did not impair their right to a common fate with their children.

–3–

Another issue to be resolved in this case is the question of whether or not herein petitioners were entitled
to notice of plaintiff's motion to drop their co-defendants Lim and Leonardo, considering that petitioners had
been previously declared in default. In this connection, the decisive consideration is that according to the
applicable rule, Section 9, Rule 13, already quoted above, (1) even after a defendant has been declared in
default, provided he "files a motion to set aside the order of default, — he shall be entitled to notice of all
further proceedings regardless of whether the order of default is set aside or not" and (2) a party in default
who has not filed such a motion to set aside must still be served with all "substantially amended or
supplemented pleadings." In the instant case, it cannot be denied that petitioners had all filed their motion
for reconsideration of the order declaring them in default. Respondents' own answer to the petition therein
makes reference to the order of April 3, 1973, Annex 8 of said answer, which denied said motion for
reconsideration. On page 3 of petitioners' memorandum herein this motion is referred to as "a motion to
set aside the order of default." But as We have not been favored by the parties with a copy of the said
motion, We do not even know the excuse given for petitioners' failure to appear at the pre-trial, and We
cannot, therefore, determine whether or not the motion complied with the requirements of Section 3 of Rule
18 which We have held to be controlling in cases of default for failure to answer on time. (The Philippine-
British Co. Inc. etc. et al. vs. The Hon. Walfrido de los Angeles etc. et al., 63 SCRA 50.)

We do not, however, have here, as earlier noted, a case of default for failure to answer but one for failure
to appear at the pre-trial. We reiterate, in the situation now before Us, issues have already been joined. In
fact, evidence had been partially offered already at the pre-trial and more of it at the actual trial which had
already begun with the first witness of the plaintiff undergoing re-cross-examination. With these facts in
mind and considering that issues had already been joined even as regards the defaulted defendants, it would
be requiring the obvious to pretend that there was still need for an oath or a verification as to the merits of
the defense of the defaulted defendants in their motion to reconsider their default. Inasmuch as none of the
parties had asked for a summary judgment there can be no question that the issues joined were genuine,
and consequently, the reason for requiring such oath or verification no longer holds. Besides, it may also be
reiterated that being the parents of the non-defaulted defendants, petitioners must have assumed that their
presence was superfluous, particularly because the cause of action against them as well as their own
defenses are common. Under these circumstances, the form of the motion by which the default was sought
to be lifted is secondary and the requirements of Section 3 of Rule 18 need not be strictly complied with,
unlike in cases of default for failure to answer. We can thus hold as We do hold for the purposes of the
revival of their right to notice under Section 9 of Rule 13, that petitioner's motion for reconsideration was
in substance legally adequate regardless of whether or not it was under oath.

In any event, the dropping of the defendants Lim and Leonardo from plaintiff's amended complaint was
virtually a second amendment of plaintiffs complaint. And there can be no doubt that such amendment was
substantial, for with the elimination thereby of two defendants allegedly solidarily liable with their co-
defendants, herein petitioners, it had the effect of increasing proportionally what each of the remaining
defendants, the said petitioners, would have to answer for jointly and severally. Accordingly, notice to
petitioners of the plaintiff's motion of October 18, 1974 was legally indispensable under the rule above-
quoted. Consequently, respondent court had no authority to act on the motion, to dismiss, pursuant to
Section 6 of Rule 15, for according to Senator Francisco, "(t) he Rules of Court clearly provide that no motion
shall be acted upon by the Court without the proof of service of notice thereof, together with a copy of the
motion and other papers accompanying it, to all parties concerned at least three days before the hearing
thereof, stating the time and place for the hearing of the motion. (Rule 26, section 4, 5 and 6, Rules of
Court (now Sec. 15, new Rules). When the motion does not comply with this requirement, it is not a motion.
It presents no question which the court could decide. And the Court acquires no jurisdiction to consider it.
(Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.)
(Laserna vs. Javier, et al., CA-G.R. No. 7885, April 22, 1955; 21 L.J. 36, citing Roman Catholic Bishop of
Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.) (Francisco. The Revised Rules
of Court in the Philippines, pp. 861-862.) Thus, We see again, from a different angle, why respondent court's
order of dismissal of October 21, 1974 is fatally ineffective.

–4–

The foregoing considerations notwithstanding, it is respondents' position that certiorari is not the proper
remedy of petitioners. It is contended that inasmuch as said petitioners have in fact made their appeal
already by filing the required notice of appeal and appeal bond and a motion for extension to file their record
on appeal, which motion was granted by respondent court, their only recourse is to prosecute that appeal.
Additionally, it is also maintained that since petitioners have expressly withdrawn their motion to quash of
January 4, 1975 impugning the order of October 28, 1974, they have lost their right to assail by certiorari
the actuations of respondent court now being questioned, respondent court not having been given the
opportunity to correct any possible error it might have committed.

We do not agree. As already shown in the foregoing discussion, the proceedings in the court below have
gone so far out of hand that prompt action is needed to restore order in the entangled situation created by
the series of plainly illegal orders it had issued. The essential purpose of certiorari is to keep the proceedings
in lower judicial courts and tribunals within legal bounds, so that due process and the rule of law may prevail
at all times and arbitrariness, whimsicality and unfairness which justice abhors may immediately be stamped
out before graver injury, juridical and otherwise, ensues. While generally these objectives may well be
attained in an ordinary appeal, it is undoubtedly the better rule to allow the special remedy of certiorari at
the option of the party adversely affected, when the irregularity committed by the trial court is so grave and
so far reaching in its consequences that the long and cumbersome procedure of appeal will only further
aggravate the situation of the aggrieved party because other untoward actuations are likely to materialize
as natural consequences of those already perpetrated. If the law were otherwise, certiorari would have no
reason at all for being.

No elaborate discussion is needed to show the urgent need for corrective measures in the case at bar. Verily,
this is one case that calls for the exercise of the Supreme Court's inherent power of supervision over all
kinds of judicial actions of lower courts. Private respondent's procedural technique designed to disable
petitioners to defend themselves against her claim which appears on the face of the record itself to be at
least highly controversial seems to have so fascinated respondent court that none would be surprised should
her pending motion for immediate execution of the impugned judgment receive similar ready sanction as
her previous motions which turned the proceedings into a one-sided affair. The stakes here are high. Not
only is the subject matter considerably substantial; there is the more important aspect that not only the
spirit and intent of the rules but even the basic rudiments of fair play have been disregarded. For the Court
to leave unrestrained the obvious tendency of the proceedings below would be nothing short of wittingly
condoning inequity and injustice resulting from erroneous construction and unwarranted application of
procedural rules.

–5–

The sum and total of all the foregoing disquisitions is that the decision here in question is legally anomalous.
It is predicated on two fatal malactuations of respondent court namely (1) the dismissal of the complaint
against the non-defaulted defendants Lim and Leonardo and (2) the ex-parte reception of the evidence of
the plaintiff by the clerk of court, the subsequent using of the same as basis for its judgment and the
rendition of such judgment.

For at least three reasons which We have already fully discussed above, the order of dismissal of October
21, 1974 is unworthy of Our sanction: (1) there was no timely notice of the motion therefor to the non-
defaulted defendants, aside from there being no notice at all to herein petitioners; (2) the common answer
of the defendants, including the non-defaulted, contained a compulsory counterclaim incapable of being
determined in an independent action; and (3) the immediate effect of such dismissal was the removal of
the two non-defaulted defendants as parties, and inasmuch as they are both indispensable parties in the
case, the court consequently lost the" sine qua non of the exercise of judicial power", per Borlasa vs.
Polistico, supra. This is not to mention anymore the irregular delegation to the clerk of court of the function
of receiving plaintiff's evidence. And as regards the ex-parte reception of plaintiff's evidence and subsequent
rendition of the judgment by default based thereon, We have seen that it was violative of the right of the
petitioners, under the applicable rules and principles on default, to a common and single fate with their non-
defaulted co-defendants. And We are not yet referring, as We shall do this anon to the numerous reversible
errors in the decision itself.

It is to be noted, however, that the above-indicated two fundamental flaws in respondent court's actuations
do not call for a common corrective remedy. We cannot simply rule that all the impugned proceedings are
null and void and should be set aside, without being faced with the insurmountable obstacle that by so doing
We would be reviewing the case as against the two non-defaulted defendants who are not before Us not
being parties hereto. Upon the other hand, for Us to hold that the order of dismissal should be allowed to
stand, as contended by respondents themselves who insist that the same is already final, not only because
the period for its finality has long passed but also because allegedly, albeit not very accurately, said 'non-
defaulted defendants unsuccessfully tried to have it set aside by the Court of Appeals whose decision on
their petition is also already final, We would have to disregard whatever evidence had been presented by
the plaintiff against them and, of course, the findings of respondent court based thereon which, as the
assailed decision shows, are adverse to them. In other words, whichever of the two apparent remedies the
Court chooses, it would necessarily entail some kind of possible juridical imperfection. Speaking of their
respective practical or pragmatic effects, to annul the dismissal would inevitably prejudice the rights of the
non-defaulted defendants whom We have not heard and who even respondents would not wish to have
anything anymore to do with the case. On the other hand, to include petitioners in the dismissal would
naturally set at naught every effort private respondent has made to establish or prove her case thru means
sanctioned by respondent court. In short, We are confronted with a legal para-dilemma. But one thing is
certain — this difficult situations has been brought about by none other than private respondent who has
quite cynically resorted to procedural maneuvers without realizing that the technicalities of the adjective
law, even when apparently accurate from the literal point of view, cannot prevail over the imperatives of
the substantive law and of equity that always underlie them and which have to be inevitably considered in
the construction of the pertinent procedural rules.

All things considered, after careful and mature deliberation, the Court has arrived at the conclusion that as
between the two possible alternatives just stated, it would only be fair, equitable and proper to uphold the
position of petitioners. In other words, We rule that the order of dismissal of October 21, 1974 is in law a
dismissal of the whole case of the plaintiff, including as to petitioners herein. Consequently, all proceedings
held by respondent court subsequent thereto including and principally its decision of December 20, 1974
are illegal and should be set aside.

This conclusion is fully justified by the following considerations of equity:

1. It is very clear to Us that the procedural maneuver resorted to by private respondent in securing the
decision in her favor was ill-conceived. It was characterized by that which every principle of law and equity
disdains — taking unfair advantage of the rules of procedure in order to unduly deprive the other party of
full opportunity to defend his cause. The idea of "dropping" the non-defaulted defendants with the end in
view of completely incapacitating their co-defendants from making any defense, without considering that all
of them are indispensable parties to a common cause of action to which they have countered with a common
defense readily connotes an intent to secure a one-sided decision, even improperly. And when, in this
connection, the obvious weakness of plaintiff's evidence is taken into account, one easily understands why
such tactics had to be availed of. We cannot directly or indirectly give Our assent to the commission of
unfairness and inequity in the application of the rules of procedure, particularly when the propriety of
reliance thereon is not beyond controversy.

2. The theories of remedial law pursued by private respondents, although approved by His Honor, run
counter to such basic principles in the rules on default and such elementary rules on dismissal of actions
and notice of motions that no trial court should be unaware of or should be mistaken in applying. We are at
a loss as to why His Honor failed to see through counsel's inequitous strategy, when the provisions (1) on
the three-day rule on notice of motions, Section 4 of Rule 15, (2) against dismissal of actions on motion of
plaintiff when there is a compulsory counterclaim, Section 2, Rule 17, (3) against permitting the absence of
indispensable parties, Section 7, Rule 3, (4) on service of papers upon defendants in default when there are
substantial amendments to pleadings, Section 9, Rule 13, and (5) on the unity and integrity of the fate of
defendants in default with those not in default where the cause of action against them and their own
defenses are common, Section 4, Rule 18, are so plain and the jurisprudence declaratory of their intent and
proper construction are so readily comprehensible that any error as to their application would be unusual in
any competent trial court.

3. After all, all the malactuations of respondent court are traceable to the initiative of private respondent
and/or her counsel. She cannot, therefore, complain that she is being made to unjustifiably suffer the
consequences of what We have found to be erroneous orders of respondent court. It is only fair that she
should not be allowed to benefit from her own frustrated objective of securing a one-sided decision.

4. More importantly, We do not hesitate to hold that on the basis of its own recitals, the decision in question
cannot stand close scrutiny. What is more, the very considerations contained therein reveal convincingly
the inherent weakness of the cause of the plaintiff. To be sure, We have been giving serious thought to the
idea of merely returning this case for a resumption of trial by setting aside the order of dismissal of October
21, 1974, with all its attendant difficulties on account of its adverse effects on parties who have not been
heard, but upon closer study of the pleadings and the decision and other circumstances extant in the record
before Us, We are now persuaded that such a course of action would only lead to more legal complications
incident to attempts on the part of the parties concerned to desperately squeeze themselves out of a bad
situation. Anyway, We feel confident that by and large, there is enough basis here and now for Us to rule
out the claim of the plaintiff.

Even a mere superficial reading of the decision would immediately reveal that it is littered on its face with
deficiencies and imperfections which would have had no reason for being were there less haste and more
circumspection in rendering the same. Recklessness in jumping to unwarranted conclusions, both factual
and legal, is at once evident in its findings relative precisely to the main bases themselves of the reliefs
granted. It is apparent therein that no effort has been made to avoid glaring inconsistencies. Where
references are made to codal provisions and jurisprudence, inaccuracy and inapplicability are at once
manifest. It hardly commends itself as a deliberate and consciencious adjudication of a litigation which,
considering the substantial value of the subject matter it involves and the unprecedented procedure that
was followed by respondent's counsel, calls for greater attention and skill than the general run of cases
would.

Inter alia, the following features of the decision make it highly improbable that if We took another course of
action, private respondent would still be able to make out any case against petitioners, not to speak of their
co-defendants who have already been exonerated by respondent herself thru her motion to dismiss:

1. According to His Honor's own statement of plaintiff's case, "she is the widow of the late Tee Hoon Po
Chuan (Po Chuan, for short) who was then one of the partners in the commercial partnership, Glory
Commercial Co. with defendants Antonio Lim Tanhu (Lim Tanhu, for short) and Alfonso Leonardo Ng Sua
(Ng Sua, for short) as co-partners; that after the death of her husband on March 11, 1966 she is entitled to
share not only in the capital and profits of the partnership but also in the other assets, both real and
personal, acquired by the partnership with funds of the latter during its lifetime."

Relatedly, in the latter part of the decision, the findings are to the following effect: .

That the herein plaintiff Tan Put and her late husband Po Chuan married at the Philippine
Independent Church of Cebu City on December, 20, 1949; that Po Chuan died on March 11,
1966; that the plaintiff and the late Po Chuan were childless but the former has a foster son
Antonio Nuñez whom she has reared since his birth with whom she lives up to the present;
that prior to the marriage of the plaintiff to Po Chuan the latter was already managing the
partnership Glory Commercial Co. then engaged in a little business in hardware at Manalili
St., Cebu City; that prior to and just after the marriage of the plaintiff to Po Chuan she was
engaged in the drugstore business; that not long after her marriage, upon the suggestion of
Po Chuan the plaintiff sold her drugstore for P125,000.00 which amount she gave to her
husband in the presence of defendant Lim Tanhu and was invested in the partnership Glory
Commercial Co. sometime in 1950; that after the investment of the above-stated amount in
the partnership its business flourished and it embarked in the import business and also
engaged in the wholesale and retail trade of cement and GI sheets and under huge profits;

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business of the partnership
Glory Commercial Co. he was the one who made the final decisions and approved the
appointments of new personnel who were taken in by the partnership; that the late Po Chuan
and defendants Lim Tanhu and Ng Sua are brothers, the latter two (2) being the elder brothers
of the former; that defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens
whereas the late Po Chuan until the time of his death was a Chinese citizen; that the three
(3) brothers were partners in the Glory Commercial Co. but Po Chuan was practically the
owner of the partnership having the controlling interest; that defendants Lim Tanhu and Ng
Sua were partners in name but they were mere employees of Po Chuan .... (Pp. 89-91,
Record.)
How did His Honor arrive at these conclusions? To start with, it is not clear in the decision whether or not in
making its findings of fact the court took into account the allegations in the pleadings of the parties and
whatever might have transpired at the pre-trial. All that We can gather in this respect is that references are
made therein to pre-trial exhibits and to Annex A of the answer of the defendants to plaintiff's amended
complaint. Indeed, it was incumbent upon the court to consider not only the evidence formally offered at
the trial but also the admissions, expressed or implied, in the pleadings, as well as whatever might have
been placed before it or brought to its attention during the pre-trial. In this connection, it is to be regretted
that none of the parties has thought it proper to give Us an idea of what took place at the pre-trial of the
present case and what are contained in the pre-trial order, if any was issued pursuant to Section 4 of Rule
20.

The fundamental purpose of pre-trial, aside from affording the parties every opportunity to compromise or
settle their differences, is for the court to be apprised of the unsettled issues between the parties and of
their respective evidence relative thereto, to the end that it may take corresponding measures that would
abbreviate the trial as much as possible and the judge may be able to ascertain the facts with the least
observance of technical rules. In other words whatever is said or done by the parties or their counsel at the
pre- trial serves to put the judge on notice of their respective basic positions, in order that in appropriate
cases he may, if necessary in the interest of justice and a more accurate determination of the facts, make
inquiries about or require clarifications of matters taken up at the pre-trial, before finally resolving any issue
of fact or of law. In brief, the pre-trial constitutes part and parcel of the proceedings, and hence, matters
dealt with therein may not be disregarded in the process of decision making. Otherwise, the real essence of
compulsory pre-trial would be insignificant and worthless.

Now, applying these postulates to the findings of respondent court just quoted, it will be observed that the
court's conclusion about the supposed marriage of plaintiff to the deceased Tee Hoon Lim Po Chuan is
contrary to the weight of the evidence brought before it during the trial and the pre-trial.

Under Article 55 of the Civil Code, the declaration of the contracting parties that they take each other as
husband and wife "shall be set forth in an instrument" signed by the parties as well as by their witnesses
and the person solemnizing the marriage. Accordingly, the primary evidence of a marriage must be an
authentic copy of the marriage contract. While a marriage may also be proved by other competent evidence,
the absence of the contract must first be satisfactorily explained. Surely, the certification of the person who
allegedly solemnized a marriage is not admissible evidence of such marriage unless proof of loss of the
contract or of any other satisfactory reason for its non-production is first presented to the court. In the case
at bar, the purported certification issued by a Mons. Jose M. Recoleto, Bishop, Philippine Independent
Church, Cebu City, is not, therefore, competent evidence, there being absolutely no showing as to
unavailability of the marriage contract and, indeed, as to the authenticity of the signature of said certifier,
the jurat allegedly signed by a second assistant provincial fiscal not being authorized by law, since it is not
part of the functions of his office. Besides, inasmuch as the bishop did not testify, the same is hearsay.

As regards the testimony of plaintiff herself on the same point and that of her witness Antonio Nuñez, there
can be no question that they are both self-serving and of very little evidentiary value, it having been
disclosed at the trial that plaintiff has already assigned all her rights in this case to said Nuñez, thereby
making him the real party in interest here and, therefore, naturally as biased as herself. Besides, in the
portion of the testimony of Nuñez copied in Annex C of petitioner's memorandum, it appears admitted that
he was born only on March 25, 1942, which means that he was less than eight years old at the supposed
time of the alleged marriage. If for this reason alone, it is extremely doubtful if he could have been
sufficiently aware of such event as to be competent to testify about it.

Incidentally, another Annex C of the same memorandum purports to be the certificate of birth of one Antonio
T. Uy supposed to have been born on March 23, 1937 at Centro Misamis, Misamis Occidental, the son of
one Uy Bien, father, and Tan Put, mother. Significantly, respondents have not made any adverse comment
on this document. It is more likely, therefore, that the witness is really the son of plaintiff by her husband
Uy Kim Beng. But she testified she was childless. So which is which? In any event, if on the strength of this
document, Nuñez is actually the legitimate son of Tan Put and not her adopted son, he would have been
but 13 years old in 1949, the year of her alleged marriage to Po Chuan, and even then, considering such
age, his testimony in regard thereto would still be suspect.
Now, as against such flimsy evidence of plaintiff, the court had before it, two documents of great weight
belying the pretended marriage. We refer to (1) Exhibit LL, the income tax return of the deceased Tee Hoon
Lim Po Chuan indicating that the name of his wife was Ang Sick Tin and (2) the quitclaim, Annex A of the
answer, wherein plaintiff Tan Put stated that she had been living with the deceased without benefit of
marriage and that she was his "common-law wife". Surely, these two documents are far more reliable than
all the evidence of the plaintiff put together.

Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is evidence offered to the judge
himself, not to the clerk of court, and should have at least moved him to ask plaintiff to explain if not rebut
it before jumping to the conclusion regarding her alleged marriage to the deceased, Po Chuan. And in regard
to the quitclaim containing the admission of a common-law relationship only, it is to be observed that His
Honor found that "defendants Lim Tanhu and Ng Sua had the plaintiff execute a quitclaim on November 29,
1967 (Annex "A", Answer) where they gave plaintiff the amount of P25,000 as her share in the capital and
profits of the business of Glory Commercial Co. which was engaged in the hardware business", without
making mention of any evidence of fraud and misrepresentation in its execution, thereby indicating either
that no evidence to prove that allegation of the plaintiff had been presented by her or that whatever evidence
was actually offered did not produce persuasion upon the court. Stated differently, since the existence of
the quitclaim has been duly established without any circumstance to detract from its legal import, the court
should have held that plaintiff was bound by her admission therein that she was the common-law wife only
of Po Chuan and what is more, that she had already renounced for valuable consideration whatever claim
she might have relative to the partnership Glory Commercial Co.

And when it is borne in mind that in addition to all these considerations, there are mentioned and discussed
in the memorandum of petitioners (1) the certification of the Local Civil Registrar of Cebu City and (2) a
similar certification of the Apostolic Prefect of the Philippine Independent Church, Parish of Sto. Niño, Cebu
City, that their respective official records corresponding to December 1949 to December 1950 do not show
any marriage between Tee Hoon Lim Po Chuan and Tan Put, neither of which certifications have been
impugned by respondent until now, it stands to reason that plaintiff's claim of marriage is really unfounded.
Withal, there is still another document, also mentioned and discussed in the same memorandum and
unimpugned by respondents, a written agreement executed in Chinese, but purportedly translated into
English by the Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan to the following effect:

CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines

TRANSLATION

This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr. Lim Po Chuan alias
TeeHoon since 1949 but it recently occurs that we are incompatible with each other and are
not in the position to keep living together permanently. With the mutual concurrence, we
decided to terminate the existing relationship of common law-marriage and promised not to
interfere each other's affairs from now on. The Forty Thousand Pesos (P40,000.00) has been
given to me by Mr. Lim Po Chuan for my subsistence.

Witnesses:

Mr. Lim Beng Guan Mr. Huang Sing Se

Signed on the 10 day of the 7th month of the 54th year of the Republic of China
(corresponding to the year 1965).

(SGD) TAN KI ENG

Verified from the records. JORGE TABAR (Pp. 283-284, Record.)

Indeed, not only does this document prove that plaintiff's relation to the deceased was that of a common-
law wife but that they had settled their property interests with the payment to her of P40,000.
In the light of all these circumstances, We find no alternative but to hold that plaintiff Tan Put's allegation
that she is the widow of Tee Hoon Lim Po Chuan has not been satisfactorily established and that, on the
contrary, the evidence on record convincingly shows that her relation with said deceased was that of a
common-law wife and furthermore, that all her claims against the company and its surviving partners as
well as those against the estate of the deceased have already been settled and paid. We take judicial notice
of the fact that the respective counsel who assisted the parties in the quitclaim, Attys. H. Hermosisima and
Natalio Castillo, are members in good standing of the Philippine Bar, with the particularity that the latter
has been a member of the Cabinet and of the House of Representatives of the Philippines, hence, absent
any credible proof that they had allowed themselves to be parties to a fraudulent document His Honor did
right in recognizing its existence, albeit erring in not giving due legal significance to its contents.

2. If, as We have seen, plaintiff's evidence of her alleged status as legitimate wife of Po Chuan is not only
unconvincing but has been actually overcome by the more competent and weighty evidence in favor of the
defendants, her attempt to substantiate her main cause of action that defendants Lim Tanhu and Ng Sua
have defrauded the partnership Glory Commercial Co. and converted its properties to themselves is even
more dismal. From the very evidence summarized by His Honor in the decision in question, it is clear that
not an iota of reliable proof exists of such alleged misdeeds.

Of course, the existence of the partnership has not been denied, it is actually admitted impliedly in
defendants' affirmative defense that Po Chuan's share had already been duly settled with and paid to both
the plaintiff and his legitimate family. But the evidence as to the actual participation of the defendants Lim
Tanhu and Ng Sua in the operation of the business that could have enabled them to make the extractions
of funds alleged by plaintiff is at best confusing and at certain points manifestly inconsistent.

In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is entitled to ¹/3 share
of the assets and properties of the partnership. In fact, her prayer in said complaint is, among others, for
the delivery to her of such ¹/3 share. His Honor's statement of the case as well as his findings and judgment
are all to that same effect. But what did she actually try to prove at the ex- parte hearing?

According to the decision, plaintiff had shown that she had money of her own when she "married" Po Chuan
and "that prior to and just after the marriage of the plaintiff to Po Chuan, she was engaged in the drugstore
business; that not long after her marriage, upon the suggestion of Po Chuan, the plaintiff sold her drugstore
for P125,000 which amount she gave to her husband in the presence of Tanhu and was invested in the
partnership Glory Commercial Co. sometime in 1950; that after the investment of the above-stated amount
in the partnership, its business flourished and it embarked in the import business and also engaged in the
wholesale and retail trade of cement and GI sheets and under (sic) huge profits." (pp. 25-26, Annex L,
petition.)

To begin with, this theory of her having contributed of P125,000 to the capital of the partnership by reason
of which the business flourished and amassed all the millions referred to in the decision has not been alleged
in the complaint, and inasmuch as what was being rendered was a judgment by default, such theory should
not have been allowed to be the subject of any evidence. But inasmuch as it was the clerk of court who
received the evidence, it is understandable that he failed to observe the rule. Then, on the other hand, if it
was her capital that made the partnership flourish, why would she claim to be entitled to only to ¹/ 3 of its
assets and profits? Under her theory found proven by respondent court, she was actually the owner of
everything, particularly because His Honor also found "that defendants Lim Tanhu and Ng Sua were partners
in the name but they were employees of Po Chuan that defendants Lim Tanhu and Ng Sua had no means of
livelihood at the time of their employment with the Glory Commercial Co. under the management of the late
Po Chuan except their salaries therefrom; ..." (p. 27, id.) Why then does she claim only ¹/3 share? Is this
an indication of her generosity towards defendants or of a concocted cause of action existing only in her
confused imagination engendered by the death of her common-law husband with whom she had settled her
common-law claim for recompense of her services as common law wife for less than what she must have
known would go to his legitimate wife and children?

Actually, as may be noted from the decision itself, the trial court was confused as to the participation of
defendants Lim Tanhu and Ng Sua in Glory Commercial Co. At one point, they were deemed partners, at
another point mere employees and then elsewhere as partners-employees, a newly found concept, to be
sure, in the law on partnership. And the confusion is worse comfounded in the judgment which allows these
"partners in name" and "partners-employees" or employees who had no means of livelihood and who must
not have contributed any capital in the business, "as Po Chuan was practically the owner of the partnership
having the controlling interest", ¹/3 each of the huge assets and profits of the partnership. Incidentally, it
may be observed at this juncture that the decision has made Po Chuan play the inconsistent role of being
"practically the owner" but at the same time getting his capital from the P125,000 given to him by plaintiff
and from which capital the business allegedly "flourished."

Anent the allegation of plaintiff that the properties shown by her exhibits to be in the names of defendants
Lim Tanhu and Ng Sua were bought by them with partnership funds, His Honor confirmed the same by
finding and holding that "it is likewise clear that real properties together with the improvements in the
names of defendants Lim Tanhu and Ng Sua were acquired with partnership funds as these defendants were
only partners-employees of deceased Po Chuan in the Glory Commercial Co. until the time of his death on
March 11, 1966." (p. 30, id.) It Is Our considered view, however, that this conclusion of His Honor is based
on nothing but pure unwarranted conjecture. Nowhere is it shown in the decision how said defendants could
have extracted money from the partnership in the fraudulent and illegal manner pretended by plaintiff.
Neither in the testimony of Nuñez nor in that of plaintiff, as these are summarized in the decision, can there
be found any single act of extraction of partnership funds committed by any of said defendants. That the
partnership might have grown into a multi-million enterprise and that the properties described in the exhibits
enumerated in the decision are not in the names of Po Chuan, who was Chinese, but of the defendants who
are Filipinos, do not necessarily prove that Po Chuan had not gotten his share of the profits of the business
or that the properties in the names of the defendants were bought with money of the partnership. In this
connection, it is decisively important to consider that on the basis of the concordant and mutually cumulative
testimonies of plaintiff and Nuñez, respondent court found very explicitly that, and We reiterate:

xxx xxx xxx

That the late Po Chuan was the one who actively managed the business of the partnership
Glory Commercial Co. he was the one who made the final decisions and approved the
appointments of new Personnel who were taken in by the partnership; that the late Po Chuan
and defendants Lim Tanhu and Ng Sua are brothers, the latter to (2) being the elder brothers
of the former; that defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens
whereas the late Po Chuan until the time of his death was a Chinese citizen; that the three
(3) brothers were partners in the Glory Commercial Co. but Po Chuan was practically the
owner of the partnership having the controlling interest; that defendants Lim Tanhu and Ng
Sua were partners in name but they were mere employees of Po Chuan; .... (Pp. 90-91,
Record.)

If Po Chuan was in control of the affairs and the running of the partnership, how could the defendants have
defrauded him of such huge amounts as plaintiff had made his Honor believe? Upon the other hand, since
Po Chuan was in control of the affairs of the partnership, the more logical inference is that if defendants had
obtained any portion of the funds of the partnership for themselves, it must have been with the knowledge
and consent of Po Chuan, for which reason no accounting could be demanded from them therefor,
considering that Article 1807 of the Civil Code refers only to what is taken by a partner without the consent
of the other partner or partners. Incidentally again, this theory about Po Chuan having been actively
managing the partnership up to his death is a substantial deviation from the allegation in the amended
complaint to the effect that "defendants Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan and
Eng Chong Leonardo, through fraud and machination, took actual and active management of the partnership
and although Tee Hoon Lim Po Chuan was the manager of Glory Commercial Co., defendants managed to
use the funds of the partnership to purchase lands and buildings etc. (Par. 4, p. 2 of amended complaint,
Annex B of petition) and should not have been permitted to be proven by the hearing officer, who naturally
did not know any better.

Moreover, it is very significant that according to the very tax declarations and land titles listed in the decision,
most if not all of the properties supposed to have been acquired by the defendants Lim Tanhu and Ng Sua
with funds of the partnership appear to have been transferred to their names only in 1969 or later, that is,
long after the partnership had been automatically dissolved as a result of the death of Po Chuan. Accordingly,
defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that
they had violated the trust of Po Chuan during the existence of the partnership. (See Hanlon vs. Hansserman
and. Beam, 40 Phil. 796.)

There are other particulars which should have caused His Honor to readily disbelieve plaintiffs' pretensions.
Nuñez testified that "for about 18 years he was in charge of the GI sheets and sometimes attended to the
imported items of the business of Glory Commercial Co." Counting 18 years back from 1965 or 1966 would
take Us to 1947 or 1948. Since according to Exhibit LL, the baptismal certificate produced by the same
witness as his birth certificate, shows he was born in March, 1942, how could he have started managing
Glory Commercial Co. in 1949 when he must have been barely six or seven years old? It should not have
escaped His Honor's attention that the photographs showing the premises of Philippine Metal Industries
after its organization "a year or two after the establishment of Cebu Can Factory in 1957 or 1958" must
have been taken after 1959. How could Nuñez have been only 13 years old then as claimed by him to have
been his age in those photographs when according to his "birth certificate", he was born in 1942? His Honor
should not have overlooked that according to the same witness, defendant Ng Sua was living in Bantayan
until he was directed to return to Cebu after the fishing business thereat floundered, whereas all that the
witness knew about defendant Lim Teck Chuan's arrival from Hongkong and the expenditure of partnership
money for him were only told to him allegedly by Po Chuan, which testimonies are veritably exculpatory as
to Ng Sua and hearsay as to Lim Teck Chuan. Neither should His Honor have failed to note that according
to plaintiff herself, "Lim Tanhu was employed by her husband although he did not go there always being a
mere employee of Glory Commercial Co." (p. 22, Annex the decision.)

The decision is rather emphatic in that Lim Tanhu and Ng Sua had no known income except their salaries.
Actually, it is not stated, however, from what evidence such conclusion was derived in so far as Ng Sua is
concerned. On the other hand, with respect to Lim Tanhu, the decision itself states that according to Exhibit
NN-Pre trial, in the supposed income tax return of Lim Tanhu for 1964, he had an income of P4,800 as
salary from Philippine Metal Industries alone and had a total assess sable net income of P23,920.77 that
year for which he paid a tax of P4,656.00. (p. 14. Annex L, id.) And per Exhibit GG-Pretrial in the year, he
had a net income of P32,000 for which be paid a tax of P3,512.40. (id.) As early as 1962, "his fishing
business in Madridejos Cebu was making money, and he reported "a net gain from operation (in) the amount
of P865.64" (id., per Exhibit VV-Pre-trial.) From what then did his Honor gather the conclusion that all the
properties registered in his name have come from funds malversed from the partnership?

It is rather unusual that His Honor delved into financial statements and books of Glory Commercial Co.
without the aid of any accountant or without the same being explained by any witness who had prepared
them or who has knowledge of the entries therein. This must be the reason why there are apparent
inconsistencies and inaccuracies in the conclusions His Honor made out of them. In Exhibit SS-Pre-trial, the
reported total assets of the company amounted to P2,328,460.27 as of December, 1965, and yet, Exhibit
TT-Pre-trial, according to His Honor, showed that the total value of goods available as of the same date was
P11,166,327.62. On the other hand, per Exhibit XX-Pre-trial, the supposed balance sheet of the company
for 1966, "the value of inventoried merchandise, both local and imported", as found by His Honor, was
P584,034.38. Again, as of December 31, 1966, the value of the company's goods available for sale was
P5,524,050.87, per Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pre-trial, the supposed Book of
Account, whatever that is, of the company showed its "cash analysis" was P12,223,182.55. We do not
hesitate to make the observation that His Honor, unless he is a certified public accountant, was hardly
qualified to read such exhibits and draw any definite conclusions therefrom, without risk of erring and
committing an injustice. In any event, there is no comprehensible explanation in the decision of the
conclusion of His Honor that there were P12,223,182.55 cash money defendants have to account for,
particularly when it can be very clearly seen in Exhibits 11-4, 11-4- A, 11-5 and 11-6-Pre-trial, Glory
Commercial Co. had accounts payable as of December 31, 1965 in the amount of P4,801,321.17. (p. 15, id.)
Under the circumstances, We are not prepared to permit anyone to predicate any claim or right from
respondent court's unaided exercise of accounting knowledge.

Additionally, We note that the decision has not made any finding regarding the allegation in the amended
complaint that a corporation denominated Glory Commercial Co., Inc. was organized after the death of Po
Chuan with capital from the funds of the partnership. We note also that there is absolutely no finding made
as to how the defendants Dy Ochay and Co Oyo could in any way be accountable to plaintiff, just because
they happen to be the wives of Lim Tanhu and Ng Sua, respectively. We further note that while His Honor
has ordered defendants to deliver or pay jointly and severally to the plaintiff P4,074,394.18 or ¹/ 3 of the
P12,223,182.55, the supposed cash belonging to the partnership as of December 31, 1965, in the same
breath, they have also been sentenced to partition and give ¹/3 share of the properties enumerated in the
dispositive portion of the decision, which seemingly are the very properties allegedly purchased from the
funds of the partnership which would naturally include the P12,223,182.55 defendants have to account for.
Besides, assuming there has not yet been any liquidation of the partnership, contrary to the allegation of
the defendants, then Glory Commercial Co. would have the status of a partnership in liquidation and the
only right plaintiff could have would be to what might result after such liquidation to belong to the deceased
partner, and before this is finished, it is impossible to determine, what rights or interests, if any, the
deceased had (Bearneza vs. Dequilla 43 Phil. 237). In other words, no specific amounts or properties may
be adjudicated to the heir or legal representative of the deceased partner without the liquidation being first
terminated.

Indeed, only time and the fear that this decision would be much more extended than it is already prevent
us from further pointing out the inexplicable deficiencies and imperfections of the decision in question. After
all, what have been discussed should be more than sufficient to support Our conclusion that not only must
said decision be set aside but also that the action of the plaintiff must be totally dismissed, and, were it not
seemingly futile and productive of other legal complications, that plaintiff is liable on defendants'
counterclaims. Resolution of the other issues raised by the parties albeit important and perhaps pivotal has
likewise become superfluous.

IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings held in respondent court in its
Civil Case No. 12328 subsequent to the order of dismissal of October 21, 1974 are hereby annulled and set
aside, particularly the ex-parte proceedings against petitioners and the decision on December 20, 1974.
Respondent court is hereby ordered to enter an order extending the effects of its order of dismissal of the
action dated October 21, 1974 to herein petitioners Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua
and Co Oyo. And respondent court is hereby permanently enjoined from taking any further action in said
civil case gave and except as herein indicated. Costs against private respondent.

G.R. No. 114398 October 24, 1997

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, represented by the Solicitor General, respondents.

ROMERO, J.:

Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon
City, in an information which reads as follows.

That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines
and within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with
unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and
feloniously defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and
in the place aforementioned, said accused received in trust from the offended party cash
money amounting to P536,650.00, Philippine Currency, with the express obligation involving
the duty to act as complainant's agent in purchasing local cigarettes (Philip Morris and
Marlboro cigarettes), to resell them to several stores, to give her commission corresponding
to 40% of the profits; and to return the aforesaid amount of offended party, but said accused,
far from complying her aforesaid obligation, and once in possession thereof, misapplied,
misappropriated and converted the same to her personal use and benefit, despite repeated
demands made upon her, accused failed and refused and still fails and refuses to deliver
and/or return the same to the damage and prejudice of the said ISIDORA ROSALES, in the
aforementioned amount and in such other amount as may be awarded under the provision of
the Civil Code.

CONTRARY TO LAW.

The antecedent facts are as follows:

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant
Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes.
Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would
give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a
corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to
Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to
P633,650.00.

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the progress
of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain information
regarding their business proved futile.

Alarmed by this development and believing that the amounts she advanced were being misappropriated,
Rosales filed a case of estafa against Liwanag.

After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty
as charged. The dispositive portion of the decision reads thus:

WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused,
beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS
OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION
MAYOR AS MAXIMUM, AND TO PAY THE COSTS.

The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00,
without subsidiary imprisonment, in case of insolvency.

SO ORDERED.

Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29,
1993, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with
the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8)
MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14)
YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects, the
decision is AFFIRMED.

SO ORDERED.

Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the
instant petition, submitting the following assignment of errors:

1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE CONVICTION

OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT
THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT
OF A SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON
RETURN OF THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT
CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-

PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE "EQUIPOISE RULE".

Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership,
wherein Rosales would contribute the funds while she would buy and sell the cigarettes, and later divide the
profits between
them. 1 She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending
to her the amount stated on an installment basis.2

The Court of Appeals correctly rejected these pretenses.

While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the
Supreme Court, and carry more weight when these affirm the factual findings of the trial court, 3 we deem
it more expedient to resolve the instant petition on its merits.

Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means
of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts.4

From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded another
by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused
to the offended party or third party, 5 and it is essential that there be a fiduciary relation between them
either in the form of a trust, commission or administration.6

The receipt signed by Liwanag states thus:

May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND
AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets
(sic) (Philip & Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not
sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P.
Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988.

(SGD & Thumbedmarked) (sic)

CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City

Signed in the presence of:

(Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was
for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold,
the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we
have ruled that when money or property have been received by a partner for a specific purpose (such as
that obtaining
in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7

Neither can the transaction be considered a loan, since in a contract of loan once the money is received by
the debtor, ownership over the same is transferred. 8 Being the owner, the borrower can dispose of it for
whatever purpose he may deem proper.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased
because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this
was not possible then to return the money to Rosales. Since in this case there was no transfer of ownership
of the money delivered, Liwanag is liable for conversion under Art. 315, par. l(b) of the Revised Penal Code.

WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29,
1993, is AFFIRMED. Costs against petitioner. SO ORDERED.
G.R. No. 5840 September 17, 1910

THE UNITED STATES, plaintiff-appellee, vs. EUSEBIO CLARIN, defendant-appellant.

ARELLANO, C.J.:

Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in company with Eusebio Clarin and
Carlos de Guzman, might buy and sell mangoes, and, believing that he could make some money in this
business, the said Larin made an agreement with the three men by which the profits were to be divided
equally between him and them.

Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in mangoes and obtained P203 from
the business, but did not comply with the terms of the contract by delivering to Larin his half of the profits;
neither did they render him any account of the capital.

Larin charged them with the crime of estafa, but the provincial fiscal filed an information only against
Eusebio Clarin in which he accused him of appropriating to himself not only the P172 but also the share of
the profits that belonged to Larin, amounting to P15.50.

Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and assumed that the facts presented
concerned the defendant and themselves together.

The trial court, that of First Instance of Pampanga, sentenced the defendant, Eusebio Clarin, to six
months' arresto mayor, to suffer the accessory penalties, and to return to Pedro Larin P172, besides P30.50
as his share of the profits, or to subsidiary imprisonment in case of insolvency, and to pay the costs. The
defendant appealed, and in deciding his appeal we arrive at the following conclusions:

When two or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves, a contract is formed which is called partnership.
(Art. 1665, Civil Code.)

When Larin put the P172 into the partnership which he formed with Tarug, Clarin, and Guzman, he invested
his capital in the risks or benefits of the business of the purchase and sale of mangoes, and, even though
he had reserved the capital and conveyed only the usufruct of his money, it would not devolve upon of his
three partners to return his capital to him, but upon the partnership of which he himself formed part, or if
it were to be done by one of the three specifically, it would be Tarug, who, according to the evidence, was
the person who received the money directly from Larin.

The P172 having been received by the partnership, the business commenced and profits accrued, the action
that lies with the partner who furnished the capital for the recovery of his money is not a criminal action
for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership and a levy
on its assets if there should be any.

No. 5 of article 535 of the Penal Code, according to which those are guilty of estafa "who, to the prejudice
of another, shall appropriate or misapply any money, goods, or any kind of personal property which they
may have received as a deposit on commission for administration or in any other character producing the
obligation to deliver or return the same," (as, for example, in commodatum, precarium, and other unilateral
contracts which require the return of the same thing received) does not include money received for a
partnership; otherwise the result would be that, if the partnership, instead of obtaining profits, suffered
losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the ownership
of the money brought in by him, it would have to answer to the charge of estafa, for which it would be
sufficient to argue that the partnership had received the money under obligation to return it.

We therefore freely acquit Eusebio Clarin, with the costs de oficio. The complaint for estafa is dismissed
without prejudice to the institution of a civil action.

G.R. No. L-16318 October 21, 1921

PANG LIM and BENITO GALVEZ, plaintiffs-appellees, vs. LO SENG, defendant-appellant.

STREET, J.:

For several years prior to June 1, 1916, two of the litigating parties herein, namely, Lo Seng and Pang Lim,
Chinese residents of the City of Manila, were partners, under the firm name of Lo Seng and Co., in the
business of running a distillery, known as "El Progreso," in the Municipality of Paombong, in the Province of
Bulacan. The land on which said distillery is located as well as the buildings and improvements originally
used in the business were, at the time to which reference is now made, the property of another Chinaman,
who resides in Hongkong, named Lo Yao, who, in September, 1911, leased the same to the firm of Lo Seng
and Co. for the term of three years.

Upon the expiration of this lease a new written contract, in the making of which Lo Yao was represented by
one Lo Shui as attorney in fact, became effective whereby the lease was extended for fifteen years. The
reason why the contract was made for so long a period of time appears to have been that the Bureau of
Internal Revenue had required sundry expensive improvements to be made in the distillery, and it was
agreed that these improvements should be effected at the expense of the lessees. In conformity with this
understanding many thousands of pesos were expended by Lo Seng and Co., and later by Lo Seng alone,
in enlarging and improving the plant.

Among the provisions contained in said lease we note the following:

Know all men by these presents:

xxx xxx xxx

1. That I, Lo Shui, as attorney in fact in charge of the properties of Mr. Lo Yao of

Hongkong, cede by way of lease for fifteen years more said distillery "El Progreso" to
Messrs. Pang Lim and Lo Seng (doing business under the firm name of Lo Seng and
Co.), after the termination of the previous contract, because of the fact that they are
required, by the Bureau of Internal Revenue, to rearrange, alter and clean up the
distillery.

2. That all the improvements and betterments which they may introduce, such as
machinery, apparatus, tanks, pumps, boilers and buildings which the business may
require, shall be, after the termination of the fifteen years of lease, for the benefit of
Mr. Lo Yao, my principal, the buildings being considered as improvements.

3. That the monthly rent of said distillery is P200, as agreed upon in the previous
contract of September 11, 1911, acknowledged before the notary public D. Vicente
Santos; and all modifications and repairs which may be needed shall be paid for by
Messrs. Pang Lim and Lo Seng.

We, Pang Lim and Lo Seng, as partners in said distillery "El Progreso," which we are at present
conducting, hereby accept this contract in each and all its parts, said contract to be effective
upon the termination of the contract of September 11, 1911.

Neither the original contract of lease nor the agreement extending the same was inscribed in the property
registry, for the reason that the estate which is the subject of the lease has never at any time been so
inscribed.

On June 1, 1916, Pang Lim sold all his interest in the distillery to his partner Lo Seng, thus placing the latter
in the position of sole owner; and on June 28, 1918, Lo Shui, again acting as attorney in fact of Lo Yao,
executed and acknowledged before a notary public a deed purporting to convey to Pang Lim and another
Chinaman named Benito Galvez, the entire distillery plant including the land used in connection therewith.
As in case of the lease this document also was never recorded in the registry of property. Thereafter Pang
Lim and Benito Galvez demanded possession from Lo Seng, but the latter refused to yield; and the present
action of unlawful detainer was thereupon initiated by Pang Lim and Benito Galvez in the court of the justice
of the peace of Paombong to recover possession of the premises. From the decision of the justice of the
peace the case was appealed to the Court of First Instance, where judgment was rendered for the plaintiffs;
and the defendant thereupon appealed to the Supreme Court.

The case for the plaintiffs is rested exclusively on the provisions of article 1571 of the Civil Code, which
reads in part as follows:

ART. 1571. The purchaser of a leased estate shall be entitled to terminate any lease in force at the
time of making the sale, unless the contrary is stipulated, and subject to the provisions of the
Mortgage Law.

In considering this provision it may be premised that a contract of lease is personally binding on all who
participate in it regardless of whether it is recorded or not, though of course the unrecorded lease creates
no real charge upon the land to which it relates. The Mortgage Law was devised for the protection of third
parties, or those who have not participated in the contracts which are by that law required to be registered;
and none of its provisions with reference to leases interpose any obstacle whatever to the giving of full effect
to the personal obligations incident to such contracts, so far as concerns the immediate parties thereto. This
is rudimentary, and the law appears to be so understood by all commentators, there being, so far as we are
aware, no authority suggesting the contrary. Thus, in the commentaries of the authors Galindo and
Escosura, on the Mortgage Law, we find the following pertinent observation: "The Mortgage Law is enacted
in aid of and in respect to third persons only; it does not affect the relations between the contracting parties,
nor their capacity to contract. Any question affecting the former will be determined by the dispositions of
the special law [i.e., the Mortgage Law], while any question affecting the latter will be determined by the
general law." (Galindo y Escosura, Comentarios a la Legislacion Hipotecaria, vol. I, p. 461.)

Although it is thus manifest that, under the Mortgage Law, as regards the personal obligations expressed
therein, the lease in question was from the beginning, and has remained, binding upon all the parties thereto
— among whom is to be numbered Pang Lim, then a member of the firm of Lo Seng and Co. — this does
not really solve the problem now before us, which is, whether the plaintiffs herein, as purchasers of the
estate, are at liberty to terminate the lease, assuming that it was originally binding upon all parties
participating in it.

Upon this point the plaintiffs are undoubtedly supported, prima facie, by the letter of article 1571 of the
Civil Code; and the position of the defendant derives no assistance from the mere circumstance that the
lease was admittedly binding as between the parties thereto. 1awph!l.net

The words "subject to the provisions of the Mortgage Law," contained in article 1571, express a qualification
which evidently has reference to the familiar proposition that recorded instruments are effective against
third persons from the date of registration (Co-Tiongco vs. Co-Guia, 1 Phil., 210); from whence it follows
that a recorded lease must be respected by any purchaser of the estate whomsoever. But there is nothing
in the Mortgage Law which, so far as we now see, would prevent a purchaser from exercising the precise
power conferred in article 1571 of the Civil Code, namely, of terminating any lease which is unrecorded;
nothing in that law that can be considered as arresting the force of article 1571 as applied to the lease now
before us.

Article 1549 of the Civil Code has also been cited by the attorneys for the appellant as supplying authority
for the proposition that the lease in question cannot be terminated by one who, like Pang Lim, has taken
part in the contract. That provision is practically identical in terms with the first paragraph of article 23 of
the Mortgage Law, being to the effect that unrecorded leases shall be of no effect as against third persons;
and the same observation will suffice to dispose of it that was made by us above in discussing the Mortgage
Law, namely, that while it recognizes the fact that an unrecorded lease is binding on all persons who
participate therein, this does not determine the question whether, admitting the lease to be so binding, it
can be terminated by the plaintiffs under article 1571.

Having thus disposed of the considerations which arise in relation with the Mortgage Law, as well as article
1549 of the Civil Coded — all of which, as we have seen, are undecisive — we are brought to consider the
aspect of the case which seems to us conclusive. This is found in the circumstance that the plaintiff Pang
Lim has occupied a double role in the transactions which gave rise to this litigation, namely, first, as one of
the lessees; and secondly, as one of the purchasers now seeking to terminate the lease. These two positions
are essentially antagonistic and incompatible. Every competent person is by law bond to maintain in all good
faith the integrity of his own obligations; and no less certainly is he bound to respect the rights of any person
whom he has placed in his own shoes as regards any contract previously entered into by himself.

While yet a partner in the firm of Lo Seng and Co., Pang Lim participated in the creation of this lease, and
when he sold out his interest in that firm to Lo Seng this operated as a transfer to Lo Seng of Pang Lim's
interest in the firm assets, including the lease; and Pang Lim cannot now be permitted, in the guise of a
purchaser of the estate, to destroy an interest derived from himself, and for which he has received full value.

The bad faith of the plaintiffs in seeking to deprive the defendant of this lease is strikingly revealed in the
circumstance that prior to the acquisition of this property Pang Lim had been partner with Lo Seng and
Benito Galvez an employee. Both therefore had been in relations of confidence with Lo Seng and in that
position had acquired knowledge of the possibilities of the property and possibly an experience which would
have enabled them, in case they had acquired possession, to exploit the distillery with profit. On account of
his status as partner in the firm of Lo Seng and Co., Pang Lim knew that the original lease had been extended
for fifteen years; and he knew the extent of valuable improvements that had been made thereon. Certainly,
as observed in the appellant's brief, it would be shocking to the moral sense if the condition of the law were
found to be such that Pang Lim, after profiting by the sale of his interest in a business, worthless without
the lease, could intervene as purchaser of the property and confiscate for his own benefit the property which
he had sold for a valuable consideration to Lo Seng. The sense of justice recoils before the mere possibility
of such eventuality.

Above all other persons in business relations, partners are required to exhibit towards each other the highest
degree of good faith. In fact the relation between partners is essentially fiduciary, each being considered in
law, as he is in fact, the confidential agent of the other. It is therefore accepted as fundamental in equity
jurisprudence that one partner cannot, to the detriment of another, apply exclusively to his own benefit the
results of the knowledge and information gained in the character of partner. Thus, it has been held that if
one partner obtains in his own name and for his own benefit the renewal of a lease on property used by the
firm, to commence at a date subsequent to the expiration of the firm's lease, the partner obtaining the
renewal is held to be a constructive trustee of the firm as to such lease. (20 R. C. L., 878-882.) And this
rule has even been applied to a renewal taken in the name of one partner after the dissolution of the firm
and pending its liquidation. (16 R. C. L., 906; Knapp vs. Reed, 88 Neb., 754; 32 L. R. A. [N. S.], 869;
Mitchell vs. Reed 61 N. Y., 123; 19 Am. Rep., 252.)

An additional consideration showing that the position of the plaintiff Pang Lim in this case is untenable is
deducible from articles 1461 and 1474 of the Civil Code, which declare that every person who sells anything
is bound to deliver and warrant the subject-matter of the sale and is responsible to the vendee for the legal
and lawful possession of the thing sold. The pertinence of these provisions to the case now under
consideration is undeniable, for among the assets of the partnership which Pang Lim transferred to Lo Seng,
upon selling out his interest in the firm to the latter, was this very lease; and while it cannot be supposed
that the obligation to warrant recognized in the articles cited would nullify article 1571, if the latter article
had actually conferred on the plaintiffs the right to terminate this lease, nevertheless said articles (1461,
1474), in relation with other considerations, reveal the basis of an estoppel which in our opinion precludes
Pang Lim from setting up his interest as purchaser of the estate to the detriment of Lo Seng.

It will not escape observation that the doctrine thus applied is analogous to the doctrine recognized in courts
of common law under the head of estoppel by deed, in accordance with which it is held that if a person,
having no title to land, conveys the same to another by some one or another of the recognized modes of
conveyance at common law, any title afterwards acquired by the vendor will pass to the purchaser; and the
vendor is estopped as against such purchaser from asserting such after-acquired title. The indenture of
lease, it may be further noted, was recognized as one of the modes of conveyance at common law which
created this estoppel. (8 R. C. L., 1058, 1059.)

From what has been said it is clear that Pang Lim, having been a participant in the contract of lease now in
question, is not in a position to terminate it: and this is a fatal obstacle to the maintenance of the action of
unlawful detainer by him. Moreover, it is fatal to the maintenance of the action brought jointly by Pang Lim
and Benito Galvez. The reason is that in the action of unlawful detainer, under section 80 of the Code of
Civil Procedure, the only question that can be adjudicated is the right to possession; and in order to maintain
the action, in the form in which it is here presented, the proof must show that occupant's possession is
unlawful, i. e., that he is unlawfully withholding possession after the determination of the right to hold
possession. In the case before us quite the contrary appears; for, even admitting that Pang Lim and Benito
Galvez have purchased the estate from Lo Yao, the original landlord, they are, as between themselves, in
the position of tenants in common or owners pro indiviso, according to the proportion of their respective
contribution to the purchase price. But it is well recognized that one tenant in common cannot maintain a
possessory action against his cotenant, since one is as much entitled to have possession as the other. The
remedy is ordinarily by an action for partition. (Cornista vs. Ticson, 27 Phil., 80.) It follows that as Lo Seng
is vested with the possessory right as against Pang Lim, he cannot be ousted either by Pang Lim or Benito
Galvez. Having lawful possession as against one cotenant, he is entitled to retain it against both.
Furthermore, it is obvious that partition proceedings could not be maintained at the instance of Benito
Galvez as against Lo Seng, since partition can only be effected where the partitioners are cotenants, that
is, have an interest of an identical character as among themselves. (30 Cyc., 178-180.) The practical result
is that both Pang Lim and Benito Galvez are bound to respect Lo Seng's lease, at least in so far as the
present action is concerned.

We have assumed in the course of the preceding discussion that the deed of sale under which the plaintiffs
acquired the right of Lo Yao, the owner of the fee, is competent proof in behalf of the plaintiffs. It is,
however, earnestly insisted by the attorney for Lo Seng that this document, having never been recorded in
the property registry, cannot under article 389 of the Mortgage Law, be used in court against him because
as to said instrument he is a third party. The important question thus raised is not absolutely necessary to
the decision of this case, and we are inclined to pass it without decision, not only because the question does
not seem to have been ventilated in the Court of First Instance but for the further reason that we have not
had the benefit of any written brief in this case in behalf of the appellees.

The judgment appealed from will be reversed, and the defendant will be absolved from the complaint. It is
so ordered, without express adjudication as to costs.

[No. L-11648. April 22, 1959]

THE DIRECTOR OF LANDS, petitioner, vs. LOPE ALBA, ET AL., claimants. ELIGIO CATALAN, movant and
appellee, vs. RAMON GATCHALIAN, oppositor and appellant.

Appeal from the order of the Court of First Instance of Tacloban City. It appears that Eligio Catalan and
Ramon Gatchalian, as partners, mortgaged to Dr. Dionisio Marave two lots in Tacloban City, including the
improvements thereon, all belonging to the partnership, to secure the payment of a loan. The partnership
failed to pay the loan; the mortgage was foreclosed and the properties were sold at public auction to Dr.
Marave. Before the expiration of the one year period of redemption, Catalan, on his own behalf, redeemed
the properties with his private funds. The Sheriff issued the corresponding certificate of redemption in favor
of Catalan. Upon Catalan's petition, the lower court ordered the cancellation of the title in the name of the
partnership and to issue in its stead another in the name of Catalan.

Held: The theory of Catalan, accepted by the trial court, that he became the absolute owner of
the properties in question upon making the redemption because he was subrogated to the
rights of Dr. Marave who made the purchase at public auction, is untenable. Under general principles of law,
a partner is an agent of the partnership. (Art. 1818, new Civil Code). Furthermore, every partner becomes
a trustee for his copartner with regard to any benefits or profits derived from his act as partner (Art. 1807,
new Civil Code). Consequently, when Catalan redeemed the properties in question, he became a trustee
and held the same in trust for his copartner Gatchalian, subject to his right to demand from the latter his
contribution to the amount of redemption. The principle of subrogation cannot be applied because at the
time Catalan redeemed the property, Dr. Marave, the purchaser at public auction, had not yet become the
absolute owner of said properties. He never received the definite and formal certificate of sale constituting
muniment of title, for the reason that redemption was made. Consequently, there was no title to the
properties which he could convey to Catalan as
redemptioner.
Judgment reversed. Montemayor, J., ponente

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs.

THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No.
66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The
plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197)
was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay
plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded
monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966,
until full payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is
further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary damages in the amount
of P184,878.84 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two
Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and

another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00
as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good
faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and
that they were required to file a counterbond in order to dissolve the attachment, is not an
act of bad faith. When a man tries to protect his rights, he should not be saddled with moral
 or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant,
for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company
would be liable for damages in performing an act which is clearly within its power and which
is the reason for its being, then nobody would engage in the insurance business. No further
claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No.
24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator
of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal,
Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto
Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds
used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the
other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated
that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and
save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges
and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety
upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums
and amounts of money which it or its representatives should or may pay or cause to be paid or become
liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed
of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein
that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with
the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration
pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff
of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-
owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they
were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being
exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against
all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF

PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS
AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its
risk of liability under the surety bond in favor of JDA and subsequently collected the proceeds
of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer
amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the amount of
P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in
interest to institute the instant action as it does not stand to be benefited or injured by the
judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even
present any evidence that it is the attorney-in-fact of the reinsurance company, authorized
to institute an action for and in behalf of the latter. To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be the present real
owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court,
1979 ed., p. 155). It has been held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga
v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield
Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v.
City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and
its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged
chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by the reinsurance company of
the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties
herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo,
p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had
any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant
to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to
recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not
applicable considering that whatever amount he would recover from the co-indemnitor will be paid to the
reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by
the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations
to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed
in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid
with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is
plain that on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants
for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains
to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is
representing the reinsurers to recover the amount.' In other words, insofar as the amount
paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing
as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own name an action for the benefit of the
reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where the name of the
principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must
be prosecuted in the name of the real party in interest.' This provision is
mandatory. The real party in interest is the party who would be benefitted or
injured by the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party
in interest, that there is no law permitting an action to be brought by an
attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco
v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San
Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.
 The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference
between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue
defendants, assuming that the indemnity agreement is still valid and effective. But since the
amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the
airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid
by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal,
pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to
the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section
91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E.
330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court
of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as
against the respondents for the reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to
issue the bond provided that the same would be mortgaged to it, but this was not possible
because the planes were still in Japan and could not be mortgaged here in the Philippines. As
soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer
Insurance to cover the bond, and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and
rendered insufficient the security under the chattel mortgage and there is thus
no other sufficient security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security for
the claim sought to be enforced by this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this action was instituted. Sec
2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes
and spare parts, no longer has any further action against the defendants as indemnitors to
recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished
upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be
entitled to be subrogated to the right of Pioneer should they make payments to the latter.
Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure

precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that
Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights
of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision
be validly opposed on the ground that these defendants and defendant Maglana are not the
vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862,
Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months
interval installments, the first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and payable on the 26th day x x
 x of each succeeding three months and the last of which shall be due and
payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim
and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the
remainder of which ... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and payable 4th June
1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
different from that fixed in the aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were
done without the knowledge, much less, would have it believed that these defendants Maglana
(sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and
defendant Maglana knew of and consented to the modification of the obligations. But if that
were so, there would have been the corresponding documents in the form of a written notice
to as well as written conformity of these defendants, and there are no such document. The
consequence of this was the extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished. Applicable by analogy are
the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil.
553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of
Lim or SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed
or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of
G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

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

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they
had chosen to invest? How are the losses to be treated in situations where their contributions
to the intended 'corporation' were invested not through the corporate form? This Petition
presents these fundamental questions which we believe were resolved erroneously by the
Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must share
in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents
to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the
total amount of P184,878.74 as correctly found by the trial court, with interest from the filing
of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of
the said amount to Bormaheco and the Cervanteses and the other one-half to defendant
Maglana. It is established in the records that defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation
in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-
party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and the laws
of the state relating thereto and not by the rules governing partners (Cannon v. Brush Electric
Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt,
but fail, to form a corporation and who carry on business under the corporate name occupy
the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas.
1913A 1065). Thus, where persons associate themselves together under articles to purchase
property to carry on a business, and their organization is so defective as to come short of
creating a corporation within the statute, they become in legal effect partners inter se, and
their rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker,
29 Mich. 369). So, where certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed land to the corporation, and
two of them contracted to pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee
for the associates in an action between them for an accounting, and its capital stock was
treated as partnership assets, sold, and the proceeds distributed among them in proportion
to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However,
such a relation does not necessarily exist, for ordinarily persons cannot be made to assume
the relation of partners, as between themselves, when their purpose is that no partnership
shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other stockholders, who were also
 directors, will not be implied in the absence of an agreement, so as to make the former liable
to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W.
210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer, the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing
the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru
the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the effect
that they were induced and lured by the petitioner to make contributions to a proposed corporation which
was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the
necessary certificates of public convenience and necessity as well as the required permits for
the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime
on or about August 9,1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account. Since then up to the
filing of this answer, Lim has refused, failed and still refuses to set up the corporation or
return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and
third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their lawful
contribution and participation in the proposed corporation to be known as SAL. Arrangements
and negotiations were undertaken by defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to
the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed
and executed the alleged chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering defendants learned for the first
time of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an
adverse claim in the form of third party claim. Notwithstanding repeated oral demands made
by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of
the two planes and their accessories and or return the amount advanced by the former
amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts,
the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341-
342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own
and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED. SO ORDERED.

G.R. No. L-31684 June 28, 1973

EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and LEONARDA
ATIENZA ABAD SABTOS, petitioners, vs. ESTRELLA ABAD SANTOS, respondent.

MAKALINTAL, J.:

On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co." On June 7, 1955
the Articles of Co-partnership was amended as to include herein respondent, Estrella Abad Santos, as
industrial partner, with herein petitioners Domingo C. Evangelista, Jr., Leonardo Atienza Abad Santos and
Conchita P. Navarro, the original capitalist partners, remaining in that capacity, with a contribution of
P17,500 each. The amended Articles provided, inter alia, that "the contribution of Estrella Abad Santos
consists of her industry being an industrial partner", and that the profits and losses "shall be divided and
distributed among the partners ... in the proportion of 70% for the first three partners, Domingo C.
Evangelista, Jr., Conchita P. Navarro and Leonardo Atienza Abad Santos to be divided among them equally;
and 30% for the fourth partner Estrella Abad Santos."

On December 17, 1963 herein respondent filed suit against the three other partners in the Court of First
Instance of Manila, alleging that the partnership, which was also made a party-defendant, had been paying
dividends to the partners except to her; and that notwithstanding her demands the defendants had refused
and continued to refuse and let her examine the partnership books or to give her information regarding the
partnership affairs to pay her any share in the dividends declared by the partnership. She therefore prayed
that the defendants be ordered to render accounting to her of the partnership business and to pay her
corresponding share in the partnership profits after such accounting, plus attorney's fees and costs.

The defendants, in their answer, denied ever having declared dividends or distributed profits of the
partnership; denied likewise that the plaintiff ever demanded that she be allowed to examine the partnership
books; and byway of affirmative defense alleged that the amended Articles of Co-partnership did not express
the true agreement of the parties, which was that the plaintiff was not an industrial partner; that she did
not in fact contribute industry to the partnership; and that her share of 30% was to be based on the profits
which might be realized by the partnership only until full payment of the loan which it had obtained in
December, 1955 from the Rehabilitation Finance Corporation in the sum of P30,000, for which the plaintiff
had signed a promisory note as co-maker and mortgaged her property as security.

The parties are in agreement that the main issue in this case is "whether the plaintiff-appellee (respondent
here) is an industrial partner as claimed by her or merely a profit sharer entitled to 30% of the net profits
that may be realized by the partnership from June 7, 1955 until the mortgage loan from the Rehabilitation
Finance Corporation shall be fully paid, as claimed by appellants (herein petitioners)." On that issue the
Court of First Instance found for the plaintiff and rendered judgement "declaring her an industrial partner
of Evangelista & Co.; ordering the defendants to render an accounting of the business operations of the
(said) partnership ... from June 7, 1955; to pay the plaintiff such amounts as may be due as her share in
the partnership profits and/or dividends after such an accounting has been properly made; to pay plaintiff
attorney's fees in the sum of P2,000.00 and the costs of this suit."

The defendants appealed to the Court of Appeals, which thereafter affirmed judgments of the court a quo.

In the petition before Us the petitioners have assigned the following errors:

I. The Court of Appeals erred in the finding that the respondent is an industrial partner of
Evangelista & Co., notwithstanding the admitted fact that since 1954 and until after
promulgation of the decision of the appellate court the said respondent was one of the judges
of the City Court of Manila, and despite its findings that respondent had been paid for services
allegedly contributed by her to the partnership. In this connection the Court of Appeals erred:

(A) In finding that the "amended Articles of Co-partnership," Exhibit "A" is

conclusive evidence that respondent was in fact made an industrial partner of
Evangelista & Co.
 (B) In not finding that a portion of respondent's testimony quoted in the
decision proves that said respondent did not bind herself to contribute her
industry, and she could not, and in fact did not, because she was one of the
judges of the City Court of Manila since 1954.

(C) In finding that respondent did not in fact contribute her industry, despite
the appellate court's own finding that she has been paid for the services
allegedly rendered by her, as well as for the loans of money made by her to
the partnership.

II. The lower court erred in not finding that in any event the respondent was lawfully excluded
from, and deprived of, her alleged share, interests and participation, as an alleged industrial
partner, in the partnership Evangelista & Co., and its profits or net income.

III. The Court of Appeals erred in affirming in toto the decision of the trial court whereby
respondent was declared an industrial partner of the petitioner, and petitioners were ordered
to render an accounting of the business operation of the partnership from June 7, 1955, and
to pay the respondent her alleged share in the net profits of the partnership plus the sum of
P2,000.00 as attorney's fees and the costs of the suit, instead of dismissing respondent's
complaint, with costs, against the respondent.

It is quite obvious that the questions raised in the first assigned errors refer to the facts as found by the
Court of Appeals. The evidence presented by the parties as the trial in support of their respective positions
on the issue of whether or not the respondent was an industrial partner was thoroughly analyzed by the
Court of Appeals on its decision, to the extent of reproducing verbatim therein the lengthy testimony of the
witnesses.

It is not the function of the Supreme Court to analyze or weigh such evidence all over again, its jurisdiction
being limited to reviewing errors of law that might have been commited by the lower court. It should be
observed, in this regard, that the Court of Appeals did not hold that the Articles of Co-partnership, identified
in the record as Exhibit "A", was conclusive evidence that the respondent was an industrial partner of the
said company, but considered it together with other factors, consisting of both testimonial and documentary
evidences, in arriving at the factual conclusion expressed in the decision.

The findings of the Court of Appeals on the various points raised in the first assignment of error are
hereunder reproduced if only to demonstrate that the same were made after a through analysis of then
evidence, and hence are beyond this Court's power of review.

The aforequoted findings of the lower Court are assailed under Appellants' first assigned error,
wherein it is pointed out that "Appellee's documentary evidence does not conclusively prove
that appellee was in fact admitted by appellants as industrial partner of Evangelista & Co."
and that "The grounds relied upon by the lower Court are untenable" (Pages 21 and 26,
Appellant's Brief).

The first point refers to Exhibit A, B, C, K, K-1, J, N and S, appellants' complaint being that
"In finding that the appellee is an industrial partner of appellant Evangelista & Co., herein
referred to as the partnership — the lower court relied mainly on the appellee's documentary
evidence, entirely disregarding facts and circumstances established by appellants" evidence
which contradict the said finding' (Page 21, Appellants' Brief). The lower court could not have
done otherwise but rely on the exhibits just mentioned, first, because appellants have
admitted their genuineness and due execution, hence they were admitted without objection
by the lower court when appellee rested her case and, secondly the said exhibits indubitably
show the appellee is an industrial partner of appellant company. Appellants are virtually
estopped from attempting to detract from the probative force of the said exhibits because
they all bear the imprint of their knowledge and consent, and there is no credible showing
that they ever protested against or opposed their contents prior of the filing of their answer
to appellee's complaint. As a matter of fact, all the appellant Evangelista, Jr., would have us
believe — as against the cumulative force of appellee's aforesaid documentary evidence — is
 the appellee's Exhibit "A", as confirmed and corroborated by the other exhibits already
mentioned, does not express the true intent and agreement of the parties thereto, the real
understanding between them being the appellee would be merely a profit sharer entitled to
30% of the net profits that may be realized between the partners from June 7, 1955, until
the mortgage loan of P30,000.00 to be obtained from the RFC shall have been fully paid. This
version, however, is discredited not only by the aforesaid documentary evidence brought
forward by the appellee, but also by the fact that from June 7, 1955 up to the filing of their
answer to the complaint on February 8, 1964 — or a period of over eight (8) years —
appellants did nothing to correct the alleged false agreement of the parties contained in
Exhibit "A". It is thus reasonable to suppose that, had appellee not filed the present action,
appellants would not have advanced this obvious afterthought that Exhibit "A" does not
express the true intent and agreement of the parties thereto.

At pages 32-33 of appellants' brief, they also make much of the argument that 'there is an
overriding fact which proves that the parties to the Amended Articles of Partnership, Exhibit
"A", did not contemplate to make the appellee Estrella Abad Santos, an industrial partner of
Evangelista & Co. It is an admitted fact that since before the execution of the amended articles
of partnership, Exhibit "A", the appellee Estrella Abad Santos has been, and up to the present
time still is, one of the judges of the City Court of Manila, devoting all her time to the
performance of the duties of her public office. This fact proves beyond peradventure that it
was never contemplated between the parties, for she could not lawfully contribute her full
time and industry which is the obligation of an industrial partner pursuant to Art. 1789 of the
Civil Code.

The Court of Appeals then proceeded to consider appellee's testimony on this point, quoting it in the decision,
and then concluded as follows:

One cannot read appellee's testimony just quoted without gaining the very definite impression
that, even as she was and still is a Judge of the City Court of Manila, she has rendered services
for appellants without which they would not have had the wherewithal to operate the business
for which appellant company was organized. Article 1767 of the New Civil Code which provides
that "By 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, 'does not specify the kind of industry that a partner may thus contribute, hence
the said services may legitimately be considered as appellee's contribution to the common
fund. Another article of the same Code relied upon appellants reads:

'ART. 1789. An industrial partner cannot engage in business for himself, unless
the partnership expressly permits him to do so; and if he should do so, the
capitalist partners may either exclude him from the firm or avail themselves of
the benefits which he may have obtained in violation of this provision, with a
right to damages in either case.'

It is not disputed that the provision against the industrial partner engaging in business for
himself seeks to prevent any conflict of interest between the industrial partner and the
partnership, and to insure faithful compliance by said partner with this prestation. There is no
pretense, however, even on the part of the appellee is engaged in any business antagonistic
to that of appellant company, since being a Judge of one of the branches of the City Court of
Manila can hardly be characterized as a business. That appellee has faithfully complied with
her prestation with respect to appellants is clearly shown by the fact that it was only after
filing of the complaint in this case and the answer thereto appellants exercised their right of
exclusion under the codal art just mentioned by alleging in their Supplemental Answer dated
June 29, 1964 — or after around nine (9) years from June 7, 1955 — subsequent to the filing
of defendants' answer to the complaint, defendants reached an agreement whereby the herein
plaintiff been excluded from, and deprived of, her alleged share, interests or participation, as
an alleged industrial partner, in the defendant partnership and/or in its net profits or income,
on the ground plaintiff has never contributed her industry to the partnership, instead she has
been and still is a judge of the City Court (formerly Municipal Court) of the City of Manila,
 devoting her time to performance of her duties as such judge and enjoying the privilege and
emoluments appertaining to the said office, aside from teaching in law school in Manila,
without the express consent of the herein defendants' (Record On Appeal, pp. 24-25). Having
always knows as a appellee as a City judge even before she joined appellant company on
June 7, 1955 as an industrial partner, why did it take appellants many yearn before excluding
her from said company as aforequoted allegations? And how can they reconcile such exclusive
with their main theory that appellee has never been such a partner because "The real
agreement evidenced by Exhibit "A" was to grant the appellee a share of 30% of the net
profits which the appellant partnership may realize from June 7, 1955, until the mortgage of
P30,000.00 obtained from the Rehabilitation Finance Corporal shall have been fully paid."
(Appellants Brief, p. 38).

What has gone before persuades us to hold with the lower Court that appellee is an industrial
partner of appellant company, with the right to demand for a formal accounting and to receive
her share in the net profit that may result from such an accounting, which right appellants
take exception under their second assigned error. Our said holding is based on the following
article of the New Civil Code:

'ART. 1899. Any partner shall have the right to a formal account as to
partnership affairs:

(1) If he is wrongfully excluded from the partnership business or possession of its property
by his co-partners;

(2) If the right exists under the terms of any agreement;

(3) As provided by article 1807;

(4) Whenever other circumstance render it just and reasonable.

We find no reason in this case to depart from the rule which limits this Court's appellate jurisdiction to
reviewing only errors of law, accepting as conclusive the factual findings of the lower court upon its own
assessment of the evidence.

The judgment appealed from is affirmed, with costs.

G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner, vs. THE HON. COURT OF APPEALS and MARIANO E.
PECSON, respondents.

GUTIERREZ, JR., J.:ñé+.£ªwph!1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered
petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.

As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£

xxx xxx xxx

... on February 22, 1971 Pecson and Moran entered into an agreement whereby both would
contribute P15,000 each for the purpose of printing 95,000 posters (featuring the delegates
to the 1971 Constitutional Convention), with Moran actually supervising the work; that Pecson
would receive a commission of P l,000 a month starting on April 15, 1971 up to December
15, 1971; that on December 15, 1971, a liquidation of the accounts in the distribution and
printing of the 95,000 posters would be made, that Pecson gave Moran P10,000 for which the
 latter issued a receipt; that only a few posters were printed; that on or about May 28, 1971,
Moran executed in favor of Pecson a promissory note in the amount of P20,000 payable in
two equal installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on
or before June 30, 1971), the whole sum becoming due upon default in the payment of the
first installment on the date due, complete with the costs of collection.

Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery of a
sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged partnership
agreement, the return of his contribution of P10,000.00, payment of his share in the profits that the
partnership would have earned, and, payment of unpaid commission; (2) on the alleged promissory note,
payment of the sum of P20,000.00; and, (3) moral and exemplary damages and attorney's fees.

After the trial, the Court of First Instance held that: têñ.£îhqwâ£

From the evidence presented it is clear in the mind of the court that by virtue of the
partnership agreement entered into by the parties-plaintiff and defendant the plaintiff did
contribute P10,000.00, and another sum of P7,000.00 for the Voice of the Veteran or Delegate
Magazine. Of the expected 95,000 copies of the posters, the defendant was able to print 2,000
copies only authorized of which, however, were sold at P5.00 each. Nothing more was done
after this and it can be said that the venture did not really get off the ground. On the other
hand, the plaintiff failed to give his full contribution of P15,000.00. Thus, each party is entitled
to rescind the contract which right is implied in reciprocal obligations under Article 1385 of
the Civil Code whereunder 'rescission creates the obligation to return the things which were
the object of the contract ...

WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to
return to plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate
from the filing of the complaint on June 19, 1972, and the costs of the suit.

For insufficiency of evidence, the counterclaim is hereby dismissed.

From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise rendered
a decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is
hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to pay plaintiff- appellant
Mariano E. Pecson:

(a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to
Pecson under their agreement);

(b) Eight thousand (P8,000), (the commission for eight months);

(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project);

(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time
payment is made)

The petitioner contends that the respondent Court of Appeals decided questions of substance in a way not
in accord with law and with Supreme Court decisions when it committed the following errors:

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN,
JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED
PROFITS DUE HIM.
II

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN,
JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN
THE PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.

III

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN,
JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF
INVESTMENT IN A MAGAZINE VENTURE.

IV

ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE HONORABLE
COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S
COMPULSORY COUNTERCLAIM FOR DAMAGES.

The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share
in the unrealized profits of the partnership. The petitioner contends that the award is highly speculative.
The petitioner maintains that the respondent court did not take into account the great risks involved in the
business undertaking.

We agree with the petitioner that the award of speculative damages has no basis in fact and law.

There is no dispute over the nature of the agreement between the petitioner and the private respondent. It
is a contract of partnership. The latter in his complaint alleged that he was induced by the petitioner to enter
into a partnership with him under the following terms and conditions: têñ.£îhqwâ£

1. That the partnership will print colored posters of the delegates to the Constitutional
Convention;

2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;

3. That they will print Ninety Five Thousand (95,000) copies of the said posters;

4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month
starting April 15, 1971 up to December 15, 1971;

5. That upon the termination of the partnership on December 15, 1971, a liquidation of the
account pertaining to the distribution and printing of the said 95,000 posters shall be made.

The petitioner on the other hand admitted in his answer the existence of the partnership.

The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he becomes a
debtor of the partnership for whatever he may have promised to contribute (Art. 1786, Civil Code) and for
interests and damages from the time he should have complied with his obligation (Art. 1788, Civil Code).
Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, we
allowed a total of P200,000.00 compensatory damages in favor of the appellee because the appellant therein
was remiss in his obligations as a partner and as prime contractor of the construction projects in question.
This case was decided on a particular set of facts. We awarded compensatory damages in the Uy case
because there was a finding that the constructing business is a profitable one and that the UP construction
company derived some profits from its contractors in the construction of roads and bridges despite its
deficient capital." Besides, there was evidence to show that the partnership made some profits during the
periods from July 2, 1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The
profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case, there
is no evidence whatsoever that the partnership between the petitioner and the private respondent would
have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no basis
for the award of speculative damages in favor of the private respondent.

Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more
than what was expected of him. In this case, however, there was mutual breach. Private respondent failed
to give his entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner
likewise failed to give any of the amount expected of him. He further failed to comply with the agreement
to print 95,000 copies of the posters. Instead, he printed only 2,000 copies.

Article 1797 of the Civil Code provides: têñ.£îhqwâ£

The losses and profits shall be distributed in conformity with the agreement. If only the share
of each partner in the profits has been agreed upon, the share of each in the losses shall be
in the same proportion.

Being a contract of partnership, each partner must share in the profits and losses of the venture. That is
the essence of a partnership. And even with an assurance made by one of the partners that they would earn
a huge amount of profits, in the absence of fraud, the other partner cannot claim a right to recover the
highly speculative profits. It is a rare business venture guaranteed to give 100% profits. In this case, on an
investment of P15,000.00, the respondent was supposed to earn a guaranteed P1,000.00 a month for eight
months and around P142,500.00 on 95,000 posters costing P2.00 each but 2,000 of which were sold at
P5.00 each. The fantastic nature of expected profits is obvious. We have to take various factors into account.
The failure of the Commission on Elections to proclaim all the 320 candidates of the Constitutional
Convention on time was a major factor. The petitioner undesirable his best business judgment and felt that
it would be a losing venture to go on with the printing of the agreed 95,000 copies of the posters. Hidden
risks in any business venture have to be considered.

It does not follow however that the private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The latter used
this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total printing cost of
P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each. The gross income
therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the gross income of P10,000.00
and with no evidence on the cost of distribution, the net profits amount to only P6,000.00. This net profit of
P6,000.00 should be divided between the petitioner and the private respondent. And since only P4,000.00
was undesirable by the petitioner in printing the 2,000 copies, the remaining P6,000.00 should therefore be
returned to the private respondent.

Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's
supposed commission has no justifiable basis in law.

Again, we agree with the petitioner.

The partnership agreement stipulated that the petitioner would give the private respondent a monthly
commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the commission. The payment of the commission
could only have been predicated on relatively extravagant profits. The parties could not have intended the
giving of a commission inspite of loss or failure of the venture. Since the venture was a failure, the private
respondent is not entitled to the P8,000.00 commission.

Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in holding
him liable to the private respondent in the sum of P7,000.00 as a supposed return of investment in a
magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice of the
Veterans" magazine venture, the respondent court ruled that: têñ.£îhqwâ£

xxx xxx xxx

... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does
not question the due execution of said note. Must Moran therefore pay the amount of
P20,000? The evidence indicates that the P20,000 was assigned by Moran to cover the
following: têñ.£îhqwâ£

(a) P 7,000 — the amount of the PNB check given by Pecson to

Moran representing Pecson's investment in Moran's other project
(the publication and printing of the 'Voice of the Veterans');

(b) P10,000 — to cover the return of Pecson's contribution in the

project of the Posters;

(c) P3,000 — representing Pecson's commission for three months

(April, May, June, 1971).

Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans'
project, for this project never left the ground) ...

As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on
appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the record or are based
on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain
exceptions. Thus, in Carolina Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97 SCRA 734), we held
that this Court retains the power to review and rectify the findings of fact of the Court of Appeals when (1)
the conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2) when the
inference made is manifestly mistaken absurd and impossible; (3) where there is grave abuse of discretion;
(4) when the judgment is based on a misapprehension of facts; and (5) when the court, in making its
findings, went beyond the issues of the case and the same are contrary to the admissions of both the
appellant and the appellee.

In this case, there is misapprehension of facts. The evidence of the private respondent himself shows that
his investment in the "Voice of Veterans" project amounted to only P3,000.00. The remaining P4,000.00
was the amount of profit that the private respondent expected to receive.

The records show the following exhibits- têñ.£îhqwâ£

E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of
defendant. Defendant admitted the authenticity of this check and of his receipt of the proceeds
thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for the purpose of
showing plaintiff's capital investment in the printing of the "Voice of the Veterans" for which
he was promised a fixed profit of P8,000. This investment of P6,000.00 and the promised
profit of P8,000 are covered by defendant's promissory note for P14,000 dated March 31,
1971 marked by defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff as
Exhibit P. Later, defendant returned P3,000.00 of the P6,000.00 investment thereby
proportionately reducing the promised profit to P4,000. With the balance of P3,000 (capital)
and P4,000 (promised profit), defendant signed and executed the promissory note for P7,000
marked Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000 partial payment of the
promised profit. The P3,000 balance of the promised profit was made part consideration of
the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is, therefore, being
presented to show the consideration for the P20,000 promissory note.
 F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant.
The authenticity of the check and his receipt of the proceeds thereof were admitted by the
defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part consideration, and in cash, of
the P20,000 promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show
the consideration for the P20,000 note and the existence and validity of the obligation.

xxx xxx xxx

L-Book entitled "Voice of the Veterans" which is being offered for the purpose of showing the
subject matter of the other partnership agreement and in which plaintiff invested the P6,000
(Exhibit E) which, together with the promised profit of P8,000 made up for the consideration
of the P14,000 promissory note (Exhibit 2; Exhibit P). As explained in connection with Exhibit
E. the P3,000 balance of the promised profit was later made part consideration of the P20,000
promissory note.

M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This
document is being offered for the purpose of further showing the transaction as explained in
connection with Exhibits E and L.

N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital
investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also
defendant's Exhibit 4. This document is being offered in support of plaintiff's explanation in
connection with Exhibits E, L, and M to show the transaction mentioned therein.

xxx xxx xxx

P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for
the purpose of showing the transaction as explained in connection with Exhibits E, L, M, and
N above.

Explaining the above-quoted exhibits, respondent Pecson testified that: têñ.£îhqwâ£

Q During the pre-trial of this case, Mr. Pecson, the defendant presented a
promissory note in the amount of P14,000.00 which has been marked as Exhibit
2. Do you know this promissory note?

A Yes, sir.

Q What is this promissory note, in connection with your transaction with the
defendant?

A This promissory note is for the printing of the "Voice of the Veterans".

Q What is this "Voice of the Veterans", Mr. Pecson?

A It is a book.têñ.£îhqwâ£

(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the promissory note,
Exhibit 2, represent?

A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by

the Philippine National Bank Manager's check and the P8,000.00 profit assured
me by Mr. Moran which I will derive from the printing of this "Voice of the
Veterans" book.
Q You said that the P6,000.00 of this P14,000.00 is covered by, a Manager's
check. I show you Exhibit E, is this the Manager's check that mentioned?

A Yes, sir.

Q What happened to this promissory note of P14,000.00 which you said

represented P6,000.00 of your investment and P8,000.00 promised profits?

A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2)

of the P6,000.00 capital I gave to him.

Q As a consequence of the return by Mr. Moran of one-half (1/2) of the

P6,000.00 capital you gave to him, what happened to the promised profit of
P8,000.00?

A It was reduced to one-half (1/2) which is P4,000.00.

Q Was there any document executed by Mr. Moran in connection with the
Balance of P3,000.00 of your capital investment and the P4,000.00 promised
profits?

A Yes, sir, he executed a promissory note.

Q I show you a promissory note in the amount of P7,000.00 dated March 30,
1971 which for purposes of Identification I request the same to be marked as
Exhibit M. . .

Court têñ.£îhqwâ£Mark it as Exhibit M.

Q (continuing) is this the promissory note which you said was executed by Mr.
Moran in connection with your transaction regarding the printing of the "Voice
of the Veterans"?

A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).

Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson?

A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the

promissory note.

Q Was there a receipt issued by you covering this payment of P4,000.00 in

favor of Mr. Moran?

A Yes, sir.

(T.S.N., p. 23, Nov. 29, 1972).

Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the
P7,000.00 covered by the promissory note, Exhibit M. What does this P4,000.00
covered by Exhibit N represent?

A This P4,000.00 represents the P3,000.00 which he has returned of my

P6,000.00 capital investment and the P1,000.00 represents partial payment of
the P4,000.00 profit that was promised to me by Mr. Moran.
 Q And what happened to the balance of P3,000.00 under the promissory note,
Exhibit M?

A The balance of P3,000.00 and the rest of the profit was applied as part of the
consideration of the promissory note of P20,000.00.

(T.S.N., pp. 23-24, Nov. 29, 1972).

The respondent court erred when it concluded that the project never left the ground because the project did
take place. Only it failed. It was the private respondent himself who presented a copy of the book entitled
"Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error to state that the project
never took place and on this basis decree the return of the private respondent's investment.

As already mentioned, there are risks in any business venture and the failure of the undertaking cannot
entirely be blamed on the managing partner alone, specially if the latter exercised his best business
judgment, which seems to be true in this case. In view of the foregoing, there is no reason to pass upon
the fourth and fifth assignments of errors raised by the petitioner. We likewise find no valid basis for the
grant of the counterclaim.

WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now Intermediate
Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the petitioner Isabelo Moran, Jr.,
to pay private respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS representing the amount of
the private respondent's contribution to the partnership but which remained unused; and THREE THOUSAND
(P3,000.00) PESOS representing one half (1/2) of the net profits gained by the partnership in the sale of
the two thousand (2,000) copies of the posters, with interests at the legal rate on both amounts from the
date the complaint was filed until full payment is made. SO ORDERED.1äwphï1.ñët

G.R. No. L-5236 January 10, 1910

PEDRO MARTINEZ, plaintiff-appellee, vs. ONG PONG CO and ONG LAY, defendants.
ONG PONG CO., appellant.

ARELLANO, C.J.:

On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants who, in a private
document, acknowledged that they had received the same with the agreement, as stated by them, "that we
are to invest the amount in a store, the profits or losses of which we are to divide with the former, in equal
shares."

The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to render him an
accounting of the partnership as agreed to, or else to refund him the P1,500 that he had given them for the
said purpose. Ong Pong Co alone appeared to answer the complaint; he admitted the fact of the agreement
and the delivery to him and to Ong Lay of the P1,500 for the purpose aforesaid, but he alleged that Ong
Lay, who was then deceased, was the one who had managed the business, and that nothing had resulted
therefrom save the loss of the capital of P1,500, to which loss the plaintiff agreed.

The judge of the Court of First Instance of the city of Manila who tried the case ordered Ong Pong Co to
return to the plaintiff one-half of the said capital of P1,500 which, together with Ong Lay, he had received
from the plaintiff, to wit, P750, plus P90 as one-half of the profits, calculated at the rate of 12 per cent per
annum for the six months that the store was supposed to have been open, both sums in Philippine currency,
making a total of P840, with legal interest thereon at the rate of 6 per cent per annum, from the 12th of
June, 1901, when the business terminated and on which date he ought to have returned the said amount
to the plaintiff, until the full payment thereof with costs.

From this judgment Ong Pong Co appealed to this court, and assigned the following errors:
 1. For not having taken into consideration the fact that the reason for the closing of the store was
the ejectment from the premises occupied by it.

2. For not having considered the fact that there were losses.

3. For holding that there should have been profits.

4. For having applied article 1138 of the Civil Code.

5. and 6. For holding that the capital ought to have yielded profits, and that the latter should be
calculated 12 per cent per annum; and

7. The findings of the ejectment.

As to the first assignment of error, the fact that the store was closed by virtue of ejectment proceedings is
of no importance for the effects of the suit. The whole action is based upon the fact that the defendants
received certain capital from the plaintiff for the purpose of organizing a company; they, according to the
agreement, were to handle the said money and invest it in a store which was the object of the association;
they, in the absence of a special agreement vesting in one sole person the management of the business,
were the actual administrators thereof; as such administrators they were the agent of the company and
incurred the liabilities peculiar to every agent, among which is that of rendering account to the principal of
their transactions, and paying him everything they may have received by virtue of the mandatum. (Arts.
1695 and 1720, Civil Code.) Neither of them has rendered such account nor proven the losses referred to
by Ong Pong Co; they are therefore obliged to refund the money that they received for the purpose of
establishing the said store — the object of the association. This was the principal pronouncement of the
judgment.

With regard to the second and third assignments of error, this court, like the court below, finds no evidence
that the entire capital or any part thereof was lost. It is no evidence of such loss to aver, without proof, that
the effects of the store were ejected. Even though this were proven, it could not be inferred therefrom that
the ejectment was due to the fact that no rents were paid, and that the rent was not paid on account of the
loss of the capital belonging to the enterprise.

With regard to the possible profits, the finding of the court below are based on the statements of the
defendant Ong Pong Co, to the effect that "there were some profits, but not large ones." This court, however,
does not find that the amount thereof has been proven, nor deem it possible to estimate them to be a
certain sum, and for a given period of time; hence, it can not admit the estimate, made in the judgment, of
12 per cent per annum for the period of six months.

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a partner
who acted as agent in receiving money for a given purpose, for which he has rendered no accounting, such
agent is responsible only for the losses which, by a violation of the provisions of the law, he incurred. This
being an obligation to pay in cash, there are no other losses than the legal interest, which interest is not
due except from the time of the judicial demand, or, in the present case, from the filing of the complaint.
(Arts. 1108 and 1100, Civil Code.) We do not consider that article 1688 is applicable in this case, in so far
as it provides "that the partnership is liable to every partner for the amounts he may have disbursed on
account of the same and for the proper interest," for the reason that no other money than that contributed
as is involved.

As in the partnership there were two administrators or agents liable for the above-named amount, article
1138 of the Civil Code has been invoked; this latter deals with debts of a partnership where the obligation
is not a joint one, as is likewise provided by article 1723 of said code with respect to the liability of two or
more agents with respect to the return of the money that they received from their principal. Therefore, the
other errors assigned have not been committed.

In view of the foregoing judgment appealed from is hereby affirmed, provided, however, that the defendant
Ong Pong Co shall only pay the plaintiff the sum of P750 with the legal interest thereon at the rate of 6 per
cent per annum from the time of the filing of the complaint, and the costs, without special ruling as to the
costs of this instance. So ordered.

G.R. No. L-3745 October 26, 1907

JUAN AGUSTIN, ET AL., plaintiffs; VICTOR DEL ROSARIO, appellant, vs.

BARTOLOME INOCENCIO, defendant-appellee.

TRACEY, J.:

The parties to this controversy, who had been conducting a partnership as industrial partners without capital,
contributed from its profits the sum of P807.28 as a fund toward the construction of a casco for use in their
business, to which they added P3,500, borrowed from Maria del Rosario, the wife of the defendant,
Bartolome Inocencio, he being the managing partner. It is admitted that this total, a little over P4,300, was
the estimated cost of the casco, but in the progress of the work the defendant found that it called for
additional funds, which he advanced to the amount of P2,024.49. It is satisfactorily appears from the
evidence that this amount is necessary in order to complete the work undertaken. Although it would seem
that he failed to notify his partners of the various items from time to time going to make up this sum, it is
shown that the books were at all times open to their inspection, and that, being asked to examine them,
they omitted to do so, and that the plaintiff Juan Agustin, representing all the partners, was also present at
the construction of the casco, in charge of the practical work and cognizant of its needs and its progress.

The work done in the casco having been within the scope of the association and necessary to carry out its
express object, the borrowing of the money required to carry it on, with the acquiescence if not with the
affirmative consent of his associates, was not outside the powers of the managing partner and constitutes
a debt for which all the associates are liable.

The note passed into the hands of the defendant by reason of the successive deaths of his wife and of their
only child, each without debts, and for the amount thereof he became a creditor, subject, however, to the
deduction therefrom of his proportionate part of the indebtedness.

The trial court treated his claim on this note, as well as the sum of P2,024.49 furnished by him, as an
addition to his capital in the firm, rather than as a loan, and this constitutes one of the grounds of error
stated by the appellant. We do not deem it necessary to pass upon this objection, for the reason that,
considered as a loan, this sum would place the defendant as a creditor in a stronger position as against his
associates than if regarded as a mere contribution to capital. The error, if it be an error, is not, therefore,
prejudicial to the plaintiff, but is rather beneficial to him. The respondent did not except to it. lawphil.net

Various small sums have been paid out of the profits to some of the partners and these were properly
allowed him in the judgment.

On the theory on which the action was disposed of, the trial court committed no error in the computation of
the various shares.

Of the four parties plaintiff, but one, Victor del Rosario, is interested in this appeal, which has been dismissed
as to the others, and as to him the judgment of the trial court must be affirmed, with costs of this instance.
So ordered.