G.R. No.

143340 August 15, 2001

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,

vs.
LAMBERTO T. CHUA, respondent.

GONZAGA-REYES, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision1 of
the Court of Appeals dated January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth
Sunga Chan and Cecilia Sunga" and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga and Cecilia Sunga (hereafter collectively referred
to as petitioners).

The pertinent facts of this case are as follows:

On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga
Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and
wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for "Winding Up of
Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of
Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte.

Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience,
respondent and Jacinto allegedly agreed to register the business name of their partnership,
SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to
Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife respondent,
Erlinda Sy. As compensation, Jacinto would receive a manager's fee or remuneration of 10% of the
gross profit and Josephine would receive 10% of the net profits, in addition to her wages and other
remuneration from the business.

Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation
went quite and was profitable. Respondent claimed that he could attest to success of their business
because of the volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas
Shell Petroleum Corporation. While Jacinto furnished respondent with the merchandise inventories,
balance sheets and net worth of Shellite from 1977 to 1989, respondent however suspected that the
amount indicated in these documents were understated and undervalued by Jacinto and Josephine
for their own selfish reasons and for tax avoidance.

Upon Jacinto's death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his
daughter, petitioner Lilibeth, took over the operations, control, custody, disposition and management
of Shellite without respondent's consent. Despite respondent's repeated demands upon petitioners
for accounting, inventory, appraisal, winding up and restitution of his net shares in the partnership,
petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of Shellite,
converting to her own use and advantage its properties.

On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out the alibis and reasons to
evade respondent's demands, she disbursed out of the partnership funds the amount of
P200,000.00 and partially paid the same to respondent. Petitioner Lilibeth allegedly informed
respondent that the P200,000.00 represented partial payment of the latter's share in the partnership,
with a promise that the former would make the complete inventory and winding up of the properties
of the business establishment. Despite such commitment, petitioners allegedly failed to comply with
their duty to account, and continued to benefit from the assets and income of Shellite to the damage
and prejudice of respondent.

On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and
Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte had
jurisdiction over the action. Respondent opposed the motion to dismiss.

On January 12, 1993, the trial court finding the complaint sufficient in from and substance denied the
motion to dismiss.

On January 30, 1993, petitioners filed their Answer with Compulsory Counter-claims, contending that
they are not liable for partnership shares, unreceived income/profits, interests, damages and
attorney's fees, that respondent does not have a cause of action against them, and that the trial
court has no jurisdiction over the nature of the action, the SEC being the agency that has original
and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorney's fees and
expenses of litigation.

On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim
for winding up of partnership affairs, accounting and recovery of shares in partnership affairs,
accounting and recovery of shares in partnership assets/properties should be dismissed and
prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.

On August 16, 1993, the trial denied the second motion to dismiss for lack of merit.

On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus with
the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion to
dismiss.

On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial
Conference.

On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.

On November 15, 1994, the Court of Appeals denied the petition for lack of merit.

On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, "as
petitioners failed to show that a reversible error was committed by the appellate court."2

On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
remanded to the trial court on April 26, 1995.

On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the
case of January 17, 1996. Respondent presented his evidence while petitioners were considered to
have waived their right to present evidence for their failure to attend the scheduled date for reception
of evidence despite notice.

On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive of the
Decision reads:
 "WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:

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

procedures and standards of the properties, assets, income and profits of the Shellite
Gas Appliance Center Since the time of death of Jacinto L. Sunga, from whom they
continued the business operations including all businesses derived from Shellite Gas
Appliance Center, submit an inventory, and appraisal of all these properties, assets,
income, profits etc. to the Court and to plaintiff for approval or disapproval;

(2) ORDERING them to return and restitute to the partnership any and all properties,
assets, income and profits they misapplied and converted to their own use and
advantage the legally pertain to the plaintiff and account for the properties mentioned
in pars. A and B on pages 4-5 of this petition as basis;

(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will (sic) in
schedules A, B and C, on pages 4-5 of the petition;

(4) ORDERING them to pay the plaintiff earned but unreceived income and profits
from the partnership from 1988 to May 30, 1992, when the plaintiff learned of the
closure of the store the sum of P35,000.00 per month, with legal rate of interest until
fully paid;

(5) ORDERING them to wind up the affairs of the partnership and terminate its
business activities pursuant to law, after delivering to the plaintiff all the interest,
shares, participation and equity in the partnership, or the value thereof in money or
money's worth, if the properties are not physically divisible;

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad
faith and hold them liable to the plaintiff the sum of P50,000.00 as moral and
exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic)
and P25,000.00 as litigation expenses.

NO special pronouncements as to COSTS.

SO ORDERED."3

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to
the Court of Appeals.

On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the
Decision reads:

"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all
respects."4

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.
Hence, this petition wherein petitioner relies upon following grounds:

"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latter''
invitation and offer and that upon his death the partnership assets and business were taken
over by petitioners.

2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription
did not apply in the instant case.

3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assuming arguendo that
indeed there was a partnership, the finding of highly exaggerated amounts or values in the
partnership assets and profits."5

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

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

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

Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person
(Jacinto), now represented by petitioners.

We are not persuaded.

A partnership may be constituted in any form, except where immovable property of real rights are
contributed thereto, in which case a public instrument shall necessary.6 Hence, based on the
intention of the parties, as gathered from the facts and ascertained from their language and conduct,
a verbal contract of partnership may arise.7 The essential profits that must be proven to that a
partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest
in the profits.8 Understandably so, in view of the absence of the written contract of partnership
between respondent and Jacinto, respondent resorted to the introduction of documentary and
testimonial evidence to prove said partnership. The crucial issue to settle then is to whether or not
the "Dead Man's Statute" applies to this case so as to render inadmissible respondent's testimony
and that of his witness, Josephine.

The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the
undue advantage of giving his own uncontradicted and unexplained account of the transaction.9 But
before this rule can be successfully invoked to bar the introduction of testimonial evidence, it is
necessary that:
 "1. The witness is a party or assignor of a party to case or persons in whose behalf a case in
prosecuted.

2. The action is against an executor or administrator or other representative of a deceased

person or a person of unsound mind;

3. The subject-matter of the action is a claim or demand against the estate of such deceased
person or against person of unsound mind;

4. His testimony refers to any matter of fact of which occurred before the death of such
deceased person or before such person became of unsound mind."10

Two reasons forestall the application of the "Dead Man's Statute" to this case.

First, petitioners filed a compulsory counterclaim11 against respondents in their answer before the trial
court, and with the filing of their counterclaim, petitioners themselves effectively removed this case
from the ambit of the "Dead Man's Statute".12 Well entrenched is the rule that when it is the executor
or administrator or representatives of the estates that sets up the counterclaim, the plaintiff, herein
respondent, may testify to occurrences before the death of the deceased to defeat the
counterclaim.13 Moreover, as defendant in the counterclaim, respondent is not disqualified from
testifying as to matters of facts occurring before the death of the deceased, said action not having
been brought against but by the estate or representatives of the deceased.14

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

We are not convinced by petitioners' allegation that Josephine's testimony lacks probative value
because she was allegedly coerced coerced by respondent, her brother-in-law, to testify in his favor,
Josephine merely declared in court that she was requested by respondent to testify and that if she
were not requested to do so she would not have testified. We fail to see how we can conclude from
this candid admission that Josephine's testimony is involuntary when she did not in any way
categorically say that she was forced to be a witness of respondent.

Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her
testimony since relationship per se, without more, does not affect the credibility of witnesses.16

Petitioners' reliance alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail
over the factual findings of the trial court and the Court of Appeals that a partnership was established
between respondent and Jacinto. Based not only on the testimonial evidence, but the documentary
evidence as well, the trial court and the Court of Appeals considered the evidence for respondent as
sufficient to prove the formation of partnership, albeit an informal one.

Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial
precedents, a factual matter like the finding of the existence of a partnership between respondent
and Jacinto cannot be inquired into by this Court on review.17 This Court can no longer be tasked to
go over the proofs presented by the parties and analyze, assess and weigh them to ascertain if the
trial court and the appellate court were correct in according superior credit to this or that piece of
evidence of one party or the other.18 It must be also pointed out that petitioners failed to attend the
presentation of evidence of respondent. Petitioners cannot now turn to this Court to question the
admissibility and authenticity of the documentary evidence of respondent when petitioners failed to
object to the admissibility of the evidence at the time that such evidence was offered.19

With regard to petitioners' insistence that laches and/or prescription should have extinguished
respondent's claim, we agree with the trial court and the Court of Appeals that the action for
accounting filed by respondents three (3) years after Jacinto's death was well within the prescribed
period. The Civil Code provides that an action to enforce an oral contract prescribes in six (6)
years20 while the right to demand an accounting for a partner's interest as against the person
continuing the business accrues at the date of dissolution, in the absence of any contrary
agreement.21 Considering that the death of a partner results in the dissolution of the partnership22 , in
this case, it was Jacinto's death that respondent as the surviving partner had the right to an account
of his interest as against petitioners. It bears stressing that while Jacinto's death dissolved the
partnership, the dissolution did not immediately terminate the partnership. The Civil Code23 expressly
provides that upon dissolution, the partnership continues and its legal personality is retained until the
complete winding up of its business, culminating in its termination.24

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and
Jacinto, petitioners maintain that said partnership that had initial capital of P200,000.00 should have
been registered with the Securities and Exchange Commission (SEC) since registration is mandated
by the Civil Code, True, Article 1772 of the Civil Code requires that partnerships with a capital of
P3,000.00 or more must register with the SEC, however, this registration requirement is not
mandatory. Article 1768 of the Civil Code25 explicitly provides that the partnership retains its juridical
personality even if it fails to register. The failure to register the contract of partnership does not
invalidate the same as among the partners, so long as the contract has the essential requisites,
because the main purpose of registration is to give notice to third parties, and it can be assumed that
the members themselves knew of the contents of their contract.26 In the case at bar, non-compliance
with this directory provision of the law will not invalidate the partnership considering that the totality
of the evidence proves that respondent and Jacinto indeed forged the partnership in question.

WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
AFFIRMED.

SO ORDERED. 1w phi 1.nt

Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concur.

G.R. No. 144214 July 14, 2003

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, petitioners,

vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C.
RAMIREZ,respondents.

PANGANIBAN, J.:

A share in a partnership can be returned only after the completion of the latter's dissolution,
liquidation and winding up of the business.

The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision1 and the
July 26, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The assailed
Decision disposed as follows:

"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered
by the Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED
and in lieu thereof a new decision is rendered ordering the [petitioners] jointly and severally
to pay and reimburse to [respondents] the amount of P253,114.00. No pronouncement as to
costs."4

Reconsideration was denied in the impugned Resolution.

The Facts

On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with
a capital of P750,000 for the operation of a restaurant and catering business under the name
"Aquarius Food House and Catering Services."5 Villareal was appointed general manager and
Carmelito Jose, operations manager.

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984.
His capital contribution of P250,000 was paid by his parents, Respondents Cesar and Carmelita
Ramirez.6

After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of P250,000
was refunded to him in cash by agreement of the partners.7

In the same month, without prior knowledge of respondents, petitioners closed down the restaurant,
allegedly because of increased rental. The restaurant furniture and equipment were deposited in the
respondents' house for storage.8

On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer interested
in continuing their partnership or in reopening the restaurant, and that they were accepting the
latter's offer to return their capital contribution.9

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also reiterated the
request for the return of their one-third share in the equity of the partnership. The repeated oral and
written requests were, however, left unheeded.10

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a
Complaint11 dated November 10, 1987, for the collection of a sum of money from petitioners.

In their Answer, petitioners contended that respondents had expressed a desire to withdraw from the
partnership and had called for its dissolution under Articles 1830 and 1831 of the Civil Code; that
respondents had been paid, upon the turnover to them of furniture and equipment worth over
P400,000; and that the latter had no right to demand a return of their equity because their share,
together with the rest of the capital of the partnership, had been spent as a result of irreversible
business losses.12

In their Reply, respondents alleged that they did not know of any loan encumbrance on the
restaurant. According to them, if such allegation were true, then the loans incurred by petitioners
should be regarded as purely personal and, as such, not chargeable to the partnership. The former
further averred that they had not received any regular report or accounting from the latter, who had
solely managed the business. Respondents also alleged that they expected the equipment and the
furniture stored in their house to be removed by petitioners as soon as the latter found a better
location for the restaurant.13

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant Furniture
and Equipment14 on July 8, 1988. The furniture and the equipment stored in their house were
inventoried and appraised at P29,000.15 The display freezer was sold for P5,000 and the proceeds
were paid to them.16

After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which could
be dissolved at any time. Petitioners clearly intended to dissolve it when they stopped operating the
restaurant. Hence, the trial court, in its July 21, 1992 Decision, held there liable as follows:18

"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the

[petitioners] ordering the [petitioners] to pay jointly and severally the following:

(a) Actual damages in the amount of P250,000.00

(b) Attorney's fee in the amount of P30,000.00

(c) Costs of suit."

The CA Ruling

The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in continuing
the restaurant business with them. Because petitioners never gave a proper accounting of the
partnership accounts for liquidation purposes, and because no sufficient evidence was presented to
show financial losses, the CA. computed their liability as follows:

"Consequently, since what has been proven is only the outstanding obligation of the
partnership in the amount of P240,658.00, although contracted by the partnership before
[respondents'] have joined the partnership but in accordance with Article 1826 of the New
Civil Code, they are liable which must have to be deducted from the remaining capitalization
of the said partnership which is in the amount of P1,000,000.00 resulting in the amount of
P759,342.00, and in order to get the share of [respondents], this amount of P759,342.00
must be divided into three (3) shares or in the amount of P253,114.00 for each share and
which is the only amount which [petitioner] will return to [respondents'] representing the
contribution to the partnership minus the outstanding debt thereof."19

Hence, this Petition.20

Issues

In their Memorandum,21 petitioners submit the following issues for our consideration:

"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of the
capital contribution, instead of the net capital after the dissolution and liquidation of a
 partnership, thereby treating the capital contribution like a loan, is in accordance with law and
jurisprudence;

"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to jointly and
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on
record; and

"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as
to costs."22

On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for the
latter's share in the partnership; (2) whether the CA's computation of P253,114 as respondents'
share is correct; and (3) whether the CA was likewise correct in not assessing costs.

This Court's Ruling

The Petition has merit.

First Issue:
Share in Partnership

Both the trial and the appellate courts found that a partnership had indeed existed, and that it was
dissolved on March 1, 1987. They found that the dissolution took place when respondents informed
petitioners of the intention to discontinue it because of the former's dissatisfaction with, and loss of
trust in, the latter's management of the partnership affairs. These findings were amply supported by
the evidence on record. Respondents consequently demanded from petitioners the return of their
one-third equity in the partnership.

We hold that respondents have no right to demand from petitioners the return of their equity share.
Except as managers of the partnership, petitioners did not personally hold its equity or assets. "The
partnership has a juridical personality separate and distinct from that of each of the partners."23 Since
the capital was contributed to the partnership, not to petitioners, it is the partnership that must refund
the equity of the retiring partners.24

Second Issue:
What Must Be Returned?

Since it is the partnership, as a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its total resources. In other words, it can
only pay out what it has in its coffers, which consists of all its assets. However, before the partners
can be paid their shares, the creditors of the partnership must first be compensated.25 After all the
creditors have been paid, whatever is left of the partnership assets becomes available for the
payment of the partners' shares.

Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third share
in the partnership cannot be determined until all the partnership assets will have been liquidated
in other words, sold and converted to cash and all partnership creditors, if any, paid. The CA's
computation of the amount to be refunded to respondents as their share was thus erroneous.

First, it seems that the appellate court was under the misapprehension that the total capital
contribution was equivalent to the gross assets to be distributed to the partners at the time of the
dissolution of the partnership. We cannot sustain the underlying idea that the capital contribution at
the beginning of the partnership remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally without factual or legal support.

Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or
decreased by losses sustained. It does not remain static and unaffected by the changing fortunes of
the business. In the present case, the financial statements presented before the trial court showed
that the business had made meager profits.26However, notable therefrom is the omission of any
provision for the depreciation27 of the furniture and the equipment. The amortization of the
goodwill28 (initially valued at P500,000) is not reflected either. Properly taking these non-cash items
into account will show that the partnership was actually sustaining substantial losses, which
consequently decreased the capital of the partnership. Both the trial and the appellate courts in fact
recognized the decrease of the partnership assets to almost nil, but the latter failed to recognize the
consequent corresponding decrease of the capital.

Second, the CA's finding that the partnership had an outstanding obligation in the amount of
P240,658 was not supported by evidence. We sustain the contrary finding of the RTC, which had
rejected the contention that the obligation belonged to the partnership for the following reason:

"x x x [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh. '4') does not reveal the total loan. The Agreement (Exh.
'A') par. 6 shows an outstanding obligation of P240,055.00 which the partnership owes to
different creditors, while the Certification issued by Mercator Finance (Exh. '8') shows that it
was Sps. Diogenes P. Villareal and Luzviminda J. Villareal, the former being the nominal
party defendant in the instant case, who obtained a loan of P355,000.00 on Oct. 1983, when
the original partnership was not yet formed."

Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the
partnership to Jesus Jose when he withdrew from the partnership.

Because of the above-mentioned transactions, the partnership capital was actually reduced. When
petitioners and respondents ventured into business together, they should have prepared for the fact
that their investment would either grow or shrink. In the present case, the investment of respondents
substantially dwindled. The original amount of P250,000 which they had invested could no longer be
returned to them, because one third of the partnership properties at the time of dissolution did not
amount to that much.

It is a long established doctrine that the law does not relieve parties from the effects of unwise,
foolish or disastrous contracts they have entered into with all the required formalities and with full
awareness of what they were doing. Courts have no power to relieve them from obligations they
have voluntarily assumed, simply because their contracts turn out to be disastrous deals or unwise
investments.29

Petitioners further argue that respondents acted negligently by permitting the partnership assets in
their custody to deteriorate to the point of being almost worthless. Supposedly, the latter should have
liquidated these sole tangible assets of the partnership and considered the proceeds as payment of
their net capital. Hence, petitioners argue that the turnover of the remaining partnership assets to
respondents was precisely the manner of liquidating the partnership and fully settling the latter's
share in the partnership.

We disagree. The delivery of the store furniture and equipment to private respondents was for the
purpose of storage. They were unaware that the restaurant would no longer be reopened by
petitioners. Hence, the former cannot be faulted for not disposing of the stored items to recover their
capital investment.

Third Issue:
Costs

Section 1, Rule 142, provides:

"SECTION 1. Costs ordinarily follow results of suit. Unless otherwise provided in these
rules, costs shall be allowed to the prevailing party as a matter of course, but the court shall
have power, for special reasons, to adjudge that either party shall pay the costs of an action,
or that the same be divided, as may be equitable. No costs shall be allowed against the
Republic of the Philippines unless otherwise provided by law."

Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for special
reasons," to decree otherwise. When a lower court is reversed, the higher court normally does not
award costs, because the losing party relied on the lower court's judgment which is presumed to
have been issued in good faith, even if found later on to be erroneous. Unless shown to be patently
capricious, the award shall not be disturbed by a reviewing tribunal.

WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE.
This disposition is without prejudice to proper proceedings for the accounting, the liquidation and the
distribution of the remaining partnership assets, if any. No pronouncement as to costs.

SO ORDERED.

Puno, Corona and Carpio-Morales, JJ ., concur.

Sandoval-Gutierrez, J ., on official leave.

G.R. No. 127405 October 4, 2000

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

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

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No.
41616,1 affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No.
88-509.2

Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent
Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra Clean
Water Purifier, through her former employer in Bangkok. Belo introduced Anay to petitioner Marjorie
Tocao, who conveyed her desire to enter into a joint venture with her for the importation and local
distribution of kitchen cookwares. Belo volunteered to finance the joint venture and assigned to Anay
the job of marketing the product considering her experience and established relationship with West
Bend Company, a manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture, Belo
acted as capitalist, Tocao as president and general manager, and Anay as head of the marketing
department and later, vice-president for sales. Anay organized the administrative staff and sales
force while Tocao hired and fired employees, determined commissions and/or salaries of the
employees, and assigned them to different branches. The parties agreed that Belos name should
not appear in any documents relating to their transactions with West Bend Company. Instead, they
agreed to use Anays name in securing distributorship of cookware from that company. The parties
agreed further that Anay would be entitled to: (1) ten percent (10%) of the annual net profits of the
business; (2) overriding commission of six percent (6%) of the overall weekly production; (3) thirty
percent (30%) of the sales she would make; and (4) two percent (2%) for her demonstration
services. The agreement was not reduced to writing on the strength of Belos assurances that he
was sincere, dependable and honest when it came to financial commitments.

Anay having secured the distributorship of cookware products from the West Bend Company and
organized the administrative staff and the sales force, the cookware business took off successfully.
They operated under the name of Geminesse Enterprise, a sole proprietorship registered in Marjorie
Tocaos name, with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made good his
monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend Company invited
Anay to the distributor/dealer meeting in West Bend, Wisconsin, U.S.A., from July 19 to 21, 1987
and to the southwestern regional convention in Pismo Beach, California, U.S.A., from July 25-26,
1987. Anay accepted the invitation with the consent of Marjorie Tocao who, as president and general
manager of Geminesse Enterprise, even wrote a letter to the Visa Section of the U.S. Embassy in
Manila on July 13, 1987. A portion of the letter reads:

"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty (20)
years now, acquired the distributorship of Royal Queen cookware for Geminesse Enterprise, is the
Vice President Sales Marketing and a business partner of our company, will attend in response to
the invitation." (Italics supplied.)3

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving the
business on account of the unsatisfactory sales record in the Makati and Cubao offices. On August
31, 1987, she received a plaque of appreciation from the administrative and sales people through
Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the presence of Anay,
Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for her personal sales
"up Dec 31/87." Belo explained to her that said commission was apart from her ten percent (10%)
share in the profits. On October 9, 1987, Anay learned that Marjorie Tocao had signed a
letter6 addressed to the Cubao sales office to the effect that she was no longer the vice-president of
Geminesse Enterprise. The following day, October 10, she received a note from Lina T. Cruz,
marketing manager, that Marjorie Tocao had barred her from holding office and conducting
demonstrations in both Makati and Cubao offices.7 Anay attempted to contact Belo. She wrote him
twice to demand her overriding commission for the period of January 8, 1988 to February 5, 1988
and the audit of the company to determine her share in the net profits. When her letters were not
answered, Anay consulted her lawyer, who, in turn, wrote Belo a letter. Still, that letter was not
answered.

Anay still received her five percent (5%) overriding commission up to December 1987. The following
year, 1988, she did not receive the same commission although the company netted a gross sales of
P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with
damages8 against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati,
Branch 140.
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5, 1988;
(2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The plaintiff also
prayed for an audit of the finances of Geminesse Enterprise from the inception of its business
operation until she was "illegally dismissed" to determine her ten percent (10%) share in the net
profits. She further prayed that she be paid the five percent (5%) "overriding commission" on the
remaining 150 West Bend cookware sets before her "dismissal."

In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that was
"neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As far as
Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could not have
been a partnership because, as Anay herself admitted, Geminesse Enterprise was the sole
proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her
compensation or dismissal, such complaint should have been lodged with the Department of Labor
and not with the regular court.

Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "ill-will
and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse
Enterprise." Anay had acted like she owned the enterprise because of her experience and expertise.
Hence, petitioners were the ones who suffered actual damages "including unreturned and
unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation in the
business world, and various damages not less than P500,000.00." They also alleged that, to
"vindicate their names," they had to hire counsel for a fee of P23,000.00.

At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled to
damages.10

In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
business. He, however, admitted that the two had agreed that Anay would receive a three to four
percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to the
business or receiving a share in its profits as he merely served as a guarantor of Marjorie Tocao,
who was new in the business. He attended and/or presided over business meetings of the venture in
his capacity as a guarantor but he never participated in decision-making. He claimed that he wrote
the memo granting the plaintiff thirty-seven percent (37%) commission upon her dismissal from the
business venture at the request of Tocao, because Anay had no other income.

For her part, Marjorie Tocao denied having entered into an oral partnership agreement with Anay.
However, she admitted that Anay was an expert in the cookware business and hence, they agreed
to grant her the following commissions: thirty-seven percent (37%) on personal sales; five percent
(5%) on gross sales; two percent (2%) on product demonstrations, and two percent (2%) for
recruitment of personnel. Marjorie denied that they agreed on a ten percent (10%) commission on
the net profits. Marjorie claimed that she got the capital for the business out of the sale of the sewing
machines used in her garments business and from Peter Lo, a Singaporean friend-financier who
loaned her the funds with interest. Because she treated Anay as her "co-equal," Marjorie received
the same amounts of commissions as her. However, Anay failed to account for stocks valued at
P200,000.00.

On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:

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

1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for the
years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten percent
(10%) share of plaintiff in the net profits of the cookware business;

2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and fifty
(150) cookware sets available for disposition when plaintiff was wrongfully excluded from the
partnership by defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total production which for the
period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;

4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary

damages, and

5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as costs of suit.

SO ORDERED."

The trial court held that there was indeed an "oral partnership agreement between the plaintiff and
the defendants," based on the following: (a) there was an intention to create a partnership; (b) a
common fund was established through contributions consisting of money and industry, and (c) there
was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anays cousin and the
administrative officer of Geminesse Enterprise from August 21, 1986 until it was absorbed by Royal
International, Inc., buttressed the fact that a partnership existed between the parties. The letter of
Roger Muencheberg of West Bend Company stating that he awarded the distributorship to Anay and
Marjorie Tocao because he was convinced that with Marjories financial contribution and Anays
experience, the combination of the two would be invaluable to the partnership, also supported that
conclusion. Belos claim that he was merely a "guarantor" has no basis since there was no written
evidence thereof as required by Article 2055 of the Civil Code. Moreover, his acts of attending and/or
presiding over meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37%
commission on personal sales belied this. On the contrary, it demonstrated his involvement as a
partner in the business.

The trial court further held that the payment of commissions did not preclude the existence of the
partnership inasmuch as such practice is often resorted to in business circles as an impetus to
bigger sales volume. It did not matter that the agreement was not in writing because Article 1771 of
the Civil Code provides that a partnership may be "constituted in any form." The fact that Geminesse
Enterprise was registered in Marjorie Tocaos name is not determinative of whether or not the
business was managed and operated by a sole proprietor or a partnership. What was registered with
the Bureau of Domestic Trade was merely the business name or style of Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a partnership is an innocent
partner. Hence, the guilty partner must give him his due upon the dissolution of the partnership as
well as damages or share in the profits "realized from the appropriation of the partnership business
and goodwill." An innocent partner thus possesses "pecuniary interest in every existing contract that
was incomplete and in the trade name of the co-partnership and assets at the time he was
wrongfully expelled."

Petitioners appeal to the Court of Appeals11 was dismissed, but the amount of damages awarded by
the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as exemplary
damages. Their Motion for Reconsideration was denied by the Court of Appeals for lack of
merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for review
on certiorari, asserting that there was no business partnership between them and herein private
respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her by the
Court of Appeals.

Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a partnership
existed between them and private respondent Anay because Geminesse Enterprise "came into
being" exactly a year before the "alleged partnership" was formed, and that it was very unlikely that
petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing,
without any "memorandum whatsoever regarding the alleged partnership."13

The issue of whether or not a partnership exists is a factual matter which are within the exclusive
domain of both the trial and appellate courts. This Court cannot set aside factual findings of such
courts absent any showing that there is no evidence to support the conclusion drawn by the court a
quo.14 In this case, both the trial court and the Court of Appeals are one in ruling that petitioners and
private respondent established a business partnership. This Court finds no reason to rule otherwise.

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more
persons bind themselves to contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among themselves.15 It may be constituted in
any form; a public instrument is necessary only where immovable property or real rights are
contributed thereto.16 This implies that since a contract of partnership is consensual, an oral contract
of partnership is as good as a written one. Where no immovable property or real rights are involved,
what matters is that the parties have complied with the requisites of a partnership. The fact that there
appears to be no record in the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the Civil Code17 did not cause the
nullification of the partnership. The pertinent provision of the Civil Code on the matter states:

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the
partners, even in case of failure to comply with the requirements of article 1772, first paragraph.

Petitioners admit that private respondent had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such expertise to the partnership and
hence, under the law, she was the industrial or managing partner. It was through her reputation with
the West Bend Company that the partnership was able to open the business of distributorship of that
companys cookware products; it was through the same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private respondents indispensable role in
putting up the business when, upon being asked if private respondent held the positions of
marketing manager and vice-president for sales, she testified thus:

"A: No, sir at the start she was the marketing manager because there were no one to sell yet, its
only me there then her and then two (2) people, so about four (4). Now, after that when she recruited
already Oscar Abella and Lina Torda-Cruz these two (2) people were given the designation of
marketing managers of which definitely Nita as superior to them would be the Vice President."18

By the set-up of the business, third persons were made to believe that a partnership had indeed
been forged between petitioners and private respondents. Thus, the communication dated June 4,
1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company states:

"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations. Marge
does not have cookware experience. Nita Anay has started to gather former managers, Lina Torda
and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa Lamela,
Menchu Javier. They will continue to gather other key people and build up the organization. All they
need is the finance and the products to sell."19

On the other hand, petitioner Belos denial that he financed the partnership rings hollow in the face
of the established fact that he presided over meetings regarding matters affecting the operation of
the business. Moreover, his having authorized in writing on October 7, 1987, on a stationery of his
own business firm, Wilcon Builders Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a
proprietary interest in the business. His claim that he was merely a guarantor is belied by that
personal act of proprietorship in the business. Moreover, if he was indeed a guarantor of future debts
of petitioner Tocao under Article 2053 of the Civil Code,20 he should have presented documentary
evidence therefor. While Article 2055 of the Civil Code simply provides that guaranty must be
"express," Article 1403, the Statute of Frauds, requires that "a special promise to answer for the
debt, default or miscarriage of another" be in writing.21

Petitioner Tocao, a former ramp model,22 was also a capitalist in the partnership. She claimed that
she herself financed the business. Her and petitioner Belos roles as both capitalists to the
partnership with private respondent are buttressed by petitioner Tocaos admissions that petitioner
Belo was her boyfriend and that the partnership was not their only business venture together. They
also established a firm that they called "Wiji," the combination of petitioner Belos first name, William,
and her nickname, Jiji.23 The special relationship between them dovetails with petitioner Belos claim
that he was acting in behalf of petitioner Tocao. Significantly, in the early stage of the business
operation, petitioners requested West Bend Company to allow them to "utilize their banking and
trading facilities in Singapore" in the matter of importation and payment of the cookware
products.24 The inevitable conclusion, therefore, was that petitioners merged their respective capital
and infused the amount into the partnership of distributing cookware with private respondent as the
managing partner.

The business venture operated under Geminesse Enterprise did not result in an employer-employee
relationship between petitioners and private respondent. While it is true that the receipt of a
percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the
business,25 the evidence in the case at bar controverts an employer-employee relationship between
the parties. In the first place, private respondent had a voice in the management of the affairs of the
cookware distributorship,26 including selection of people who would constitute the administrative staff
and the sales force. Secondly, petitioner Tocaos admissions militate against an employer-employee
relationship. She admitted that, like her who owned Geminesse Enterprise,27 private respondent
received only commissions and transportation and representation allowances28 and not a fixed
salary.29 Petitioner Tocao testified:

"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. X and Y.
Please go over this. Exh. Y is denominated `Cubao overrides 8-21-87 with ending August 21,
1987, will you please go over this and tell the Honorable Court whether you ever came across this
document and know of your own knowledge the amount ---

A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.

Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I quote:
Overrides Marjorie Ann Tocao P21,410.50 this means that you have received this amount?

A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing commission,
representation, advertising and promotion?

A: Yes, sir.

Q: I see. Below your name is the words and figure and I quote Nita D. Anay P21,410.50, what is
this?

A: Thats her overriding commission.

Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there being the
same P21,410.50 is merely by coincidence?

A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a
sense because of her expertise in the business she is vital to my business. So, as part of the
incentive I offer her the same thing.

Q: So, in short you are saying that this you have shared together, I mean having gotten from the
company P21,140.50 is your way of indicating that you were treating her as an equal?

A: As an equal.

Q: As an equal, I see. You were treating her as an equal?

A: Yes, sir.

Q: I am calling again your attention to Exh. Y Overrides Makati the other one is ---

A: That is the same thing, sir.

Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao P15,314.25 the amount
there you will acknowledge you have received that?

A: Yes, sir.

Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.

Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that she
received the same amount?

A: Yes, sir.

Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?

A: No, sir.

Q: It is again in concept of you treating Miss Anay as your equal?

A: Yes, sir." (Italics supplied.)30

If indeed petitioner Tocao was private respondents employer, it is difficult to believe that they shall
receive the same income in the business. In a partnership, each partner must share in the profits
and losses of the venture, except that the industrial partner shall not be liable for the losses.31 As an
industrial partner, private respondent had the right to demand for a formal accounting of the
business and to receive her share in the net profit.32

The fact that the cookware distributorship was operated under the name of Geminesse Enterprise, a
sole proprietorship, is of no moment. What was registered with the Bureau of Domestic Trade on
August 19, 1987 was merely the name of that enterprise.33 While it is true that in her undated
application for renewal of registration of that firm name, petitioner Tocao indicated that it would be
engaged in retail of "kitchenwares, cookwares, utensils, skillet,"34 she also admitted that the
enterprise was only "60% to 70% for the cookware business," while 20% to 30% of its business
activity was devoted to the sale of water sterilizer or purifier.35 Indubitably then, the business name
Geminesse Enterprise was used only for practical reasons - it was utilized as the common name for
petitioner Tocaos various business activities, which included the distributorship of cookware.

Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00."36 Obviously a ploy to offset
the damages awarded to private respondent, that claim, more than anything else, proves the
existence of a partnership between them. In Idos v. Court of Appeals, this Court said:

"The best evidence of the existence of the partnership, which was not yet terminated (though in the
winding up stage), were the unsold goods and uncollected receivables, which were presented to the
trial court. Since the partnership has not been terminated, the petitioner and private complainant
remained as co-partners. x x x."37

It is not surprising then that, even after private respondent had been unceremoniously booted out of
the partnership in October 1987, she still received her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to reap
for herself and/or for petitioner Belo financial gains resulting from private respondents efforts to
make the business venture a success. Thus, as petitioner Tocao became adept in the business
operation, she started to assert herself to the extent that she would even shout at private respondent
in front of other people.38 Her instruction to Lina Torda Cruz, marketing manager, not to allow private
respondent to hold office in both the Makati and Cubao sales offices concretely spoke of her
perception that private respondent was no longer necessary in the business operation,39 and resulted
in a falling out between the two. However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization.40 The partnership exists until dissolved
under the law. Since the partnership created by petitioners and private respondent has no fixed term
and is therefore a partnership at will predicated on their mutual desire and consent, it may be
dissolved by the will of a partner. Thus:

"x x x. The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partners capability to give it, and the absence of cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
liability for damages."41
An unjustified dissolution by a partner can subject him to action for damages because by the mutual
agency that arises in a partnership, the doctrine of delectus personae allows the partners to have
the power, although not necessarily the right to dissolve the partnership.42

In this case, petitioner Tocaos unilateral exclusion of private respondent from the partnership is
shown by her memo to the Cubao office plainly stating that private respondent was, as of October 9,
1987, no longer the vice-president for sales of Geminesse Enterprise.43 By that memo, petitioner
Tocao effected her own withdrawal from the partnership and considered herself as having ceased to
be associated with the partnership in the carrying on of the business. Nevertheless, the partnership
was not terminated thereby; it continues until the winding up of the business.44

The winding up of partnership affairs has not yet been undertaken by the partnership. This is
1wphi1

manifest in petitioners claim for stocks that had been entrusted to private respondent in the pursuit
of the partnership business.

The determination of the amount of damages commensurate with the factual findings upon which it
is based is primarily the task of the trial court.45 The Court of Appeals may modify that amount only
when its factual findings are diametrically opposed to that of the lower court,46 or the award is
palpably or scandalously and unreasonably excessive.47 However, exemplary damages that are
awarded "by way of example or correction for the public good,"48should be reduced to P50,000.00,
the amount correctly awarded by the Court of Appeals. Concomitantly, the award of moral damages
of P100,000.00 was excessive and should be likewise reduced to P50,000.00. Similarly, attorneys
fees that should be granted on account of the award of exemplary damages and petitioners evident
bad faith in refusing to satisfy private respondents plainly valid, just and demandable
claims,49 appear to have been excessively granted by the trial court and should therefore be reduced
to P25,000.00.

WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the
winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil Code.
This case is remanded to the Regional Trial Court for proper proceedings relative to said dissolution.
The appealed decisions of the Regional Trial Court and the Court of Appeals are AFFIRMED with
MODIFICATIONS, as follows ---

1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the
partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in
order to determine private respondents ten percent (10%) share in the net profits of the
partnership;

2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
overriding commission for the one hundred and fifty (150) cookware sets available for
disposition since the time private respondent was wrongfully excluded from the partnership
by petitioners;

3. Petitioners are ordered, jointly and severally, to pay private respondent overriding
commission on the total production which, for the period covering January 8, 1988 to
February 5, 1988, amounted to P32,000.00;

4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in
the amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorneys
fees in the amount of P25,000.00.
SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

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?

A - Peter Lo is based in Singapore.

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

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

Q - You mean Peter Lo is the financier?

 A - 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.

G.R. No. 127347 November 25, 1999

ALFREDO N. AGUILA, JR., petitioner,
vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated November
29, 1990, which reversed the decision of the Regional Trial Court, Branch 273, Marikina, Metro
Manila, dated April 11, 1995. The trial court dismissed the petition for declaration of nullity of a deed
of sale filed by private respondent Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila,
Jr.

The facts are as follows:

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities.
Private respondent and her late husband, Ruben M. Abrogar, were the registered owners of a house
and lot, covered by Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On April 18,
1991, private respondent, with the consent of her late husband, and A.C. Aguila & Sons, Co.,
represented by petitioner, entered into a Memorandum of Agreement, which provided:

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-
described property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and
pursuant to this agreement, a Deed of Absolute Sale shall be executed by the FIRST
PARTY conveying the property to the SECOND PARTY for and in consideration of
the sum of Two Hundred Thousand Pesos (P200,000.00), Philippine Currency;

(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to
repurchase the said property within a period of ninety (90) days from the execution of
this memorandum of agreement effective April 18, 1991, for the amount of TWO
HUNDRED THIRTY THOUSAND PESOS (P230,000.00);

(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the
said property within a period of ninety (90) days, the FIRST PARTY is obliged to
deliver peacefully the possession of the property to the SECOND PARTY within
fifteen (15) days after the expiration of the said 90 day grace period;

(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis
pendens or whatever claims on the property nor shall be cause the annotation of say
claim at the back of the title to the said property;

(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her
ownership of the property and shall defend the rights of the SECOND PARTY
against any party whom may have any interests over the property;

(6) All expenses for documentation and other incidental expenses shall be for the
account of the FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to
the SECOND PARTY after the expiration of the 15-day grace period given in
 paragraph 3 above, the FIRST PARTY shall pay an amount equivalent to Five
Percent of the principal amount of TWO HUNDRED PESOS (P200.00) or
P10,000.00 per month of delay as and for rentals and liquidated damages;

(8) Should the FIRST PARTY fail to exercise her option to repurchase the property
within ninety (90) days period above-mentioned, this memorandum of agreement
shall be deemed cancelled and the Deed of Absolute Sale, executed by the parties
shall be the final contract considered as entered between the parties and the
SECOND PARTY shall proceed to transfer ownership of the property above
described to its name free from lines and encumbrances. 2

On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale, 3 dated June
11, 1991, wherein private respondent, with the consent of her late husband, sold the subject
property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000,00. In a special power
of attorney dated the same day, April 18, 1991, private respondent authorized petitioner to cause the
cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C.
Aguila and Sons, Co., in the event she failed to redeem the subject property as provided in the
Memorandum of Agreement. 4

Private respondent failed to redeem the property within the 90-day period as provided in the
Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned above,
petitioner caused the cancellation of TCT No. 195101 and the issuance of a new certificate of title in
the name of A.C. Aguila and Sons, Co. 5

Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil,
counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15 days after
receipt of the letter and surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise,
the latter would bring the appropriate action in court. 6

Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co. filed
an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro Manila. In
a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co.
on the ground that private respondent did not redeem the subject property before the expiration of
the 90-day period provided in the Memorandum of Agreement. Private respondent appealed first to
the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to the Court of Appeals, and later to
this Court, but she lost in all the cases.

Private respondent then filed a petition for declaration of nullity of a deed of sale with the Regional
Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that the
signature of her husband on the deed of sale was a forgery because he was already dead when the
deed was supposed to have been executed on June 11, 1991.

It appears, however, that private respondent had filed a criminal complaint for falsification against
petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a resolution,
dated February 14, 1994.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:

Plaintiff's claim therefore that the Deed of Absolute Sale is a forgery because they
could not personally appear before Notary Public Lamberto C. Nanquil on June 11,
1991 because her husband, Ruben Abrogar, died on May 8, 1991 or one month and
2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still
 in the Quezon City Medical Center recuperating from wounds which she suffered at
the same vehicular accident on May 8, 1991, cannot be sustained. The Court is
convinced that the three required documents, to wit: the Memorandum of Agreement,
the Special Power of Attorney, and the Deed of Absolute Sale were all signed by the
parties on the same date on April 18, 1991. It is a common and accepted business
practice of those engaged in money lending to prepare an undated absolute deed of
sale in loans of money secured by real estate for various reasons, foremost of which
is the evasion of taxes and surcharges. The plaintiff never questioned receiving the
sum of P200,000.00 representing her loan from the defendant. Common sense
dictates that an established lending and realty firm like the Aguila & Sons, Co. would
not part with P200,000.00 to the Abrogar spouses, who are virtual strangers to it,
without the simultaneous accomplishment and signing of all the required documents,
more particularly the Deed of Absolute Sale, to protect its interest.

xxx xxx xxx

WHEREFORE, foregoing premises considered, the case in caption is hereby

ORDERED DISMISSED, with costs against the plaintiff.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and
defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New
Civil Code finds strong application in the case at bar in the light of the following
circumstances.

First: The purchase price for the alleged sale with right to repurchase is unusually
inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the
residential house of plaintiff-appellant stands. The property is inside a
subdivision/village. The property is situated in Marikina which is already part of Metro
Manila. The alleged sale took place in 1991 when the value of the land had
considerably increased.

For this property, defendant-appellee pays only a measly P200,000.00 or P833.33

per square meter for both the land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that plaintiff-

appellant is obliged to deliver peacefully the possession of the property to the
SECOND PARTY within fifteen (15) days after the expiration of the said ninety (90)
day grace period. Otherwise stated, plaintiff-appellant is to retain physical possession
of the thing allegedly sold.

In fact, plaintiff-appellant retained possession of the property "sold" as if they were

still the absolute owners. There was no provision for maintenance or expenses,
much less for payment of rent.

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the
property "sold". It is well-known that payment of taxes accompanied by actual
possession of the land covered by the tax declaration, constitute evidence of great
weight that a person under whose name the real taxes were declared has a claim of
right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602 of
the New Civil Code is sufficient to declare a contract of sale with right to repurchase
an equitable mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price which is unusually

inadequate, has retained possession of the subject property and has continued
paying the realty taxes over the subject property, (circumstances mentioned in par.
(1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is an equitable
mortgage, not a sale with right to repurchase. The factors cited are in support to the
finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is
in actuality an equitable mortgage.

Moreover, it is undisputed that the deed of sale with right of repurchase was
executed by reason of the loan extended by defendant-appellee to plaintiff-appellant.
The amount of loan being the same with the amount of the purchase price.

xxx xxx xxx

Since the real intention of the party is to secure the payment of debt, now deemed to
be repurchase price: the transaction shall then be considered to be an equitable
mortgage.

Being a mortgage, the transaction entered into by the parties is in the nature of
a pactum commissorium which is clearly prohibited by Article 2088 of the New Civil
Code. Article 2088 of the New Civil Code reads:

Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of principal obligation; and (2) that
there should be a stipulation for an automatic appropriation by the creditor of the
thing pledged and mortgaged in the event of non-payment of the principal obligation
within the stipulated period.

In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-

appellant secured by a mortgage on the property of plaintiff-appellant. The loan was
payable within ninety (90) days, the period within which plaintiff-appellant can
repurchase the property. Plaintiff-appellant will pay P230,000.00 and not
P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of
plaintiff-appellee to pay the P230,000.00 within the ninety (90) days period, the
property shall automatically belong to defendant-appellee by virtue of the deed of
sale executed.

Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so
declare to be invalid, for being violative of law.

xxx xxx xxx

 WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED
and SET ASIDE. The questioned Deed of Sale and the cancellation of the TCT No.
195101 issued in favor of plaintiff-appellant and the issuance of TCT No. 267073
issued in favor of defendant-appellee pursuant to the questioned Deed of Sale is
hereby declared VOID and is hereby ANNULLED. Transfer Certificate of Title No.
195101 of the Registry of Marikina is hereby ordered REINSTATED. The loan in the
amount of P230,000.00 shall be paid within ninety (90) days from the finality of this
decision. In case of failure to pay the amount of P230,000.00 from the period therein
stated, the property shall be sold at public auction to satisfy the mortgage debt and
costs and if there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against
which this case should have been brought; (2) the judgment in the ejectment case is a bar to the
filing of the complaint for declaration of nullity of a deed of sale in this case; and (3) the contract
between A.C. Aguila & Sons, Co. and private respondent is a pacto de retro sale and not an
equitable mortgage as held by the appellate court.

The petition is meritorious.

Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided
that "every action must be prosecuted and defended in the name of the real party in interest." A real
party in interest is one who would be benefited or injured by the judgment, or who is entitled to the
avails of the suit. 7 This ruling is now embodied in Rule 3, 2 of the 1997 Revised Rules of Civil
Procedure. Any decision rendered against a person who is not a real party in interest in the case
cannot be executed. 8 Hence, a complaint filed against such a person should be dismissed for failure
to state a cause of action. 9

Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and distinct
from that of each of the partners." The partners cannot be held liable for the obligations of the
partnership unless it is shown that the legal fiction of a different juridical personality is being used for
fraudulent, unfair, or illegal purposes. 10 In this case, private respondent has not shown that A.C.
Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair, or illegal
purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and
the Memorandum of Agreement was executed between private respondent, with the consent of her
late husband, and A.C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership,
not its officers or agents, which should be impleaded in any litigation involving property registered in
its name. A violation of this rule will result in the dismissal of the complaint. 11 We cannot understand
why both the Regional Trial Court and the Court of Appeals sidestepped this issue when it was
squarely raised before them by petitioner.

Our conclusion that petitioner is not the real party in interest against whom this action should be
prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint
against petitioner is DISMISSED.

SO ORDERED.

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.