Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22825

February 14, 1925

TESTATE ESTATE OF LAZARO MOTA, deceased, ET AL., plaintiffs-appellants,

vs.
SALVADOR SERRA, defendant-appellee.
Eduardo Gutierrez Repide for appellants.
Hilado and Hilado, Fisher, DeWitt, Perkins and Brady, Araneta and Zaragosa, Antonio Sanz and
Jose Galan y Blanco for appellee.
VILLAMOR, J.:
On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, marked Exhibit
A, for the construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to
the place known as "Nandong." The original capital stipulated was P150,000. It was covenanted that
the parties should pay this amount in equal parts and the plaintiffs were entrusted with the
administration of the partnership. The agreed capital of P150,000, however, did not prove sufficient,
as the expenses up to May 15, 1920, had reached the amount of P226,092.92, as per statement
Exhibit B, presented by the administrator and O.K.'d by the defendant.
January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C.
Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the latter the estate and central known
as "Palma" with its running business, as well as all the improvements, machineries and buildings,
real and personal properties, rights, choses in action and interests, including the sugar plantation of
the harvest year of 1920 to 1921, covering all the property of the vendor. This contract was executed
before a notary public of Iloilo and is evidenced by Exhibit 1 of the defendant, paragraph 5 of which
reads as follows:
5. The party of the first part hereby states that he has entered into a contract with the owners
of the "San Isidro" Central for the construction, operation, and exploitation of a railroad line of
about 10 kilometers extending from the "Palma" Central and "San Isidro" Central to a point
known as "Nandong," the expenses until the termination of which shall be for the account of
the "San Isidro" Central, and of which expenses, one-half shall be borne by the "Palma"
Central with the obligation to reimburse same within five (5) years with interest at the rate of
10 per cent per annum to the said "San Isidro" Central. The vendee hereby obligates himself
to respect the aforesaid contract and all obligations arising therefrom.
Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga renounced
all his rights under the contract of January 29, 1920, in favor of Messrs. Venancio Concepcion and
Phil. C. Whitaker. This gave rise to the fact that on July 17, 1920, Venancio Concepcion and Phil. C.

Whitaker and the herein defendant executed before Mr. Antonio Sanz, a notary public in and for the
City of Manila, another deed of absolute sale of the said "Palma" Estate for the amount of
P1,695,961.90, of which the vendor received at the time of executing the deed the amount of
P945,861.90, and the balance was payable by installments in the form and manner stipulated in the
contract. The purchasers guaranteed the unpaid balance of the purchase price by a first and special
mortgage in favor of the vendor upon the hacienda and the central with all the improvements,
buildings, machineries, and appurtenances then existing on the said hacienda.
Clause 6 of the deed of July 17, 1920, contains the following stipulations:
6. Messrs. Phil. C. Whitaker and Venancio Concepcion hereby state that they are aware of
the contract that Mr. Salvador Serra has with the proprietors of the "San Isidro" Central for
the operation and exploitation of a railroad line about 10 kilometers long from the "Palma"
and "San Isidro" centrals to the place known as "Nandong;" and hereby obligate themselves
to respect the said contract and subrogate themselves into the rights and obligations
thereunder. They also bind themselves to comply with all the contracts heretofore entered by
the vendor with the customers, coparceners on shares and employees.
Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the
plaintiffs the one-half of the railroad line pertaining to the latter, executing therefor the document
Exhibit 5. The price of this sale was P237,722.15, excluding any amount which the defendant might
be owing to the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C. Whitaker paid the
sum of P47,544.43 only. In the deed Exhibit 5, the plaintiffs and Concepcion and Whitaker agreed,
among other things, that the partnership "Palma" and "San Isidro," formed by the agreement of
February 1, 1919, between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for
himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, should be dissolved upon the
execution of this contract, and that the said partnership agreement should be totally cancelled and of
no force and effect whatever.
So it results that the "Hacienda Palma," with the entire railroad, the subject-matter of the contract of
partnership between plaintiffs and defendant, became the property of Whitaker and Concepcion.
Phil. C. Whitaker and Venancio Concepcion having failed to pay to the defendant a part of the
purchase price, that is, P750,000, the vendor, the herein defendant, foreclosed the mortgage upon
the said hacienda, which was adjudicated to him at the public sale held by the sheriff for the amount
of P500,000, and the defendant put in possession thereof, including what was planted at the time,
together with all the improvements made by Messrs. Phil. C. Whitaker and Venancio Concepcion.
Since the defendant Salvador Serra failed to pay one-half of the amount expended by the plaintiffs
upon the construction of the railroad line, that is, P113,046.46, as well as Phil. C. Whitaker and
Venancio Concepcion, the plaintiffs instituted the present action praying: (1) That the deed of
February 1, 1919, be declared valid and binding; (2) that after the execution of the said document
the defendant improved economically so as to be able to pay the plaintiffs the amount owed, but that
he refused to pay either in part or in whole the said amount notwithstanding the several demands
made on him for the purpose; and (3) that the defendant be sentenced to pay plaintiffs the aforesaid
sum of P113,046.46, with the stipulated interest at 10 per cent per annum beginning June 4, 1920,
until full payment thereof, with the costs of the present action.

Defendant set up three special defenses: (1) The novation of the contract by the substitution of the
debtor with the conformity of the creditors; (2) the confusion of the rights of the creditor and debtor;
and (3) the extinguishment of the contract, Exhibit A.
The court a quo in its decision held that there was a novation of the contract by the substitution of
the debtor, and therefore absolved the defendant from the complaint with costs against the plaintiffs.
With regard to the prayer that the said contract be declared valid and binding, the court held that
there was no way of reviving the contract which the parties themselves in interest had spontaneously
and voluntarily extinguished. (Exhibit 5.)
Plaintiffs have appealed from this judgment and as causes for the review, they allege that the trial
court erred: (a) In holding that Messrs. Whitaker and Concepcion, upon purchasing the "Palma"
Central, were subrogated in the place of the defendant in all his rights and obligations under the
contract relating to the railroad line existing between the "Palma" and the "San Isidro" centrals and
that the plaintiffs agreed to this subrogation; (b) in holding that the deed Exhibit A of February 1,
1919, had been extinguished in its entirety and made null and void by the agreement Exhibit 5 dated
December 16, 1920; (c) in absolving the defendant from the complaint and in sentencing the
plaintiffs to pay the costs; and (d) in not sentencing the defendant to pay the plaintiffs the sum of
P113,046.46, with legal interest at 10 per cent per annum from June 4, 1920, until full payment, with
costs against the defendant.
Taking for granted that the defendant was under obligation to pay the plaintiffs one-half of the cost of
the construction of the railroad line in question, by virtue of the contract of partnership Exhibit A, the
decisive point here to determine is whether there was a novation of the contract by the substitution
of the debtor with the consent of the creditor, as required by article 1205 of the Civil Code. If so, it is
clear that the obligation of the defendant was, in accordance with article 1156 of the same code,
extinguished.
It should be noted that in order to give novation its legal effect, the law requires that the creditor
should consent to the substitution of a new debtor. This consent must be given expressly for the
reason that, since novation extinguishes the personality of the first debtor who is to be substituted by
new one, it implies on the part of the creditor a waiver of the right that he had before the novation
which waiver must be express under the principle that renuntiatio non praesumitur, recognized by
the law in declaring that a waiver of right may not be performed unless the will to waive is
indisputably shown by him who holds the right.
The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's
obligation to the plaintiffs is of no avail, if the latter have not expressly consented to the substitution
of the first debtor. Neither can the letter, Exhibit 6, on page 87 of the record be considered as proof
of the consent of the plaintiffs to the substitution of the debtor, because that exhibit is a letter written
by plaintiffs to Phil. C. Whitaker and Venancio Concepcion for the very reason that the defendant
had told them (plaintiffs) that after the sale of the "Hacienda Palma" to Messrs. Phil. C. Whitaker and
Venancio Concepcion, the latter from then on would bear the cost of the repairs and maintenance of
the railroad line and of the construction of whatever addition thereto might be necessary. So the
plaintiffs by their letter of August 14th, submitted a statement of account to Phil. C. Whitaker and
Venancio Concepcion containing the accounts of the "San Isidro" Central, as stated June 30, 1920,

saying that they had already explained previously the reason for the increase in the expenses and
since the retiring partner, Mr. Serra, had already given conformity with the accounts, as stated May
15, 1920, it remained only to hear the conformity of the new purchasers for the accounts covering
the period from May 15 to June 30, 1920, and their authority for future investments, or their
objection, if any, to the amounts previously expended. Neither can the testimony of Julio Infante in
connection with Exhibit 7 be taken as evidence of the consent of the plaintiffs to the change of the
person of the debtor for that of Messrs. Phil. C. Whitaker and Venancio Concepcion. This witness
testified, in substance, that he is acquainted with the partnership formed by the owners of the
"Hacienda Palma" and Hacienda San Isidro" for the construction of the railroad line; that the cost of
the construction thereof was originally estimated at P150,000; that the owner of the "Hacienda
Palma" would pay one-half of this amount; that when the "Hacienda Palma" was sold to Messrs.
Phil. C. Whitaker and Venancio Concepcion, the latter agreed to pay one-half of the cost of
P150,000; that as the cost of construction exceeded P200,000, he, as an employee of Messrs. Phil.
C. Whitaker and Venancio Concepcion, could not O.K. the accounts as presented by the plaintiffs,
and suggested that they take up in writing their points of view directly with Messrs. Phil. C. Whitaker
and Venancio Concepcion. Then the plaintiffs did as suggested, and wrote the letter Exhibit 7 in
which they asked the new owners of the "Hacienda Palma" their decision upon the following three
questions: 1. Will the "Palma" Central accept the statement of account as presented by the "San
Isidro" Central regarding the actual cost of the railroad line "Palma-San Isidro-Nandong?" 2. Is the
"Palma" Central willing to continue as co-proprietor of the railroad line for the exploitation of the
sugar-cane business of "Nandong" and neighboring barrios, and therefore to pay 50 per cent of the
expenses that may be incurred in completing the line?
It was but natural that the plaintiffs should have done this. Defendant transferred his hacienda to
Messrs. Phil. C. Whitaker and Venancio Concepcion and made it known to the plaintiffs that the new
owners would hold themselves liable for the cost of constructing the said railroad line. Plaintiffs could
not prevent the defendant from selling to Phil. C. Whitaker and Venancio Concepcion his "Hacienda
Palma" with the rights that he had over the railroad in question. The defendant ceased to be a
partner in said line and, therefore, the plaintiffs had to take the vendees as their new partners.
Plaintiffs had to come to an understanding with the new owners of the "Hacienda Palma" in
connection with the railroad line "Palma-San Isidro-Nandong." But in all of this, there was nothing to
show the express consent, the manifest and deliberate intention of the plaintiffs to exempt the
defendant from his obligation and to transfer it to his successors in interest, Messrs. Phil. C.
Whitaker and Venancio Concepcion.
The plaintiffs were not a party to the document Exhibit 1. Neither in this document, nor in others in
the record, do we find any stipulation whereby the obligation of the defendant was novated with the
consent of the creditor, and as it has been held in the case of Martinez vs. Cavives (25 Phil., 581),
the oral evidence tending to prove such a fact as this is not in law sufficient.
As has been said, in all contracts of novation consisting in the change of the debtor, the consent of
the creditor is indispensable, pursuant to article 1205 of the Civil Code which reads as follows:
Novation which consists in the substitution of a new debtor in the place of the original one
may be made without the knowledge of the latter, but not without the consent of the creditor.

Mr. Manresa in his commentaries on articles 1205 and 1206 of the Civil Code (vol. 8, 1907 ed., pp.
424-426) says as follows:
Article 1205 clearly says in what this kind of novation must consist, because in stating that
another person must be substituted in lieu of the debtor, it means that it is not enough to
extend the juridical relation to that other person, but that it is necessary to place the latter in
the same position occupied by the original debtor.
Consequently, the obligation contracted by a third person to answer for the debtor, as in the
case of suretyship, in the last analysis, does not work as a true novation, because the third
person is not put in the same position as the debtor the latter continues in his same place
and with the same obligation which is guaranteed by the former.
Since it is necessary that the third person should become a debtor in the same position as
the debtor whom he substitutes, this change and the resulting novation may be respected as
to the whole debt, thus untying the debtor from his obligation, except the eventual
responsibilities of which we shall speak later, or he may continue with the character of such
debtor and also allow the third person to participate in the obligation. In the first case, there
is a complete and perfect novation; in the second, there is a change that does not free the
debtor nor authorize the extinguishment of the accessory obligations of the latter. In this last
hypothesis, if there has been no agreement as to solidarity, the first and the new debtor
should be considered as obligated severally.
The provisions of article 1205 which require the consent of the creditor as an indispensable
requisite in this kind of novation and not always that of the debtor, while not making it
impossible to express the same, imply the distinction between these two forms of novation
and it is based on the simple consideration of justice that since the consequences of the
substitution may be prejudicial to the creditor, but not to the debtor, the consent of the
creditor alone is necessary.
The two forms of this novation, also impliedly recognized by article 1206 which employs the
word "delegate," as applied to the debt, are the expromission and the delegation. Between
these, there is a marked difference of meaning and, as a consequence, a logical difference
of requisite and another clear difference as to their effects, of which we shall speak later.
In the expromission, the initiative of the change does not emanate from the debtor and may
be made even without his consent, since it consists in a third person assuming his obligation;
it logically requires the consent of this third man and of the creditor and in this last requisite
lies the difference between novation and payment, as the latter can be effected by a third
person even against the will of the creditor, whereas in the former case it cannot.
In the delegation, the debtor offers and the creditor accepts a third person who consents to
the substitution so that the intervention and the consent of these three persons are
necessary and they are respectively known as delegante, delegatario, and delegado. It must
be noted that the consent need not be given simultaneously and that it may be given

afterwards, as for example, that of the creditor delegatario to the proposition of the debtor
accepted by the delegado.
Delegation notably differs from the mere indication made by the debtor that a third person
shall pay the debt; in this case, there is no novation and the former is not acquitted of his
obligation and his relations with the third person are regulated by the rules of agency. The
French Code in article 1276 expressly provides for this case, as well as the inverse one
where the debtor points out somebody else to answer for the payment, declaring that there is
no novation in either case. The same sound criterion is impliedly accepted by our Code.
In the case of E.C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), it appears that McCullough
and Co., Inc., sold to Veloso a real estate worth P700,000 on account of which Veloso paid P50,000,
promising to pay the balance at the times and manner stipulated in the contract. He further bound
himself to pay 10 per cent of the amount of the debt as attorney's fees in case of litigation. To secure
the unpaid balance of the purchaser price he executed a first mortgage upon the property in favor of
the vendor. Subsequently, Veloso sold the property for P100,000 to Joaquin Serna who bound
himself to respect the mortgage in favor of McCullough and Co., Inc., and to assume Veloso's
obligation to pay the unpaid balance of the purchase price of the property at the times agreed upon
in the contract between Veloso and McCullough and Co., Inc.
Veloso had paid on account of the price the amount of P50,000, and Serna also made several
payments aggregating the total amount of P250,000. But after this, neither Veloso nor Serna made
further payments and thus gave cause for a litigation. The court in deciding the case said:
The defendant contends that having sold the property to Serna, and the latter having
assumed the obligation to pay the plaintiff the unpaid balance of the price secured by the
mortgage upon the property, he was relieved from this obligation and it then devolved upon
Serna to pay the plaintiff. This means that as a consequence of the contract between the
defendant and Serna, the contract between the defendant and the plaintiff was novated by
the substitution of Serna as a new debtor. This is untenable. In order that this novation may
take place, the law requires the consent of the creditor (art. 1205 of the Civil Code). The
plaintiff did not intervene in the contract between Veloso and Serna and did not expressly
give his consent to this substitution. Novation must be express, and cannot be presumed.
In Martinez vs. Cavives (25 Phil., 581), it was held that:
. . . The consent of the new debtor is as essential to the novation as is that of the creditor . . . .
There is no express stipulation in any of the documents of record that the obligation of the
defendant was novated, and the parol evidence tending to show that it was novated is not
sufficient in law to establish that fact.
The same doctrine was upheld in the case of Vaca vs. Kosca (26 Phil., 388):
A new debtor cannot be substituted for the original obligor in the first contract without the
creditor's consent.

The supreme court of Spain has constantly laid down the same doctrine with regard to novation of
contracts:
The obligations and rights in a contract cannot be novated with regard to a third person who
has not intervened in the execution thereof. (Decision of June 28, 1860.)
Novation by the change of debtors cannot be effected without the express approval of the
creditor. (Decisions of February 8, 1862 and June 12, 1867.)
Novation should not be established by presumptions but by the express will of the parties.
(Decisions of February 14, 1876 and June 16, 1883.)
In order that novation of a contract by subrogation of the debtor may take effect and thus
liberate the first debtor from the obligation, it is necessary that the subrogation be made with
the consent of the creditor. (Decision of March 2, 1897.)
It is undeniable that obligations judicially declared, as well as those acquired by any title, can
be novated by substituting a new debtor in place of the primitive, only when the creditor
gives his consent to the substitution. (Decision of November 15, 1899.)
Novation can in no case be presumed in contracts, but it is necessary that it should result
from the will of the parties, or that the old and the new one be altogether incompatible.
(Decision of December 31, 1904.)
An obligation cannot be deemed novated by means of modifications which do not
substantially change the essence thereof, nor when it is not extinguished by another
obligation, nor when the debtor is not substituted. (Decision of March 14, 1908.)
The consent of the creditor required in a novation consisting of the change of debtors (art.
1205, Civil Code) must appear in an express and positive manner and must be given with
the deliberate intention of exonerating the primitive debtor of his obligations and transfer
them wholly upon the new debtor. (Decision of June 22, 1911.)
In the decision in the case of Martinez vs. Cavives, supra, the following decisions of the several
courts of the United States are cited, wherein this question was decided in the same manner:
In Latiolais, admrx. vs. Citizens' Bank of Louisiana (33 La. Ann., 1444), one Duclozel
mortgaged property to the defendant bank for the triple purpose of obtaining shares in the
capital stock of the bank, bonds which the bank was authorized to issue, and loans to him as
a stockholder. Duclozel subsequently sold this mortgaged property to one Sproule, who, as
one of the terms of the sale, assumed the liabilities of his vendor to the bank. Sproule sold
part of the property to Graff and Chalfant. The debt becoming due, the bank brought suit
against the last two named and Sproule as owners. Duclozel was not made a party. The
bank discontinued these proceedings and subsequently brought suit against Latiolais,
administratrix of Duclozel, who had died.

The court said: "But the plaintiff insists that in its petition in the proceeding first brought the
bank ratified the sale made by Duclozel to Sproule, and by the latter to other parties, in
treating them as owners. Be that so, but it does not follow in the absence of either a formal
and express or of an implied consent to novate, which should be irresistibly inferred from
surrounding circumstances, that it has discharged Duclozel unconditionally, and has
accepted those parties as new delegated debtors in his place. Nemo presumitur donare.
"Novation is a contract, the object of which is: either to extinguish an existing
obligation and to substitute a new one in its place; or to discharge an old debtor and
substitute a new one to him; or to substitute a new creditor to an old creditor with
regard to whom the debtor is discharged.
"It is never presumed. The intention must clearly result from the terms of the
agreement or by a full discharge of the original debt. Novation by the substitution of a
new debtor can take place without the consent of the debtor, but the delegation does
not operate a novation, unless the creditor has expressly declared that he intends to
discharge with delegating debtor, and the delegating debtor was not in open failure or
insolvency at the time. The mere indication by a debtor of a person who is to pay in
his place does not operate a novation. Delegatus debitor est odiosus in lege.
"The most that could be inferred would be that the bank in the exercise of a sound
discretion, proposed to better its condition by accepting an additional debtor to be
and remain bound with the original one."
In Fidelity L. & T. Co. vs. Engleby (99 Va., 168), the court said: "Whether or not a debt has
been novated is a question of fact and depends entirely upon the intention of the parties to
the particular transaction claimed to be novated. In the absence of satisfactory proof to the
contrary, the presumption is that the debt has not been extinguished by taking the new
evidence in the absence of an intention expressed or implied, being treated as a conditional
payment merely."
In Hamlin vs. Drummond (91 Me., 175; 39 A., 551), it was said that novation is never
presumed but must always be proven. In Netterstorn vs. Gallistel (110 Ill. App., 352), it was
said that the burden of establishing a novation is on the party who asserts its existence; that
novation is not easily presumed; and that it must clearly appear before the court will
recognize it.
Notwithstanding the doctrines above quoted, defendant's counsel calls our attention to the decision
of the supreme court of Spain of June 16, 1908, wherein it was held that the provisions of article
1205 of Code do not mean nor require that the consent of the creditor to the change of a debtor
must be given just at the time when the debtors agree on the substitution, because its evident object
being the full protection of the rights of the creditor, it is sufficient if the latter manifests his consent in
any form and at any time as long as the agreement among the debtors holds good. And defendant
insists that the acts performed by the plaintiffs after the "Hacienda Palma" was sold to Messrs. Phil.
C. Whitaker and Venancio Concepcion constitute evidence of the consent of the creditor. First of all,

we should have an idea of the facts upon which that decision was rendered by the supreme court of
Spain.
A partnership known as "La Azucarera de Pravia" obtained a fire insurance policy from the company
"La Union y Fenix Espanol," by virtue of which, said company insured in consideration of an annual
premium of 3,000pesetas, the buildings, machinery and other apparatuses pertaining to the "Pravia
Factory" for ten years and for half their value, and another insurance from another insurance
company insuring the same property and effects for the other half of their value.
Later, "La Azucarera de Pravia," with other sugar companies, ceded all its property to another
company known as "Sociedad General Azucarera de Espaa," in which in consideration of certain
amount of stock that the said "Sociedad General Azucarera de Espaa" issued to the "La Azucarera
de Pravia," the latter was merged with the former. After the cession, "La Union y Fenix Expaol"
sued the "Sociedad General Azucarera de Espaa" demanding the payment of the premium that
should have been paid by the "La Azucarera de Pravia," which payment the "Sociedad General
Azucarera de Espaa" refused to make on the ground that the "La Azucarera de Pravia" was not
merged with the "Sociedad General Azucarera de Espaa," but merely transferred its properties to
the latter in consideration of the stock that was issued to the "La Azucarera de Pravia." It was further
contended by the "Sociedad General Azucarera de Espaa" that even if it were true that in the
contract of cession it appeared that the "La Azucarera de Pravia" was merged with the "Sociedad
General Azucarera de Espaa," nevertheless, there was no such merger in law, for in truth and in
fact, the "La Azucarera de Pravia" had ceded only its property, but not its rights and obligations; that
the existence of the partnership known as "La Azucarera de Pravia" was proven by its registration in
the mercantile register, which was not cancelled, did it contain any statement to the effect that the
"La Azucarera de Pravia" had been extinguished or had ceased to do business even after the
cession of properties to the "Sociedad General Azucarera de Espaa." Another argument advanced
by the "Sociedad General" was that at the time the "Azucarera de Pravia" ceded its properties to the
"Sociedad General Azucarera de Espaa," the insurance company "La Union y Fenix Espanol" did
not assent to the subrogation of the "Sociedad General Azucarera" into the rights and obligations of
the "Azucarera de Pravia," assuming that there had been such a subrogation or substitution of a
debtor by another.
The supreme court of Spain gave judgment in favor of the "La Union y Fenix Espaol" insurance
company for the following reasons:
1. While it is true that it cannot be strictly said that "La Azucarera de Pravia" was merged with
the "Sociedad General Azucarera de Espaa," the document whereby the property of the "La
Azucarera de Pravia" was ceded to the "Sociedad General Azucarera de Espaa" clearly
and expressly recites that this company upon taking charge of the immovable property of the
"La Azucarera de Pravia" accepted in general, with respect to the property ceded,
"everything belonging to the same," after making provisions about active and passive
easements, contracts for transportation and other matters.
The supreme court held that by virtue of the words hereinabove quoted, the "Sociedad General
Azucarera de Espaa" took over the obligation to pay the insurance premiums of the "La Azucarera
de Pravia" inasmuch as said insurance pertained to the property that was ceded.

2. While it is true that "La Union y Fenix Espaol" insurance company did not give its consent
to the contract of cession at the moment of its execution, yet the mere fact that the said
insurance company now sues the "Sociedad General Azucarera de Espaa" is an
incontrovertible proof that the said insurance company accepts the substitution of the new
debtor.
By comparing the facts of that case with the defenses of the case at bar, it will be seen that, whereas
in the former case the creditor sued the new debtor, in the instant case the creditor sues the original
debtor. The supreme court of Spain in that case held that the fact that the creditor sued the new
debtor was proof incontrovertible of his assent to the substitution of the debtor. This would seem
evident because the judicial demand made on the new debtor to comply with the obligation of the
first debtor is the best proof that the creditor accepts the change of the debtor. His complaint is an
authentic document where his consent is given to the change of the debtor. We are not holding that
the creditor's consent must necessarily be given in the same instrument between the first and the
new debtor. The consent of the creditor may be given subsequently, but in either case it must be
expressly manifested. In the present case, however, the creditor makes judicial demand upon the
first debtor for the fulfillment of his obligation, evidently showing by this act that he does not give his
consent to the substitution of the new debtor. We are of the opinion that the decision of the supreme
court of Spain of June 16, 1908, cannot be successfully invoked in support of defendant's
contention. Wherefore, we hold that in accordance with article 1205 of the Civil Code, in the instant
case, there was no novation of the contract, by the change of the person of the debtor.
Another defense urged by the defendant is the merger of the rights of debtor and creditor, whereby
under article 1192 of the Civil Code, the obligation, the fulfillment of which is demanded in the
complaint, became extinguished. It is maintained in appellee's brief that the debt of the defendant
was transferred to Phil. C. Whitaker and Venancio Concepcion by the document Exhibit 1. These in
turn acquired the credit of the plaintiffs by virtue of the debt, Exhibit 5; thus the rights of the debtor
and creditor were merged in one person. The argument would at first seem to be incontrovertible,
but if we bear in mind that the rights and titles which the plaintiffs sold to Phil. C. Whitaker and
Venancio Concepcion refer only to one-half of the railroad line in question, it will be seen that the
credit which they had against the defendant for the amount of one-half of the cost of construction of
the said line was not included in the sale contained in Exhibit 5. That the plaintiffs sold their rights
and titles over one-half of the line, is evident from the very Exhibit 5. The purchasers, Phil. C.
Whitaker and Venancio Concepcion, to secure the payment of the price, executed a mortgage in
favor of the plaintiffs on the same rights and titles that they had bought and also upon what they had
purchased from Mr. Salvador Serra. In other words, Phil. C. Whitaker and Venancio Concepcion
mortgaged unto the plaintiffs what they had bought from the plaintiffs and also what they had bought
from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased
something from Mr. Salvador Serra, the herein defendant, regarding the railroad line, it was
undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that the rights
and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were only those
they had over the other half of the railroad line. Therefore, as already stated, since there was no
novation of the contract between the plaintiffs and the defendant, as regards the obligation of the
latter to pay the former one-half of the cost of the construction of the said railroad line, and since the
plaintiffs did not include in the sale, evidenced by Exhibit 5, the credit that they had against the
defendant, the allegation that the obligation of the defendant became extinguished by the merger of

the rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio
Concepcion is wholly untenable.
Appellants assign also as a ground of their appeal the holding of the court that by the termination of
the partnership, as shown by the document Exhibit 5, no legal rights can be derived therefrom.
By virtue of the contract Exhibit 5, the plaintiffs and Phil. C. Whitaker and Venancio Concepcion, by
common consent, decided to dissolve the partnership between the "Hacienda Palma" and "Hacienda
San Isidro," thus cancelling the contract of partnership of February 1, 1919.
Counsel for appellee in his brief and oral argument maintains that the plaintiffs cannot enforce any
right arising out of that contract of partnership, which has been annulled, such as the right to claim
now a part of the cost of the construction of the railroad line stipulated in that contract.
Defendant's contention signifies that any person, who has contracted a valid obligation with a
partnership, is exempt from complying with his obligation by the mere fact of the dissolution of the
partnership. Defendant's contention is untenable. The dissolution of a partnership must not be
understood in the absolute and strict sense so that at the termination of the object for which it was
created the partnership is extinguished, pending the winding up of some incidents and obligations of
the partnership, but in such case, the partnership will be reputed as existing until the juridical
relations arising out of the contract are dissolved. This doctrine has been upheld by the supreme
court of Spain in its decision of February 6, 1903, in the following case: There was a partnership
formed between several persons to purchase some lands sold by the state. The partnership paid the
purchase price and distributed among its members the lands so acquired, but after the lapse of
some time, one of the partners instituted an action in the court of Badajoz, praying that he be
accepted as a partner with the same rights and obligations as the others, for the reason that he had
not been allowed all that he had a right to. The court granted the petition, which judgment was
affirmed by the Audiencia de Caceres.
From that decision the defendant sued out a writ of error alleging infringement of articles 1680 and
1700 of the Civil Code, on the proposition that all contracts are reputed consummated and therefore
extinguished, when the contracting parties fulfill all the obligations arising therefrom and that by the
payment of the money and the granting and distribution of the lands without any opposition, the
juridical relations between the contracting parties become extinguished and none of the parties has
any right of action under the contract. The supreme court, holding that some corrections and
liquidations asked by the actor were still pending, denied the writ, ruling that the articles cited were
not infringed because a partnership cannot be considered as extinguished until all the obligations
pertaining to it are fulfilled. (11 Manresa, page 312.)
The dissolution of a firm does not relieve any of its members from liability for existing obligations,
although it does save them from new obligations to which they have not expressly or impliedly
assented, and any of them may be discharged from old obligations by novation of other form of
release. It is often said that a partnership continues, even after dissolution, for the purpose of
winding up its affairs. (30 Cyc., page 659.)

Another question presented by appellee's counsel in his memorandum and oral argument is that as
in the partnership articles of February 1, 1919, it was covenanted that the defendant would put up
one-half of the cost of the railroad line within five years from the date, that is, from February 1, 1919,
with interest at 10 per cent per annum, the present action is premature since, from the execution of
the contract until October 25, 1922, the date of the complaint, the five years, within which the
defendant could pay his part of the cost of the construction of the line, had not yet elapsed. Suffice it
to say that the plaintiff and the successors in interest of the defendant, by mutual consent, dissolved
the partnership on June 16, 1920, cancelling the contract Exhibit A to all of which the defendant
consented as evidence by his allegations in his answer. If this is so, there is no reason for waiting for
the expiration of the five years which the parties themselves had seen fit to stipulate and therefore
the provisions of article 113, regarding the fulfillment of pure obligations, must be applied in this
case.
For all of the foregoing, the judgment appealed from is reversed, and we hold that the defendant
Salvador Serra is indebted to the plaintiffs, the Testate Estate of Lazaro Mota, et al., in the amount of
P113,046.46, and said defendant is hereby sentenced to pay the plaintiffs the said amount, together
with the agreed interest at the rate of 10 per cent per annum from the date of the filing of the
complaint.
Without special pronouncement as to costs, it is so ordered.
Johnson, Street, Malcolm, Ostrand, Johns, and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and orders so as to make them
conformable to law and justice includes the right to reverse itself, especially when in its honest
opinion it has committed an error or mistake in judgment, and that to adhere to its decision will cause
injustice to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for
Reconsideration of our Decision dated October 4, 2000. They maintain that there was no partnership
between petitioner Belo, on the one hand, and respondent Nenita A. Anay, on the other hand; and
that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo
acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed by respondent's
own witness, Elizabeth Bantilan, during her cross-examination. Furthermore, Bantilan testified that it
was Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William
Belo with Geminesse Enterprise?

A - William Belo is the friend of Marjorie Tocao and he was the guarantor of the
company.
Q

What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as
guarantor for us. We can borrow money from him.
Q

You mentioned a certain Peter Lo. Who is this Peter Lo?

Peter Lo is based in Singapore.

What is the role of Peter Lo in the Geminesse Enterprise?

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

You mean Peter Lo is the financier?

Yes, he is the financier.

Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise,
am I correct?
A

Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled
that the business relationship created between petitioner Tocao and respondent Anay was an
informal partnership, which was not even recorded with the Securities and Exchange Commission.
As such, it was understandable that Belo, who was after all petitioner Tocao's good friend and
confidante, would occasionally participate in the affairs of the business, although never in a formal or
official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's
presence in Geminesse Enterprise's meetings was merely as guarantor of the company and to help
petitioner Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the
business enterprise. Respondent herself professed lack of knowledge that petitioner Belo received
any share in the net income of the partnership.5 On the other hand, petitioner Tocao declared that
petitioner Belo was not entitled to any share in the profits of Geminesse Enterprise. 6 With no
participation in the profits, petitioner Belo cannot be deemed a partner since the essence of a
partnership is that the partners share in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent
had no cause of action against him and her complaint against him should accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in bad faith
for failing to account for stocks of Geminesse Enterprise amounting to P208,250.00 and that,

accordingly, her claim for damages should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondent's sudden ouster from the partnership by petitioner
Tocao, her act of withholding whatever stocks were in her possession and control was justified, if
only to serve as security for her claims against the partnership. However, while we do not agree that
the same renders private respondent in bad faith and should bar her claim for damages, we find that
the said sum of P208,250.00 should be deducted from whatever amount is finally adjudged in her
favor on the basis of the formal account of the partnership affairs to be submitted to the Regional
Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY
GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS the complaint,
docketed as Civil Case No. 88-509, as against petitioner William T. Belo only. The sum of
P208,250.00 shall be deducted from whatever amount petitioner Marjorie Tocao shall be held liable
to pay respondent after the normal accounting of the partnership affairs.
SO ORDERED.
Davide, Jr., Kapunan, and Pardo; JJ., concur.
Puno, J., on official leave.

SECOND DIVISION
[G.R. No. 30616 : December 10, 1990.]
192 SCRA 110
EUFRACIO D. ROJAS, Plaintiff-Appellant, vs. CONSTANCIO B.
MAGLANA,Defendant-Appellee.
DECISION
PARAS, J.:
This is a direct appeal to this Court from a decision ** of the then Court of First Instance of
Davao, Seventh Judicial District, Branch III, in Civil Case No. 3518, dismissing appellant's
complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit
"A") called Eastcoast Development Enterprises (EDE) with only the two of them as partners.
The partnership EDE with an indefinite term of existence was duly registered on January 21,
1955 with the Securities and Exchange Commission.
One of the purposes of the duly-registered partnership was to "apply or secure timber
and/or minor forests products licenses and concessions over public and/or private forest
lands and to operate, develop and promote such forests rights and concessions." (Rollo, p.
114).

A duly registered Articles of Co-Partnership was filed together with an application for a
timber concession covering the area located at Cateel and Baganga, Davao with the Bureau
of Forestry which was approved and Timber License No. 35-56 was duly issued and became
the basis of subsequent renewals made for and in behalf of the duly registered partnership
EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage the business
affairs of the partnership, including marketing and handling of cash and is authorized to sign
all papers and instruments relating to the partnership, while appellant Rojas shall be the
logging superintendent and shall manage the logging operations of the partnership. It is
also provided in the said articles of co-partnership that all profits and losses of the
partnership shall be divided share and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no operation of said
partnership (Record on Appeal [R.A.] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to avail of the services
of Pahamotang as industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of CoPartnership (Exhibit "B" and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT
ENTERPRISES (EDE). Aside from the slight difference in the purpose of the second
partnership which is to hold and secure renewal of timber license instead of to secure the
license as in the first partnership and the term of the second partnership is fixed to thirty
(30) years, everything else is the same.
The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1,
1956, and was able to ship logs and realize profits. An income was derived from the
proceeds of the logs in the sum of P643,633.07 (Decision, R.A. 919).
On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled
"CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT
ENTERPRISE" (Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas
shall purchase the interest, share and participation in the Partnership of Pahamotang
assessed in the amount of P31,501.12. It was also agreed in the said instrument that after
payment of the sum of P31,501.12 to Pahamotang including the amount of loan secured by
Pahamotang in favor of the partnership, the two (Maglana and Rojas) shall become the
owners of all equipment contributed by Pahamotang and the EASTCOAST DEVELOPMENT
ENTERPRISES, the name also given to the second partnership, be dissolved. Pahamotang
was paid in fun on August 31, 1957. No other rights and obligations accrued in the name of
the second partnership (R.A. 921).
After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas
without the benefit of any written agreement or reconstitution of their written Articles of
Partnership (Decision, R.A. 948).
On January 28, 1957, Rojas entered into a management contract with another logging
enterprise, the CMS Estate, Inc. He left and abandoned the partnership (Decision, R.A.
947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the
newly acquired area (Decision, R.A. 948).
The equipment withdrawn were his supposed contributions to the first partnership and was
transferred to CMS Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).

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

Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a
letter dated February 21, 1961 (Exhibit "10") Maglana notified Rojas that he dissolved the
partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against
Maglana for the recovery of properties, accounting, receivership and damages, docketed as
Civil Case No. 3518 (Record on Appeal, pp. 1-26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine
the long and voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114)
was denied by Judge Romero for want of merit (Ibid., p. 125). Judge Romero also required
the inclusion of the entire year 1961 in the report to be submitted by the commissioners
(Ibid., pp. 138-143). Accordingly, the commissioners started examining the records and
supporting papers of the partnership as well as the information furnished them by the
parties, which were compiled in three (3) volumes.
On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with
counterclaim, attaching thereto the amended answer (Ibid., pp. 26-336), which was granted
on May 22, 1964 (Ibid., p. 336).
On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid.,
p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27,
1964 approving the report of the commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues
were agreed upon to be submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after the
dissolution of the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and
share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the
partnership (Decision, R.A. pp. 895-896).
- nad

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

"WHEREFORE, the above facts and issues duly considered, judgment is hereby
rendered by the Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after
Pahamotang retired from the second partnership, that is, after August 31, 1957,
when Pahamotang was finally paid his share the partnership of the defendant and
the plaintiff is one of a de facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation,
that is the ratio and proportion of their respective contributions, or on the basis of
share and share alike this covered by actual contributions of the plaintiff and the
defendant and by their verbal agreement; that the sharing of profits and losses is on
the basis of actual contributions; that from 1957 to 1959, the sharing is on the basis
of 80% for the defendant and 20% for the plaintiff of the profits, but from 1960 to
the date of dissolution, February 23, 1961, the plaintiff's share will be on the basis of
his actual contribution and, considering his indebtedness to the partnership, the
plaintiff is not entitled to any share in the profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and placed in
his or in his wife's name were acquired with partnership funds or with funds of the
defendant and the Court declares that there is no evidence that these properties
were acquired by the partnership funds, and therefore the same should not belong to
the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused
them and who should be liable for them the Court declares that neither parties is
entitled to damages, for as already stated above it is not a wise policy to place a
price on the right of a person to litigate and/or to come to Court for the assertion of
the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated
February 23, 1961; did it dissolve the partnership or not the Court declares that
the letter of the defendant to the plaintiff dated February 23, 1961, in effect
dissolved the partnership;
"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and
other merchandise to the laborers and employees of the Eastcoast Development
Enterprises, the COURT DECLARES THE SAME AS NOT BELONGING TO THE
PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles
David is VALID AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED
AS PART OF MAGLANA'S CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the
partnership the amount of P69,000.00 the profits he received from the CMS Estate,
Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of
P85,000.00 which according to him he is still entitled to receive from the CMS Estate,
Inc. is hereby denied considering that it has not yet been actually received, and
further the receipt is merely based upon an expectancy and/or still speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19
his personal account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he
should have received as logging superintendent, and which was not paid to him, and

this should be considered as part of Maglana's contribution likewise to the

partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.

: rd

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

Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal relationship of the
Maglana-Rojas after Pahamotang retired from the second partnership.
The lower court is of the view that the second partnership superseded the first, so that
when the second partnership was dissolved there was no written contract of co-partnership;
there was no reconstitution as provided for in the Maglana, Rojas and Pahamotang
partnership contract. Hence, the partnership which was carried on by Rojas and Maglana
after the dissolution of the second partnership was a de facto partnership and at will. It was
considered as a partnership at will because there was no term, express or implied; no
period was fixed, expressly or impliedly (Decision, R.A. pp. 962-963).
On the other hand, Rojas insists that the registered partnership under the firm name of
Eastcoast Development Enterprises (EDE) evidenced by the Articles of Co-Partnership dated
January 14, 1955 (Exhibit "A") has not been novated, superseded and/or dissolved by the
unregistered articles of co-partnership among appellant Rojas, appellee Maglana and
Agustin Pahamotang, dated March 4, 1956 (Exhibit "C") and accordingly, the terms and
stipulations of said registered Articles of Co-Partnership (Exhibit "A") should govern the
relations between him and Maglana. Upon withdrawal of Agustin Pahamotang from the
unregistered partnership (Exhibit "C"), the legally constituted partnership EDE (Exhibit "A")
continues to govern the relations between them and it was legal error to consider a de facto
partnership between said two partners or a partnership at will. Hence, the letter of appellee
Maglana dated February 23, 1961, did not legally dissolve the registered partnership
between them, being in contravention of the partnership agreement agreed upon and
stipulated in their Articles of Co-Partnership (Exhibit "A"). Rather, appellant is entitled to the
rights enumerated in Article 1837 of the Civil Code and to the sharing profits between them
of "share and share alike" as stipulated in the registered Articles of Co-Partnership (Exhibit
"A").
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it
appears evident that it was not the intention of the partners to dissolve the first partnership,
upon the constitution of the second one, which they unmistakably called an "Additional
Agreement" (Exhibit "9-B") (Brief for Defendant-Appellee, pp. 24-25). Except for the fact
that they took in one industrial partner; gave him an equal share in the profits and fixed the
term of the second partnership to thirty (30) years, everything else was the same. Thus,
they adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the
same purposes and the capital contributions of Rojas and Maglana as stipulated in both
partnerships call for the same amounts. Just as important is the fact that all subsequent
renewals of Timber License No. 35-36 were secured in favor of the First Partnership, the
original licensee. To all intents and purposes therefore, the First Articles of Partnership were
only amended, in the form of Supplementary Articles of Co-Partnership (Exhibit "C") which
was never registered (Brief for Plaintiff-Appellant, p. 5). Otherwise stated, even during the
existence of the second partnership, all business transactions were carried out under the
duly registered articles. As found by the trial court, it is an admitted fact that even up to
now, there are still subsisting obligations and contracts of the latter (Decision, R.A. pp. 950957). No rights and obligations accrued in the name of the second partnership except in
favor of Pahamotang which was fully paid by the duly registered partnership (Decision, R.A.,
pp. 919-921).

On the other hand, there is no dispute that the second partnership was dissolved by
common consent. Said dissolution did not affect the first partnership which continued to
exist. Significantly, Maglana and Rojas agreed to purchase the interest, share and
participation in the second partnership of Pahamotang and that thereafter, the two (Maglana
and Rojas) became the owners of equipment contributed by Pahamotang. Even more
convincing, is the fact that Maglana on March 17, 1957, wrote Rojas, reminding the latter of
his obligation to contribute either in cash or in equipment, to the capital investment of the
partnership as well as his obligation to perform his duties as logging superintendent. This
reminder cannot refer to any other but to the provisions of the duly registered Articles of
Co-Partnership. As earlier stated, Rojas replied that he will not be able to comply with the
promised contributions and he will not work as logging superintendent. By such statements,
it is obvious that Roxas understood what Maglana was referring to and left no room for
doubt that both considered themselves governed by the articles of the duly registered
partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of
Pahamotang can neither be considered as a De Facto Partnership, nor a Partnership at Will,
for as stressed, there is an existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the
case at bar, the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the
partnership, it is in effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner
can cause its dissolution by expressly withdrawing even before the expiration of the period,
with or without justifiable cause. Of course, if the cause is not justified or no cause was
given, the withdrawing partner is liable for damages but in no case can he be compelled to
remain in the firm. With his withdrawal, the number of members is decreased, hence, the
dissolution. And in whatever way he may view the situation, the conclusion is inevitable that
Rojas and Maglana shall be guided in the liquidation of the partnership by the provisions of
its duly registered Articles of Co-Partnership; that is, all profits and losses of the partnership
shall be divided "share and share alike" between the partners.
But an accounting must first be made and which in fact was ordered by the trial court and
accomplished by the commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners
from 1956-1961 are as follows: Eufracio Rojas who should have contributed P158,158.00,
contributed only P18,750.00 while Maglana who should have contributed P160,984.00,
contributed P267,541.44 (Decision, R.A. p. 976). It is a settled rule that when a partner
who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of
the partnership for whatever he may have promised to contribute (Article 1786, Civil Code)
and for interests and damages from the time he should have complied with his obligation
(Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a
contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their
voluminous reports which was approved by the trial court, they showed that on 50-50%
basis, Rojas will be liable in the amount of P131,166.00; on 80-20%, he will be liable for
P40,092.96 and finally on the basis of actual capital contribution, he will be liable for
P52,040.31.
Consequently, except as to the legal relationship of the partners after the withdrawal of
Pahamotang which is unquestionably a continuation of the duly registered partnership and

the sharing of profits and losses which should be on the basis of share and share alike as
provided for in the duly registered Articles of Co-Partnership, no plausible reason could be
found to disturb the findings and conclusions of the trial court.
: nad

As to whether Maglana is liable for damages because of such withdrawal, it will be recalled
that after the withdrawal of Pahamotang, Rojas entered into a management contract with
another logging enterprise, the CMS Estate, Inc., a company engaged in the same business
as the partnership. He withdrew his equipment, refused to contribute either in cash or in
equipment to the capital investment and to perform his duties as logging superintendent, as
stipulated in their partnership agreement. The records also show that Rojas not only
abandoned the partnership but also took funds in an amount more than his contribution
(Decision, R.A., p. 949).
In the given situation Maglana cannot be said to be in bad faith nor can he be liable for
damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao,
Branch III, is hereby MODIFIED in the sense that the duly registered partnership of
Eastcoast Development Enterprises continued to exist until liquidated and that the sharing
basis of the partners should be on share and share alike as provided for in its Articles of
Partnership, in accordance with the computation of the commissioners. We also hereby
AFFIRM the decision of the trial court in all other respects.
: nad

SO ORDERED.
Melencio-Herrera, Sarmiento and Regalado, JJ., concur.
Padilla, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 167379

June 27, 2006

PRIMELINK PROPERTIES AND DEVELOPMENT CORPORATION and RAFAELITO W.

LOPEZ, Petitioners,
vs.
MA. CLARITA T. LAZATIN-MAGAT, JOSE SERAFIN T. LAZATIN, JAIME TEODORO T. LAZATIN
and JOSE MARCOS T. LAZATIN, Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure of
the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 69200 and its Resolution2 denying
petitioners motion for reconsideration thereof.
The factual and procedural antecedents are as follows:
Primelink Properties and Development Corporation (Primelink for brevity) is a domestic corporation
engaged in real estate development. Rafaelito W. Lopez is its President and Chief Executive Officer.3

Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose
Marcos T. Lazatin (the Lazatins for brevity), are co-owners of two (2) adjoining parcels of land, with a
combined area of 30,000 square meters, located in Tagaytay City and covered by Transfer
Certificate of Title (TCT) No. T-108484of the Register of Deeds of Tagaytay City.
On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as President,
entered into a Joint Venture Agreement5 (JVA) for the development of the aforementioned property
into a residential subdivision to be known as "Tagaytay Garden Villas." Under the JVA, the Lazatin
siblings obliged themselves to contribute the two parcels of land as their share in the joint venture.
For its part, Primelink undertook to contribute money, labor, personnel, machineries, equipment,
contractors pool, marketing activities, managerial expertise and other needed resources to develop
the property and construct therein the units for sale to the public. Specifically, Primelink bound itself
to accomplish the following, upon the execution of the deed:
a.) Survey the land, and prepare the projects master plans, engineering designs, structural
and architectural plans, site development plans, and such other need plans in accordance
with existing laws and the rules and regulations of appropriate government institutions, firms
or agencies;
b.) Secure and pay for all the licenses, permits and clearances needed for the projects;
c.) Furnish all materials, equipment, labor and services for the development of the land in
preparation for the construction and sale of the different types of units (single-detached,
duplex/twin, cluster and row house);
d.) Guarantee completion of the land development work if not prevented by force majeure or
fortuitous event or by competent authority, or other unavoidable circumstances beyond the
DEVELOPERS control, not to exceed three years from the date of the signing of this Joint
Venture Agreement, except the installation of the electrical facilities which is solely
MERALCOS responsibility;
e.) Provide necessary manpower resources, like executive and managerial officers, support
personnel and marketing staff, to handle all services related to land and housing
development (administrative and construction) and marketing (sales, advertising and
promotions).6
The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as
follows:
1. During the first two years of the Project, the DEVELOPER and the LANDOWNER can
draw allowances or make advances not exceeding a total of twenty percent (20%) of the net
revenue for that period, on the basis of sixty percent (60%) for the DEVELOPER and forty
percent (40%) for the LANDOWNERS.
The drawing allowances/advances are limited to twenty percent (20%) of the net revenue for
the first two years, in order to have sufficient reserves or funds to protect and/or guarantee
the construction and completion of the different types of units mentioned above.
2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to drawing
allowances and/or advances equivalent to sixty percent (60%) and forty percent (40%),
respectively, of the total net revenue or income of the sale of the units. 7

They also agreed to share in the profits from the joint venture, thus:
1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or income of
the Joint Venture project, after deducting all expenses incurred in connection with the land
development (such as administrative management and construction expenses), and
marketing (such as sales, advertising and promotions), and
2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or income
of the Joint Venture project, after deducting all the above-mentioned expenses. 8
Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:
SALES-INCOME-COST PROJECTION
lawphil.net

SELLING PRICE

COST PRICE

DIFFERENCE

INCOME

CLUSTER:
A1 3,200,000

A2 1,260,000

1,940,000 x 24 =

P 46,560,000.00

B2 960,000

1,540,000 x 24 =

36,960,000.00

C2 1,400,000

2,100,000 x 16 =

33,600,000.00

900,000 x 24 =

21,600,000.00

TWIN:
B1 2,500,000
SINGLE:
C1 3,500,000

ROW-TYPE TOWNHOMES:
D1 1,600,000

D2 700,000

P138,720,000.00
(GROSS)

Total Cash Price (A1+B1+C1+D1)

P231,200,000.00

Total Building Expense (A2+B2+C2+D2)

92,480,000.00

COMPUTATION OF ADDL. INCOME ON INTEREST

TCP x 30% D/P

P 69,360,000

Balance = 70%

161,840,000

x .03069 x 48 =

P238,409,740

Total Amount (TCP + int. earn.)

P 69,360,000.00

238,409,740.00
P307,769,740.00

EXPENSES:
less: A Building expenses
B Commission (8% of TCP)

P 92,480,000.00
18,496,000.00

C Admin. & Mgmt. expenses (2% of TCP)

4,624,000.00

D Advertising & Promo exp. (2% of TCP)

4,624,000.00

E Building expenses for the open

12,000,000.00

spaces and Amenities (Development

cost not incl. Housing) 400 x 30,000 sqms.
TOTAL EXPENSES (A+B+C+D+E)

P132,224,000.00

RECONCILIATION OF INCOME VS. EXPENSES

Total Projected Income (incl. income from interest earn.)
less:
Total Expenses

P307,769,740.00
132,224,000.00
P175,545,740.009

The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions
between the parties relative to the interpretation, scope and reach, and the
enforcement/implementation of any provision of the agreement shall be referred to Voluntary
Arbitration in accordance with the Arbitration Law.10
The Lazatins agreed to subject the title over the subject property to an escrow agreement.
Conformably with the escrow agreement, the owners duplicate of the title was deposited with the
China Banking Corporation.11However, Primelink failed to immediately secure a Development Permit
from Tagaytay City, and applied the permit only on August 30, 1995. On October 12, 1995, the City
issued a Development Permit to Primelink.12
In a Letter13 dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply
with its obligations under the JVA, otherwise the appropriate action would be filed against it to protect
their rights and interests. This impelled the officers of Primelink to meet with the Lazatins and
enabled the latter to review its business records/papers. In another Letter 14 dated October 22, 1997,
the Lazatins informed Primelink that they had decided to rescind the JVA effective upon its receipt of
the said letter. The Lazatins demanded that Primelink cease and desist from further developing the
property.
Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC) of
Tagaytay City, Branch 18, a complaint for rescission accounting and damages, with prayer for
temporary restraining order and/or preliminary injunction against Primelink and Lopez. The case was
docketed as Civil Case No. TG-1776. Plaintiffs alleged, among others, that, despite the lapse of
almost four (4) years from the execution of the JVA and the delivery of the title and possession of the
land to defendants, the land development aspect of the project had not yet been completed, and the
construction of the housing units had not yet made any headway, based on the following facts,
namely: (a) of the 50 housing units programmed for Phase I, only the following types of houses
appear on the site in these condition: (aa) single detached, one completed and two units
uncompleted; (bb) cluster houses, one unit nearing completion; (cc) duplex, two units completed and
two units unfinished; and (dd) row houses, two units, completed; (b) in Phase II thereof, all that was
done by the defendants was to grade the area; the units so far constructed had been the object of
numerous complaints by their owners/purchasers for poor workmanship and the use of sub-standard
materials in their construction, thus, undermining the projects marketability. Plaintiffs also alleged
that defendants had, without justifiable reason, completely disregarded previously agreed accounting
and auditing procedures, checks and balances system installed for the mutual protection of both
parties, and the scheduled regular meetings were seldom held to the detriment and disadvantage of
plaintiffs. They averred that they sent a letter through counsel, demanding compliance of what was
agreed upon under the agreement but defendants refused to heed said demand. After a succession

of letters with still no action from defendants, plaintiffs sent a letter on October 22, 1997, a letter
formally rescinding the JVA.
Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by
defendants, they (plaintiffs) stood to receive the amount of P70,218,296.00 as their net share in the
joint venture project; to date, however, after almost four (4) years and despite the undertaking in the
JVA that plaintiffs shall initially get 20% of the agreed net revenue during the first two (2) years (on
the basis of the 60%-40% sharing) and their full 40% share thereafter, defendants had yet to deliver
these shares to plaintiffs which by conservative estimates would amount to no less
than P40,000,000.00.15
Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:
WHEREFORE, it is respectfully prayed of this Honorable Court that a temporary restraining order be
forthwith issued enjoining the defendants to immediately stop their land development, construction
and marketing of the housing units in the aforesaid project; after due proceedings, to issue a writ of
preliminary injunction enjoining and prohibiting said land development, construction and marketing of
housing units, pending the disposition of the instant case.
After trial, a decision be rendered:
1. Rescinding the Joint Venture Agreement executed between the plaintiffs and the
defendants;
2. Immediately restoring to the plaintiffs possession of the subject parcels of land;
3. Ordering the defendants to render an accounting of all income generated as well as
expenses incurred and disbursement made in connection with the project;
4. Making the Writ of Preliminary Injunction permanent;
5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount Forty Million
Pesos (P40,000,000.00) in actual and/or compensatory damages;
6. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of Two
Million Pesos (P2,000,000.00) in exemplary damages;
7. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount equivalent
to ten percent (10%) of the total amount due as and for attorneys fees; and
8. To pay the costs of this suit.
Other reliefs and remedies as are just and equitable are likewise being prayed for.16
Defendants opposed plaintiffs plea for a writ of preliminary injunction on the ground that plaintiffs
complaint was premature, due to their failure to refer their complaint to a Voluntary Arbitrator
pursuant to the JVA in relation to Section 2 of Republic Act No. 876 before filing their complaint in the
RTC. They prayed for the dismissal of the complaint under Section 1(j), Rule 16 of the Rules of
Court:
WHEREFORE, it is respectfully prayed that an Order be issued:

a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited Rules of
Court, or, in the alternative,
b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to
arbitrate, and then asking the parties to resolve their controversies, pursuant to the
Arbitration Law, or in the alternative;
c) staying or suspending the proceedings in captioned case until the completion of the
arbitration, and
d) denying the plaintiffs prayer for the issuance of a temporary restraining order or writ of
preliminary injunction.
Other reliefs and remedies just and equitable in the premises are prayed for.17
In the meantime, before the expiration of the reglementary period to answer the complaint,
defendants, invoking their counsels heavy workload, prayed for a 15-day extension 18 within which to
file their answer. The additional time prayed for was granted by the RTC.19 However, instead of filing
their answer, defendants prayed for a series of 15-day extensions in eight (8) successive motions for
extensions on the same justification.20 The RTC again granted the additional time prayed for, but in
granting the last extension, it warned against further extension.21Despite the admonition, defendants
again moved for another 15-day extension,22 which, this time, the RTC denied. No answer having
been filed, plaintiffs moved to declare the defendants in default,23 which the RTC granted in its
Order24 dated June 24, 1998.
On June 25, 1998, defendants filed, via registered mail, their "Answer with Counterclaim and
Opposition to the Prayer for the Issuance of a Writ of Preliminary Injunction." 25 On July 8, 1998,
defendants filed a Motion to Set Aside the Order of Default. 26 This was opposed by plaintiffs.27 In an
Order28 dated July 14, 1998, the RTC denied defendants motion to set aside the order of default and
ordered the reception of plaintiffs evidence ex parte. Defendants filed a motion for
reconsideration29 of the July 14, 1998 Order, which the RTC denied in its Order30 dated October 21,
1998.
Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in default,
as well as the Order denying their motion to set aside the order of default, alleging that these were
contrary to facts of the case, the law and jurisprudence. 31 On September 16, 1999, the appellate
court issued a Resolution32 dismissing the appeal on the ground that the Orders appealed from were
interlocutory in character and, therefore, not appealable. No motion for reconsideration of the Order
of the dismissal was filed by defendants.
In the meantime, plaintiffs adduced ex parte their testimonial and documentary evidence. On April
17, 2000, the RTC rendered a Decision, the dispositive part of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as
follows:
1. Ordering the rescission of the Joint Venture Agreement as of the date of filing of this
complaint;
2. Ordering the defendants to return possession, including all improvements therein, of the
real estate property belonging to the plaintiffs which is described in, and covered by Transfer

Certificate of Title No. T-10848 of the Register of Deeds of Tagaytay City, and located in
Barangay Anulin, City of Tagaytay;
3. Ordering the defendants to turn over all documents, records or papers that have been
executed, prepared and retained in connection with any contract to sell or deed of sale of all
lots/units sold during the effectivity of the joint venture agreement;
4. Ordering the defendants to pay the plaintiffs the sum of P1,041,524.26 representing their
share of the net income of the P2,603,810.64 as of September 30, 1995, as stipulated in the
joint venture agreement;
5. Ordering the defendants to pay the plaintiffs attorneys fees in the amount of P104,152.40;
6. Ordering the defendants to pay the costs.
SO ORDERED.33
The trial court anchored its decision on the following findings:
x x x Evidence on record have shown patent violations by the defendants of the stipulations
particularly paragraph II covering Developers (defendant) undertakings, as well as paragraph III and
paragraph V of the JVA. These violations are not limited to those made against the plaintiffs alone as
it appears that some of the unit buyers themselves have their own separate gripes against the
defendants as typified by the letters (Exhibits "G" and "H") of Mr. Emmanuel Enciso.
xxxx
Rummaging through the evidence presented in the course of the testimony of Mrs. Maminta on
August 6, 1998 (Exhibits "N," "O," "P," "Q" and "R" as well as submarkings, pp. 60 to 62, TSN August
6, 1998) this court has observed, and is thus convinced, that a pattern of what appears to be a
scheme or plot to reduce and eventually blot out the net income generated from sales of housing
units by defendants, has been established. Exhibit "P-2" is explicit in declaring that, as of September
30, 1995, the joint venture project earned a net income of aboutP2,603,810.64. This amount,
however, was drastically reduced in a subsequent financial report submitted by the defendants
to P1,954,216.39. Shortly thereafter, and to the dismay of the plaintiffs, the defendants submitted an
income statement and a balance sheet (Exhibits "R" and "R-1") indicating a net loss
of P5,122,906.39 as of June 30, 1997.
Of the reported net income of P2,603,810.64 (Exhibit "P-2") the plaintiffs should have received the
sum ofP1,041,524.26 representing their 40% share under paragraph II and V of the JVA. But this
was not to be so. Even before the plaintiffs could get hold of their share as indicated above, the
defendants closed the chance altogether by declaring a net loss. The court perceives this to be one
calculated coup-de-grace that would put to thin air plaintiffs hope of getting their share in the profit
under the JVA.
That this matter had reached the court is no longer a cause for speculation. The way the defendants
treated the JVA and the manner by which they handled the project itself vis--vis their partners, the
plaintiffs herein, there is bound to be certain conflict as the latter repeatedly would received the
losing end of the bargain.

Under the intolerable circumstances, the plaintiffs could not have opted for some other recourse but
to file the present action to enforce their rights. x x x34
On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal35 alleging defendants
dilatory tactics for its allowance. This was opposed by defendants.36
On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of
plaintiffs.37 Upon posting a bond of P1,000,000.00 by plaintiffs, a writ of execution pending appeal
was issued on June 20, 2000.38
Defendants appealed the decision to the CA on the following assignment of errors:
I
THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST REFERRING THE
COMPLAINT FOR VOLUNTARY ARBITRATION (RA NO. 876), CONTRARY TO THE MANDATED
VOLUNTARY ARBITRATION CLAUSE UNDER THE JOINT VENTURE AGREEMENT, AND THE
DOCTRINE IN "MINDANAO PORTLAND CEMENT CORPORATION V. MCDONOUGH
CONSTRUCTION COMPANY OF FLORIDA" (19 SCRA 814-815).
II
THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING APPEAL EVEN IN
THE ABSENCE OF GOOD AND COMPELLING REASONS TO JUSTIFY SAID ISSUANCE, AND
DESPITE PRIMELINKS STRONG OPPOSITION THERETO.
III
THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINKS MOTION TO QUASH THE
WRIT OF EXECUTION PENDING APPEAL AND THE MOTION FOR RECONSIDERATION,
ALTHOUGH THE COURT HAS RETAINED ITS JURISDICTION TO RULE ON ALL QUESTIONS
RELATED TO EXECUTION.
IV
THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT ALTHOUGH
PRIMELINK HAS SUBSTANTIALLY DEVELOPED THE PROJECT AND HAS SPENT MORE OR
LESS FORTY MILLION PESOS, AND DESPITE APPELLEES FAILURE TO PRESENT
SUFFICIENT EVIDENCE JUSTIFYING THE SAID RESCISSION.
V
THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE RIGHT TO TAKE
OVER THE SUBDIVISION AND TO APPROPRIATE FOR THEMSELVES ALL THE EXISTING
IMPROVEMENTS INTRODUCED THEREIN BY PRIMELINK, ALTHOUGH SAID RIGHT WAS
NEITHER ALLEGED NOR PRAYED FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING
THE EX PARTE HEARING, AND EVEN WITHOUT ORDERING APPELLEES TO FIRST
REIMBURSE PRIMELINK OF THE SUBSTANTIAL DIFFERENCE BETWEEN THE MARKET
VALUE OF APPELLEES RAW, UNDEVELOPED AND UNPRODUCTIVE LAND (CONTRIBUTED
TO THE PROJECT) AND THE SUM OF MORE OR LESS FORTY MILLION PESOS WHICH
PRIMELINK HAD SPENT FOR THE HORIZONTAL AND VERTICAL DEVELOPMENT OF THE

PROJECT, THEREBY ALLOWING APPELLEES TO UNJUSTLY ENRICH THEMSELVES AT THE

EXPENSE OF PRIMELINK.39
The appeal was docketed in the CA as CA-G.R. CV No. 69200.
On August 9, 2004, the appellate court rendered a decision affirming, with modification, the appealed
decision. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the assailed decision of the Regional Trial Court of Tagaytay
City, Branch 18, promulgated on April 17, 2000 in Civil Case No. TG-1776, is hereby AFFIRMED.
Accordingly, Transfer Certificate of Title No. T-10848 held for safekeeping by Chinabank pursuant to
the Escrow Agreement is ordered released for return to the plaintiffs-appellees and conformably with
the affirmed decision, the cancellation by the Register of Deeds of Tagaytay City of whatever
annotation in TCT No. 10848 by virtue of the Joint Venture Agreement, is now proper.
SO ORDERED.40
Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation, 41 the
appellate court ruled that, under Philippine law, a joint venture is a form of partnership and is to be
governed by the laws of partnership. The aggrieved parties filed a motion for reconsideration, 42 which
the CA denied in its Resolution43dated March 7, 2005.
Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:
1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND REVERSIBLE
LEGAL ERROR AND/OR GRAVE ABUSE OF DISCRETION IN ORDERING THE RETURN
TO THE RESPONDENTS OF THE PROPERTY WITH ALL IMPROVEMENTS THEREON,
EVEN WITHOUT ORDERING/REQUIRING THE RESPONDENTS TO FIRST PAY OR
REIMBURSE PRIMELINK OF ALL EXPENSES INCURRED IN DEVELOPING AND
MARKETING THE PROJECT, LESS THE ORIGINAL VALUE OF THE PROPERTY, AND
THE SHARE DUE RESPONDENTS FROM THE PROFITS (IF ANY) OF THE JOINT
VENTURE PROJECT?
2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE AND
UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD HUMAN RELATIONS AND
VIOLATIVE OF EXISTING LAWS AND JURISPRUDENCE ON JUDICIAL NOTICE,
DEFAULT, UNJUST ENRICHMENT AND RESCISSION OF CONTRACT WHICH
REQUIRES MUTUAL RESTITUTION, NOT UNILATERAL APPROPRIATION, OF
PROPERTY BELONGING TO ANOTHER?44
Petitioners maintain that the aforesaid portion of the decision which unconditionally awards to
respondents "all improvements" on the project without requiring them to pay the value thereof or to
reimburse Primelink for all expenses incurred therefore is inherently and essentially illegal and
confiscatory, oppressive and unconscionable, contrary to the tenets of good human relations, and
will allow respondents to unjustly enrich themselves at Primelinks expense. At the time respondents
contributed the two parcels of land, consisting of 30,000 square meters to the joint venture project
when the JVA was signed on March 10, 1994, the said properties were worth not more than P500.00
per square meter, the "price tag" agreed upon the parties for the purpose of the JVA. Moreover,
before respondents rescinded the JVA sometime in October/November 1997, the property had
already been substantially developed as improvements had already been introduced thereon;
petitioners had likewise incurred administrative and marketing expenses, among others, amounting
to more or less P40,000,000.00.45

Petitioners point out that respondents did not pray in their complaint that they be declared the
owners and entitled to the possession of the improvements made by petitioner Primelink on the
property; neither did they adduce evidence to prove their entitlement to said improvements. It
follows, petitioners argue, that respondents were not entitled to the improvements although petitioner
Primelink was declared in default.
They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to the extent
necessary to cover the damages caused and that, under Article 1385 of the same Code, rescission
creates the obligation to return the things which were not object of the contract, together with their
fruits, and the price with its interest; consequently, it can be effected only when respondents can
return whatever they may be obliged to return. Respondents who sought the rescission of the JVA
must place petitioner Primelink in the status quo. They insist that respondents cannot rescind and, at
the same time, retain the consideration, or part of the consideration received under the JVA. They
cannot have the benefits of rescission without assuming its burden. All parties must be restored to
their original positions as nearly as possible upon the rescission of a contract. In the event that
restoration to the status quo is impossible, rescission may be granted if the Court can balance the
equities and fashion an appropriate remedy that would be equitable to both parties and afford
complete relief.
Petitioners insist that being defaulted in the court a quo would in no way defeat their claim for
reimbursement because "[w]hat matters is that the improvements exist and they cannot be
denied."46 Moreover, they point out, the ruling of this Court in Aurbach v. Sanitary Wares
Manufacturing Corporation47 cited by the CA is not in point.
On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not
specifically pray for their takeover of the property and for the possession of the improvements on the
parcels of land, nevertheless, respondents were entitled to said relief as a necessary consequence
of the ruling of the trial court ordering the rescission of the JVA. The appellate court cited the ruling of
this Court in the Aurbach case and Article 1838 of the New Civil Code, to wit:
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When
the agreement is silent on any particular issue, the general principles of partnership may be resorted
to.48
Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with
rescissible contracts. What applies is Article 1191 of the New Civil Code, which reads:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with articles 1385 and 1388 and the Mortgage Law.

They insist that petitioners are not entitled to rescission for the improvements because, as found by
the RTC and the CA, it was petitioner Primelink that enriched itself at the expense of respondents.
Respondents reiterate the ruling of the CA, and argue as follows:
PRIMELINK argued that the LAZATINs in their complaint did not allege, did not prove and did not
pray that they are and should be entitled to take over the development of the project, and that the
improvements and existing structures which were introduced by PRIMELINK after spending more or
less Forty Million Pesos be awarded to them. They merely asked in the complaint that the joint
venture agreement be rescinded, and that the parcels of land they contributed to the project be
returned to them.
PRIMELINKs argument lacks merit. The order of the court for PRIMELINK to return possession of
the real estate property belonging to the LAZATINs including all improvements thereon was not a
judgment that was different in kind than what was prayed for by the LAZATINs. The order to return
the property with all the improvements thereon is just a necessary consequence to the order of
rescission.
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When
the agreement is silent on any particular issue, the general principles of partnership may be resorted
to. In Aurbach v. Sanitary Wares Manufacturing Corporation, the Supreme Court discussed the
following points regarding joint ventures and partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it
has been generally understood to mean an organization formed for some temporary purpose. (Gates
v. Megargel, 266 Fed. 811 [1920]) It is, in fact, hardly distinguishable from the partnership, since
elements are similar community of interest in the business, sharing of profits and losses, and a
mutual right of control. (Blackner v. McDermott, 176 F.2d 498 [1949]; Carboneau v. Peterson, 95
P.2d 1043 [1939]; Buckley v. Chadwick, 45 Cal.2d 183, 288 P.2d 12, 289 P.2d 242 [1955]) The main
distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for the execution
of a single transaction, and is thus of a temporary nature. (Tuffs v. Mann, 116 Cal.App. 170, 2 P.2d
500 [1931]; Harmon v. Martin, 395 III. 595, 71 N.E.2d 74 [1947]; Gates v. Megargel, 266 Fed. 811
[1920]) This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code). It would seem therefore that, under Philippine law, a
joint venture is a form of partnership and should thus be governed by the laws of partnership. The
Supreme Court has, however, recognized a distinction between these two business forms, and has
held that although a corporation cannot enter into a partnership contract, it may, however, engage in
a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]; Campos and Lopez
Campos Comments, Notes and Selected Cases, Corporation Code 1981) (Emphasis Supplied)
The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the words of the
court a quo, was a pattern of what appears to be a scheme or plot to reduce and eventually blot out
the net incomes generated from sales of housing units by the defendants. Under Article 1838 of the
Civil Code, where the partnership contract is rescinded on the ground of the fraud or
misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to
any other right is entitled to a lien on, or right of retention of, the surplus of the partnership
property after satisfying the partnership liabilities to third persons for any sum of money paid by him
for the purchase of an interest in the partnership and for any capital or advance contributed by him.
In the instant case, the joint venture still has outstanding liabilities to third parties or the buyers of the
property.

It is not amiss to state that title to the land or TCT No. T-10848 which is now held by Chinabank for
safekeeping pursuant to the Escrow Agreement executed between Primelink Properties and
Development Corporation and Ma. Clara T. Lazatin-Magat should also be returned to the LAZATINs
as a necessary consequence of the order of rescission of contract. The reason for the existence of
the Escrow Agreement has ceased to exist when the joint venture agreement was rescinded. 49
Respondents stress that petitioners must bear any damages or losses they may have suffered. They
likewise stress that they did not enrich themselves at the expense of petitioners.
In reply, petitioners assert that it is unjust and inequitable for respondents to retain the improvements
even if their share in the P1,041,524.26 of the net income of the property and the sale of the land
were to be deducted from the value of the improvements, plus administrative and marketing
expenses in the total amount ofP40,000,000.00. Petitioners will still be entitled to an accounting from
respondents. Respondents cannot deny the existence and nature of said improvements as they are
visible to the naked eye.
The threshold issues are the following: (1) whether respondents are entitled to the possession of the
parcels of land covered by the JVA and the improvements thereon introduced by petitioners as their
contribution to the JVA; (2) whether petitioners are entitled to reimbursement for the value of the
improvements on the parcels of land.
The petition has no merit.
On the first issue, we agree with petitioners that respondents did not specifically pray in their
complaint below that possession of the improvements on the parcels of land which they contributed
to the JVA be transferred to them. Respondents made a specific prayer in their complaint that, upon
the rescission of the JVA, they be placed in possession of the parcels of land subject of the
agreement, and for other "reliefs and such other remedies as are just and equitable in the premises."
However, the trial court was not precluded from awarding possession of the improvements on the
parcels of land to respondents in its decision. Section 2(c), Rule 7 of the Rules of Court provides that
a pleading shall specify the relief sought but it may add as general prayer for such further or other
relief as may be deemed just and equitable. Even without the prayer for a specific remedy, proper
relief may be granted by the court if the facts alleged in the complaint and the evidence introduced
so warrant.50 The court shall grant relief warranted by the allegations and the proof even if no such
relief is prayed for.51 The prayer in the complaint for other reliefs equitable and just in the premises
justifies the grant of a relief not otherwise specifically prayed for.52
The trial court was not proscribed from placing respondents in possession of the parcels of land and
the improvements on the said parcels of land. It bears stressing that the parcels of land, as well as
the improvements made thereon, were contributed by the parties to the joint venture under the JVA,
hence, formed part of the assets of the joint venture.53 The trial court declared that respondents were
entitled to the possession not only of the parcels of land but also of the improvements thereon as a
consequence of its finding that petitioners breached their agreement and defrauded respondents of
the net income under the JVA.
On the second issue, we agree with the CA ruling that petitioner Primelink and respondents entered
into a joint venture as evidenced by their JVA which, under the Courts ruling in Aurbach, is a form of
partnership, and as such is to be governed by the laws on partnership.
When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that
petitioners willfully and persistently committed a breach of the JVA, the court thereby
dissolved/cancelled the partnership.54With the rescission of the JVA on account of petitioners

fraudulent acts, all authority of any partner to act for the partnership is terminated except so far as
may be necessary to wind up the partnership affairs or to complete transactions begun but not yet
finished.55 On dissolution, the partnership is not terminated but continues until the winding up of
partnership affairs is completed.56 Winding up means the administration of the assets of the
partnership for the purpose of terminating the business and discharging the obligations of the
partnership.
The transfer of the possession of the parcels of land and the improvements thereon to respondents
was only for a specific purpose: the winding up of partnership affairs, and the partition and
distribution of the net partnership assets as provided by law.57 After all, Article 1836 of the New Civil
Code provides that unless otherwise agreed by the parties in their JVA, respondents have the right
to wind up the partnership affairs:
Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership
or the legal representative of the last surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his legal representative or his assignee,
upon cause shown, may obtain winding up by the court.
It must be stressed, too, that although respondents acquired possession of the lands and the
improvements thereon, the said lands and improvements remained partnership property, subject to
the rights and obligations of the parties, inter se, of the creditors and of third parties under Articles
1837 and 1838 of the New Civil Code, and subject to the outcome of the settlement of the accounts
between the parties as provided in Article 1839 of the New Civil Code, absent any agreement of the
parties in their JVA to the contrary.58 Until the partnership accounts are determined, it cannot be
ascertained how much any of the parties is entitled to, if at all.
It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of
the improvements on the parcels of land owned by the joint venture/partnership. Notably, the JVA of
the parties does not contain any provision designating any party to wind up the affairs of the
partnership.
Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is caused
in contravention of the partnership agreement are as follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to
damages for breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue
the business in the same name either by themselves or jointly with others, may do so, during
the agreed term for the partnership and for that purpose may possess the partnership
property, provided they secure the payment by bond approved by the court, or pay to any
partner who has caused the dissolution wrongfully, the value of his interest in the partnership
at the dissolution, less any damages recoverable under the second paragraph, No. 1(b) of
this article, and in like manner indemnify him against all present or future partnership
liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:

(a) If the business is not continued under the provisions of the second paragraph,
No. 2, all the rights of a partner under the first paragraph, subject to liability for
damages in the second paragraph, No. 1(b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the
right as against his co-partners and all claiming through them in respect of their
interests in the partnership, to have the value of his interest in the partnership, less
any damage caused to his co-partners by the dissolution, ascertained and paid to
him in cash, or the payment secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership; but in ascertaining the value of
the partners interest the value of the good-will of the business shall not be
considered.
And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to
any other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying
the partnership liabilities to third persons for any sum of money paid by him for the purchase
of an interest in the partnership and for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the representation against
all debts and liabilities of the partnership.
The accounts between the parties after dissolution have to be settled as provided in Article 1839 of
the New Civil Code:
Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be
observed, subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of all the liabilities
specified in No. 2.
(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.

(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the
satisfaction of the liabilities.
(4) The partners shall contribute, as provided by article 1797, the amount necessary to
satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person appointed by the court shall have
the right to enforce the contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right to enforce the contributions
specified in No. 4, to the extent of the amount which he has paid in excess of his share of the
liability.
(7) The individual property of a deceased partner shall be liable for the contributions
specified in No. 4.
(8) When partnership property and the individual properties of the partners are in possession
of a court for distribution, partnership creditors shall have priority on partnership property and
separate creditors on individual property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 69200 are AFFIRMED insofar as they conform to this
Decision of the Court.
Costs against petitioners.
SO ORDERED.
ROMEO J. CALLEJO, SR.
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 97212 June 30, 1993

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

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

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm shall have secured additional operating funds
from abroad. Benjamin Yu actually managed the operations and finances of the business; he had
overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co
and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership interest. The partnership now
constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan
Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble quarry
was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the business
enterprise continued as before. All the employees of the partnership continued working in the business,
all, save petitioner Benjamin Yu as it turned out.
On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met
private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
bought the business from the original partners and that it was for him to decide whether or not he
was responsible for the obligations of the old partnership, including petitioner's unpaid salaries.
Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
unpaid salaries remained unpaid. 3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
salaries accruing from November 1984 to October 1988, moral and exemplary damages and
attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was
never hired as an employee by the present or new partnership. 4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had
been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for
unpaid salaries, backwages and attorney's fees. 5
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor
Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC
held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
Jade Mountain business, that the new partnership had not retained petitioner Yu in his original
position as Assistant General Manager, and that there was no law requiring the new partnership to
absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages

should be asserted against the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the proceedings before the Labor
Arbiter. 6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and
annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or
excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership
has a juridical personality separate and distinct from that of each of its members. Such independent
legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's membership. 7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and
replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a
new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights
under his employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old partnership
which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and
Emmanuel Zapanta in 1987.
The applicable law in this connection of which the NLRC seemed quite unaware is found in the
Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in
good faith, when no definite term or particular
undertaking is specified;
xxx xxx xxx

(2) in contravention of the agreement between the

partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;
xxx xxx xxx
(Emphasis supplied)
In the case at bar, just about all of the partners had sold their partnership interests (amounting to
82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not
show what happened to the remaining 18% of the original partnership interest. The acquisition of
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was enough to constitute a new partnership.
The occurrence of events which precipitate the legal consequence of dissolution of a partnership do
not, however, automatically result in the termination of the legal personality of the old partnership.
Article 1829 of the Civil Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for the
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old partnership was simply continued by the
new partners, without the old partnership undergoing the procedures relating to dissolution and
winding up of its business affairs. In other words, the new partnership simply took over the business
enterprise owned by the preceeding partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets
or most of them and opening a new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to business on the part of the retiring and
the incoming partners. It is not, however, necessary to inquire into such matters.
What is important for present purposes is that, under the above described situation, not only the
retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson,
et al. v. Isabela Saw Mill, et al, 8 the Court held that under facts very similar to those in the case at bar, a
withdrawing partner remains liable to a third party creditor of the old partnership. 9 The liability of the new
partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in
Article 1840 of the Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved partnership
are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or to one or more of
the partners and one or more third persons, if the business is continued without
liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative of a deceased
partner assigns) their rights in partnership property to the remaining partner,
who continues the business without liquidation of partnership affairs, either alone or
with others;
(3) When any Partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired
partners or the representative of the deceased partner, but without any assignment of
his right in partnership property;
(4) When all the partners or their representatives assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners
continue the businessunder the provisions of article 1837, second paragraph, No.
2, either alone or with others, andwithout liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the
business, under this article, to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless there is a stipulation to the
contrary.
When the business of a partnership after dissolution is continued under any
conditions set forth in this article the creditors of the retiring or deceased partner or
the representative of the deceased partner, have a prior right to any claim of the
retired partner or the representative of the deceased partner against the person or
partnership continuing the business on account of the retired or deceased partner's
interest in the dissolved partnership or on account of any consideration promised for
such interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment
on the ground of fraud.
xxx xxx xxx
(Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade
Mountain which continued the business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for
unpaid wages, is entitled to priority vis-a-visany claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the
Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would
fall, if only because the facts on record are not detailed with sufficient precision to permit such
determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is
entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment
with the previous partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and
hire a new general or assistant general manager to run the affairs of the business enterprise take
over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention
of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or
termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General
Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of
Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or
redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's
pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6)
months being considered as a whole year.
While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ,
we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership
certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble
quarrying, processing and exporting enterprise. His work constituted value-added to the business
itself and therefore, the new partnership similarly benefitted from the labors of Benjamin Yu. It is
worthy of note that the new partnership did not try to suggest that there was any cause consisting of
some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to
terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office of Jade Mountain from Makati to
Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including
the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin
Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new
Jade Mountain may legitimately be required to respond by paying moral damages. This Court,
exercising its discretion and in view of all the circumstances of this case, believes that an indemnity
for moral damages in the amount of P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed from
the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain
compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent
Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the
Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new
Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company
Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay
multiplied by three (3) years of service or a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and
(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 17024

March 24, 1922

DOMINGO BEARNEZA, plaintiff-appelle,

vs.
BALBINO DEQUILLA, defendant-appellant.
C. Lozano and Cecilio I. Lim for appellant.
Montinola, Montinola & Hontiveros for appellee.
ROMUALDEZ, J.:
In the year 1903, Balbino Dequilla, the herein defendant, and Perpetua Bearneza formed a
partnership for the purpose of exploiting a fish pond situated in the barrio of Talisay, municipality of
Barotac Nuevo, Province of Iloilo, Perpetua obligating herself to contribute to the payment of the
expenses of the business, which obligation she made good, and both agreeing to divide the profits
between themselves, which they had been doing until the death of the said Perpetua in the year
1912.
The deceased left a will in one of the clauses of which she appointed Domingo Bearnez, the herein
plaintiff, as her heir to succeed to all her rights and interests in the fish pond in question.
Demand having been made upon Balbino Dequilla by Domingo Bearneza for the delivery of the part
of the fish pond belonging to his decedent, Perpetua, and delivery having been refused, Domingo
Bearneza brought this action to recover said part of the fish pond belonging to his decedent,
Perpetua, and delivery having been refused, Domingo Bearneza brought this action recover said
part of the fish pond and one-half of the profits received by the defendant from the fish pond from the
year 1913 to 1919, as damages (the amended complaint was filed on April 12, 1920), amounting,
according to plaintiff, to the sum of thirteen thousand one hundred pesos (13,100).
In his answer, the defendant denies generally and specifically the allegations of the complaint, and
alleges, as special defense, that "the formation of the supposed partnership between the plaintiff and
the defendant for the exploitation of the aforesaid fish pond was not carried into effect, on account of
the plaintiff having refused to defray the expenses of reconstruction and exploitation of said fish
pond." As another special defense, the defendant alleges "that in the event that the court should hold
the plaintiff to be entitled to the undivided one-half of the fish pond, claimed in the complaint, the
plaintiff's action has prescribed, the time for bringing the same having elapsed."
Proceedings having been held as usual, the court below rendered judgment, declaring the plaintiff
owner of one-half of the fish pond, which was composed of the portions known as "Alimango" and

"Dalusan," but without awarding him any of the damages claimed by him, the same not having been
proven, in the opinion of the court, and ordering the defendant to pay the costs.
From this judgment the defendant appeals, making various assignments of error. The plaintiff did not
appeal from that part of the judgment denying his claim for damages; hence the only question we
are called upon to decide is whether or not the plaintiff has any right to maintain an action for the
recovery of one-half of the said fish pond.
The partnership formed by Perpetua Bearneza and Balbino Dequilla, as to the existence of which
the proof contained in the record is conclusive and there is no dispute, was of a civil nature. It was a
particular partnership, as defined in article 1678 of the Civil Code, it having had for its subject-matter
a specified thing, to with, the exploitation of the aforementioned fish pond. Although, as the trial court
says in its decision, the defendant, in his letters to Perpetua or her husband, makes reference to the
fish pond, calling it "our," or "your fish pond," this reference cannot be held to include the land on
which the said fish pond was built. It has not been proven that Perpetua Bearneza participated in the
ownership of said land, and Exhibits 2 and 3 of the defendant show that he has been paying, as
exclusive owner of the fish pond, the land tax thereon, although in Exhibit X he says that the said
land belongs to the State. The conclusion, therefore, from the evidence is that the land on which the
fish pond was constructed did not constitute a part of the subject- matter of the aforesaid
partnership.
Now, this partnership not having been organized in the form of a mercantile partnership, and,
therefore, the provisions of the Code of Commerce not being applicable thereto (article 1670 of the
Civil Code), it was dissolved by the death of Perpetua Bearneza, and falls under the provisions of
article 1700, subsection 3, of the same Code, and not under the exception established in the last
paragraph of said article 1700 of the Civil Code.
Neither can it be maintained that the partnership continued to exist after the death of Perpetua,
inasmuch as it does not appear that any stipulation to that effect has ever been made by her and the
defendant, pursuant to the provisions of article 1704 of the Code last cited.
The partnership having been dissolved by the death of Perpetua Bearneza, its subsequent legal
status was that of a partnership in liquidation, and the only rights inherited by her testamentary heir,
the herein plaintiff, were those resulting from the said liquidation in favor of the deceased partner,
and nothing more. Before this liquidation is made, which up to the present has not been effected, it is
impossible to determine what rights or interests, if any, the deceased had, the partnership bond
having been dissolved.
There is no sufficient ground for holding that a community of property existed between the plaintiff
and the defendant, it not being known whether the deceased still had any interest in the partnership
property which could have been transmitted by will to the plaintiff. There being no community of
property, article 395 of the Civil Code cited by the plaintiff in support of his contention can have no
application to the case at bar.
Neither can it be said that the partnership continued between the plaintiff and the defendant. It is true
that the latter's act in requiring the heirs of Perpetua to contribute to the payment of the expenses of

exploitation of the aforesaid fishing industry was an attempt to continue the partnership, but it is also
true that neither the said heirs collectively, nor the plaintiff individually, took any action in response to
that requirement, nor made any promise to that effect, and therefore no new contract of partnership
existed.
We find that the plaintiff has not sufficiently shown his right of action.
The judgment appealed from is modified, the same being affirmed insofar as it denies the plaintiff's
claim for damages, and reversed insofar as it declares the said plaintiff owner of one-half of the fish
pond, "Alimango" and "Dalusan," here in dispute.
No special finding as to costs is made. So ordered.
Araullo, C.J., Malcolm, Avancea, Villamor, Ostrand and Johns, JJ., concur.