EN BANC

[G.R. No. 100152. March 31, 2000]

ACEBEDO OPTICAL COMPANY, INC., petitioner, vs. THE HONORABLE

COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his capacity
as Presiding Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City;
SAMAHANG OPTOMETRIST Sa PILIPINAS - Iligan City Chapter, LEO T.
CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of
Iligan, respondents.

DECISION

PURISIMA, J.:

At bar is a petition for review under Rule 45 of the Rules of Court seeking to nullify the
dismissal by the Court of Appeals of the original petition for certiorari, prohibition and
mandamus filed by the herein petitioner against the City Mayor and City Legal Officer of
Iligan and the Samahang Optometrist sa Pilipinas - Iligan Chapter (SOPI, for brevity).

The antecedent facts leading to the filing of the instant petition are as follows:

Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After
consideration of petitioners application and the opposition interposed thereto by local
optometrists, respondent City Mayor issued Business Permit No. 5342 subject to the
following conditions:

1. Since it is a corporation, Acebedo cannot put up an optical clinic but

only a commercial store;

2. Acebedo cannot examine and/or prescribe reading and similar optical

glasses for patients, because these are functions of optical clinics;

3. Acebedo cannot sell reading and similar eyeglasses without a

prescription having first been made by an independent optometrist (not its
employee) or independent optical clinic. Acebedo can only sell directly to
the public, without need of a prescription, Ray-Ban and similar
eyeglasses;

4. Acebedo cannot advertise optical lenses and eyeglasses, but can

advertise Ray-Ban and similar glasses and frames;

5. Acebedo is allowed to grind lenses but only upon the prescription of an

independent optometrist.[1]
On December 5, 1988, private respondent Samahan ng Optometrist Sa
Pilipinas (SOPI), Iligan Chapter, through its Acting President, Dr. Frances B. Apostol,
lodged a complaint against the petitioner before the Office of the City Mayor, alleging
that Acebedo had violated the conditions set forth in its business permit and requesting
the cancellation and/or revocation of such permit.

Acting on such complaint, then City Mayor Camilo P. Cabili designated City Legal
Officer Leo T. Cahanap to conduct an investigation on the matter. On July 12, 1989,
respondent City Legal Officer submitted a report to the City Mayor finding the herein
petitioner guilty of violating all the conditions of its business permit and recommending
the disqualification of petitioner from operating its business in Iligan City. The report
further advised that no new permit shall be granted to petitioner for the year 1989 and
should only be given time to wind up its affairs.

On July 19, 1989, the City Mayor sent petitioner a Notice of Resolution and Cancellation
of Business Permit effective as of said date and giving petitioner three (3)months to
wind up its affairs.

On October 17, 1989, petitioner brought a petition for certiorari, prohibition and
mandamus with prayer for restraining order/preliminary injunction against the
respondents, City Mayor, City Legal Officer and Samahan ng Optometrists sa Pilipinas-
Iligan City Chapter (SOPI), docketed as Civil Case No. 1497 before the Regional Trial
Court of Iligan City, Branch I. Petitioner alleged that (1) it was denied due process
because it was not given an opportunity to present its evidence during the investigation
conducted by the City Legal Officer; (2) it was denied equal protection of the laws as the
limitations imposed on its business permit were not imposed on similar businesses in
Iligan City; (3) the City Mayor had no authority to impose the special conditions on its
business permit; and (4) the City Legal Officer had no authority to conduct the
investigation as the matter falls within the exclusive jurisdiction of the Professional
Regulation Commission and the Board of Optometry.

Respondent SOPI interposed a Motion to Dismiss the Petition on the ground of non-
exhaustion of administrative remedies but on November 24, 1989, Presiding Judge
Mamindiara P. Mangotara deferred resolution of such Motion to Dismiss until after trial
of the case on the merits. However, the prayer for a writ of preliminary injunction was
granted. Thereafter, respondent SOPI filed its answer.

On May 30, 1990, the trial court dismissed the petition for failure to exhaust
administrative remedies, and dissolved the writ of preliminary injunction it earlier issued.
Petitioners motion for reconsideration met the same fate. It was denied by an Order
dated June 28, 1990.

On October 3, 1990, instead of taking an appeal, petitioner filed a petition for certiorari,
prohibition and mandamus with the Court of Appeals seeking to set aside the
questioned Order of Dismissal, branding the same as tainted with grave abuse of
discretion on the part of the trial court.
On January 24, 1991, the Ninth Division[2] of the Court of Appeals dismissed the petition
for lack of merit. Petitioners motion reconsideration was also denied in the Resolution
dated May 15, 1991.

Undaunted, petitioner has come before this court via the present petition, theorizing
that:

A.

THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT

THE RESPONDENT CITY MAYOR ACTED BEYOND HIS AUTHORITY
IN IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY
HAD NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING
THAT THE SAID SPECIAL CONDITIONS NEVERTHELESS BECAME
BINDING ON PETITIONER UPON ITS ACCEPTANCE THEREOF AS A
PRIVATE AGREEMENT OR CONTRACT.

B.

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

THE CONTRACT BETWEEN PETITIONER AND THE CITY OF ILIGAN
WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE OF
ITS PROPRIETARY FUNCTIONS.

The petition is impressed with merit.

Although petitioner agrees with the finding of the Court of Appeals that respondent City
Mayor acted beyond the scope of his authority in imposing the assailed conditions in
subject business permit, it has excepted to the ruling of the Court of Appeals that the
said conditions nonetheless became binding on petitioner, once accepted, as a private
agreement or contract. Petitioner maintains that the said special conditions are null and
void for being ultra vires and cannot be given effect; and therefore, the principle of
estoppel cannot apply against it.

On the other hand, the public respondents, City Mayor and City Legal Officer, private
respondent SOPI and the Office of the Solicitor General contend that as a valid exercise
of police power, respondent City Mayor has the authority to impose, as he did, special
conditions in the grant of business permits.

Police power as an inherent attribute of sovereignty is the power to prescribe

regulations to promote the health, morals, peace, education, good order or safety and
general welfare of the people.[3] The State, through the legislature, has delegated the
exercise of police power to local government units, as agencies of the State, in order to
effectively accomplish and carry out the declared objects of their creation.[4] This
delegation of police power is embodied in the general welfare clause of the Local
Government Code which provides:
 Sec. 16. General Welfare. - Every local government unit shall exercise
the powers expressly granted, those necessarily implied therefrom, as well
as powers necessary, appropriate, or incidental for its efficient and
effective governance, and those which are essential to the promotion of
the general welfare. Within their respective territorial jurisdictions, local
government units shall ensure and support, among other things, the
preservation and enrichment of culture, promote health and safety,
enhance the right of the people to a balanced ecology, encourage and
support the development of appropriate and self-reliant scientific and
technological capabilities, improve public morals, enhance economic
prosperity and social justice, promote full employment among their
residents, maintain peace and order, and preserve the comfort and
convenience of their inhabitants.

The scope of police power has been held to be so comprehensive as to encompass

almost all matters affecting the health, safety, peace, order, morals, comfort and
convenience of the community. Police power is essentially regulatory in nature and the
power to issue licenses or grant business permits, if exercised for a regulatory and not
revenue-raising purpose, is within the ambit of this power.[5]

The authority of city mayors to issue or grant licenses and business permits is beyond
cavil. It is provided for by law.

Section 171, paragraph 2 (n) of Batas Pambansa Bilang 337 otherwise known as the
Local Government Code of 1983, reads:

Sec. 171. The City Mayor shall:

xxx

n) Grant or refuse to grant, pursuant to law, city licenses or permits, and

revoke the same for violation of law or ordinance or the conditions upon
which they are granted.

However, the power to grant or issue licenses or business permits must always be
exercised in accordance with law, with utmost observance of the rights of all concerned
to due process and equal protection of the law.

Succinct and in point is the ruling of this Court, that:

"x x x While a business may be regulated, such regulation must, however,

be within the bounds of reason, i. e., the regulatory ordinance must be
reasonable, and its provision cannot be oppressive amounting to an
arbitrary interference with the business or calling subject of regulation. A
lawful business or calling may not, under the guise of regulation, be
unreasonably interfered with even by the exercise of police power. xxx
 xxx xxx xxx

xxx The exercise of police power by the local government is valid unless it
contravenes the fundamental law of the land or an act of the legislature, or
unless it is against public policy or is unreasonable, oppressive, partial,
discriminating or in derogation of a common right."[6]

In the case under consideration, the business permit granted by respondent City Mayor
to petitioner was burdened with several conditions. Petitioner agrees with the holding by
the Court of Appeals that respondent City Mayor acted beyond his authority in imposing
such special conditions in its permit as the same have no basis in the law or ordinance.
Public respondents and private respondent SOPI, on the other hand, are one in saying
that the imposition of said special conditions on petitioners business permit is well within
the authority of the City Mayor as a valid exercise of police power.

As aptly discussed by the Solicitor General in his Comment, the power to issue licenses
and permits necessarily includes the corollary power to revoke, withdraw or cancel the
same. And the power to revoke or cancel, likewise includes the power to restrict through
the imposition of certain conditions. In the case of Austin-Hardware, Inc. vs. Court of
Appeals,[7] it was held that the power to license carries with it the authority to provide
reasonable terms and conditions under which the licensed business shall be conducted.
As the Solicitor General puts it:

"If the City Mayor is empowered to grant or refuse to grant a license,

which is a broader power, it stands to reason that he can also exercise a
lesser power that is reasonably incidental to his express power, i. e. to
restrict a license through the imposition of certain conditions, especially so
that there is no positive prohibition to the exercise of such prerogative by
the City Mayor, nor is there any particular official or body vested with such
authority"[8]

However, the present inquiry does not stop there, as the Solicitor General believes. The
power or authority of the City Mayor to impose conditions or restrictions in the business
permit is indisputable. What petitioner assails are the conditions imposed in its particular
case which, it complains, amount to a confiscation of the business in which petitioner is
engaged.

Distinction must be made between the grant of a license or permit to do business and
the issuance of a license to engage in the practice of a particular profession. The first is
usually granted by the local authorities and the second is issued by the Board or
Commission tasked to regulate the particular profession. A business permit authorizes
the person, natural or otherwise, to engage in business or some form of commercial
activity. A professional license, on the other hand, is the grant of authority to a natural
person to engage in the practice or exercise of his or her profession.
In the case at bar, what is sought by petitioner from respondent City Mayor is a permit
to engage in the business of running an optical shop. It does not purport to seek a
license to engage in the practice of optometry as a corporate body or entity, although it
does have in its employ, persons who are duly licensed to practice optometry by the
Board of Examiners in Optometry.

The case of Samahan ng Optometrists sa Pilipinas vs. Acebedo International

Corporation, G.R. No. 117097,[9] promulgated by this Court on March 21, 1997, is in
point. The factual antecedents of that case are similar to those of the case under
consideration and the issue ultimately resolved therein is exactly the same issue posed
for resolution by this Court en banc.

In the said case, the Acebedo International Corporation filed with the Office of the
Municipal Mayor an application for a business permit for the operation of a branch of
Acebedo Optical in Candon, Ilocos Sur. The application was opposed by the Samahan
ng Optometrists sa Pilipinas-Ilocos Sur Chapter, theorizing that Acebedo is a juridical
entity not qualified to practice optometry. A committee was created by the Office of the
Mayor to study private respondents application. Upon recommendation of the said
committee, Acebedos application for a business permit was denied. Acebedo filed a
petition with the Regional Trial Court but the same was dismissed. On appeal, however,
the Court of Appeals reversed the trial courts disposition, prompting the Samahan ng
Optometrists to elevate the matter to this Court.

The First Division of this Court, then composed of Honorable Justice Teodoro Padilla,
Josue Bellosillo, Jose Vitug and Santiago Kapunan, with Honorable Justice Regino
Hermosisima, Jr. as ponente, denied the petition and ruled in favor of respondent
Acebedo International Corporation, holding that "the fact that private respondent hires
optometrists who practice their profession in the course of their employment in private
respondents optical shops, does not translate into a practice of optometry by private
respondent itself."[10] The Court further elucidated that in both the old and new Optometry
Law, R.A. No. 1998, superseded by R.A. No. 8050, it is significant to note that there is
no prohibition against the hiring by corporations of optometrists. The Court concluded
thus:

"All told, there is no law that prohibits the hiring by corporations of

optometrists or considers the hiring by corporations of optometrists as a
practice by the corporation itself of the profession of optometry."

In the present case, the objective of the imposition of subject conditions on petitioners
business permit could be attained by requiring the optometrists in petitioners employ to
produce a valid certificate of registration as optometrist, from the Board of Examiners in
Optometry. A business permit is issued primarily to regulate the conduct of business
and the City Mayor cannot, through the issuance of such permit, regulate the practice of
a profession, like that of optometry. Such a function is within the exclusive domain of the
administrative agency specifically empowered by law to supervise the profession, in this
case the Professional Regulations Commission and the Board of Examiners in
Optometry.

It is significant to note that during the deliberations of the bicameral conference

committee of the Senate and the House of Representatives on R.A. 8050 (Senate Bill
No. 1998 and House Bill No. 14100), the committee failed to reach a consensus as to
the prohibition on indirect practice of optometry by corporations. The proponent of the
bill, former Senator Freddie Webb, admitted thus:

"Senator Webb: xxx xxx xxx

The focus of contention remains to be the proposal of prohibiting the indirect practice of
optometry by corporations. We took a second look and even a third look at the issue in
the bicameral conference, but a compromise remained elusive." [11]

Former Senator Leticia Ramos-Shahani likewise voted her reservation in casting her
vote:

"Senator Shahani: Mr. President

The optometry bills have evoked controversial views from the members of
the panel. While we realize the need to uplift the standards of optometry
as a profession, the consensus of both Houses was to avoid touching
sensitive issues which properly belong to judicial determination. Thus, the
bicameral conference committee decided to leave the issue of indirect
practice of optometry and the use of trade names open to the wisdom of
the Courts which are vested with the prerogative of interpreting the
laws."[12]

From the foregoing, it is thus evident that Congress has not adopted a unanimous
position on the matter of prohibition of indirect practice of optometry by corporations,
specifically on the hiring and employment of licensed optometrists by optical
corporations. It is clear that Congress left the resolution of such issue for judicial
determination, and it is therefore proper for this Court to resolve the issue.

Even in the United States, jurisprudence varies and there is a conflict of opinions among
the federal courts as to the right of a corporation or individual not himself licensed, to
hire and employ licensed optometrists.[13]

Courts have distinguished between optometry as a learned profession in the category of

law and medicine, and optometry as a mechanical art. And, insofar as the courts regard
optometry as merely a mechanical art, they have tended to find nothing objectionable in
the making and selling of eyeglasses, spectacles and lenses by corporations so long as
the patient is actually examined and prescribed for by a qualified practitioner. [14]
The primary purpose of the statute regulating the practice of optometry is to insure that
optometrical services are to be rendered by competent and licensed persons in order to
protect the health and physical welfare of the people from the dangers engendered by
unlicensed practice. Such purpose may be fully accomplished although the person
rendering the service is employed by a corporation.[15]

Furthermore, it was ruled that the employment of a qualified optometrist by a

corporation is not against public policy.[16] Unless prohibited by statutes, a corporation
has all the contractual rights that an individual has[17] and it does not become the practice
of medicine or optometry because of the presence of a physician or optometrist. [18] The
manufacturing, selling, trading and bartering of eyeglasses and spectacles as articles of
merchandise do not constitute the practice of optometry. [19]

In the case of Dvorine vs. Castelberg Jewelry Corporation,[20] defendant corporation

conducted as part of its business, a department for the sale of eyeglasses and the
furnishing of optometrical services to its clients. It employed a registered optometrist
who was compensated at a regular salary and commission and who was furnished
instruments and appliances needed for the work, as well as an office. In holding that the
corporation was not engaged in the practice of optometry, the court ruled that there is
no public policy forbidding the commercialization of optometry, as in law and medicine,
and recognized the general practice of making it a commercial business by advertising
and selling eyeglasses.

To accomplish the objective of the regulation, a state may provide by statute that
corporations cannot sell eyeglasses, spectacles, and lenses unless a duly licensed
physician or a duly qualified optometrist is in charge of, and in personal attendance at
the place where such articles are sold.[21] In such a case, the patients primary and
essential safeguard lies in the optometrists control of the "treatment" by means of
prescription and preliminary and final examination.[22]

In analogy, it is noteworthy that private hospitals are maintained by corporations

incorporated for the purpose of furnishing medical and surgical treatment. In the course
of providing such treatments, these corporations employ physicians, surgeons and
medical practitioners, in the same way that in the course of manufacturing and selling
eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to
examine, prescribe and dispense ophthalmic lenses. No one has ever charged that
these corporations are engaged in the practice of medicine. There is indeed no valid
basis for treating corporations engaged in the business of running optical shops
differently.

It also bears stressing, as petitioner has pointed out, that the public and private
respondents did not appeal from the ruling of the Court of Appeals. Consequently, the
holding by the Court of Appeals that the act of respondent City Mayor in imposing the
questioned special conditions on petitioners business permit is ultra vires cannot be put
into issue here by the respondents. It is well-settled that:
 "A party who has not appealed from the decision may not obtain any
affirmative relief from the appellate court other than what he had obtain
from the lower court, if any, whose decision is brought up on appeal.[23]

xxx an appellee who is not an appellant may assign errors in his brief
where his purpose is to maintain the judgment on other grounds, but he
cannot seek modification or reversal of the judgment or affirmative relief
unless he has also appealed."[24]

Thus, respondents submission that the imposition of subject special conditions on

petitioners business permit is not ultra vires cannot prevail over the finding and ruling by
the Court of Appeals from which they (respondents) did not appeal.

Anent the second assigned error, petitioner maintains that its business permit issued by
the City Mayor is not a contract entered into by Iligan City in the exercise of its
proprietary functions, such that although petitioner agreed to such conditions, it cannot
be held in estoppel since ultra vires acts cannot be given effect.

Respondents, on the other hand, agree with the ruling of the Court of Appeals that the
business permit in question is in the nature of a contract between Iligan City and the
herein petitioner, the terms and conditions of which are binding upon agreement, and
that petitioner is estopped from questioning the same. Moreover, in the Resolution
denying petitioners motion for reconsideration, the Court of Appeals held that the
contract between the petitioner and the City of Iligan was entered into by the latter in the
performance of its proprietary functions.

This Court holds otherwise. It had occasion to rule that a license or permit is not in the
nature of a contract but a special privilege.

"xxx a license or a permit is not a contract between the sovereignty and

the licensee or permitee, and is not a property in the constitutional sense,
as to which the constitutional proscription against impairment of the
obligation of contracts may extend. A license is rather in the nature of a
special privilege, of a permission or authority to do what is within its terms.
It is not in any way vested, permanent or absolute." [25]

It is therefore decisively clear that estoppel cannot apply in this case. The fact that
petitioner acquiesced in the special conditions imposed by the City Mayor in subject
business permit does not preclude it from challenging the said imposition, which is ultra
vires or beyond the ambit of authority of respondent City Mayor. Ultra vires acts or acts
which are clearly beyond the scope of ones authority are null and void and cannot be
given any effect. The doctrine of estoppel cannot operate to give effect to an act which
is otherwise null and void or ultra vires.

The Court of Appeals erred in adjudging subject business permit as having been issued
by respondent City Mayor in the performance of proprietary functions of Iligan City. As
hereinabove elaborated upon, the issuance of business licenses and permits by a
municipality or city is essentially regulatory in nature. The authority, which devolved
upon local government units to issue or grant such licenses or permits, is essentially in
the exercise of the police power of the State within the contemplation of the general
welfare clause of the Local Government Code.

WHEREFORE, the petition is GRANTED; the Decision of the Court of Appeals in CA-
GR SP No. 22995 REVERSED; and the respondent City Mayor is hereby ordered to
reissue petitioners business permit in accordance with law and with this disposition. No
pronouncement as to costs.

SO ORDERED.

Bellosillo, Puno, Mendoza, Quisumbing, Buena, Gonzaga-Reyes, Ynares-

Santiago, and De Leon, Jr., JJ., concur.

Kapunan, J., see concurring opinion.

Vitug, J., please see dissent.

Davide, Jr., C.J., Melo, Panganiban, and Pardo, JJ., joined Mr. Justice Vitug in his
dissent.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-45425 April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Guillermo B. Reyes for appellants.

Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:

The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum
of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance
of the City of Manila, which dismissed the action with the costs against them.

The case was submitted for decision upon the following stipulation of facts:

Come now the parties to the above-mentioned case, through their respective undersigned
attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the
following statement of facts:

1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is
the Collector of Internal Revenue of the Philippines;

2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:

1. Jose
Gatchalian .........
...........................
P0.18
...........................
...........................
..........

2. Gregoria
Cristobal ............
...........................
.18
...........................
...........................
..

3. Saturnina
Silva ..................
...........................
.08
...........................
...........................
.

4. Guillermo
Tapia .................
...........................
.13
...........................
...........................
.

5. Jesus
Legaspi ............. .15
...........................
...........................
...........................
........

6. Jose
Silva ..................
...........................
.07
...........................
...........................
..........

7. Tomasa
Mercado ............
...........................
.08
...........................
...........................
...

8. Julio
Gatchalian .........
...........................
.13
...........................
...........................
.........

9. Emiliana
Santiago ............
...........................
.13
...........................
...........................
...

10. Maria C.
Legaspi .............
...........................
.16
...........................
...........................
.

11. Francisco
Cabral ...............
........................... .13
...........................
..........................

12. Gonzalo
Javier ................
...........................
.14
...........................
...........................
...
13. Maria
Santiago ............
...........................
.17
...........................
...........................
......

14.
Buenaventura
Guzman ............
.13
...........................
...........................
....................

15. Mariano
Santos ...............
...........................
.14
...........................
...........................
.

Total ..................
...........................
...........................
2.00
...........................
.....

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that
the said ticket was registered in the name of Jose Gatchalian and Company;

4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-
mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000
and that the corresponding check covering the above-mentioned prize of P50,000 was drawn
by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against
the Philippine National Bank, which check was cashed during the latter part of December,
1934 by Jose Gatchalian & Company;

5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by Jose
Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose
Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;

6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &
Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer
of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within
which to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is
enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a
copy of which marked Exhibit C is attached and made a part hereof, requesting exemption
from payment of the income tax to which reply there were enclosed fifteen (15) separate
individual income tax returns filed separately by each one of the plaintiffs, copies of which
returns are attached and marked Exhibit D-1 to D-15, respectively, in order of their names
listed in the caption of this case and made parts hereof; a statement of sale signed by Jose
Gatchalian showing the amount put up by each of the plaintiffs to cover up the attached and
marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose
Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part
thereof;

8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G
is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment
of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and
gave plaintiffs until February 10, 1935 within which to pay the said tax;

9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed,
defendant on May 13, 1935 issued a warrant of distraint and levy against the property of the
plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part hereof;

10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs,
the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus
Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is
attached and marked Exhibit J and made a part hereof, and requested defendant that
plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly
installments;

11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two solvent
persons to guarantee prompt payment of each installments as it becomes due;

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed
and made a part hereof, to guarantee the payment of the balance of the alleged tax liability
by monthly installments at the rate of P118.70 a month, the first payment under protest to be
effected on or before July 31, 1935;

13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the
sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935 overruled the protest and denied the request for
refund of the plaintiffs;

14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance
with the terms and conditions of bond filed by them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of
Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against
the plaintiffs on May 13, 1935;

15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria
 Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan,
Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and
penalties demanded by defendant as evidenced by income tax receipt No. 35811 which is
attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the
plaintiffs formally protested to the defendant against the payment of said amount and
requested the refund thereof, copy of which is attached and marked Exhibit O and made part
hereof; but that on September 4, 1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and

16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand
eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest
by them but that defendant refused and still refuses to refund the said amount
notwithstanding the plaintiffs' demands.

17. The parties hereto reserve the right to present other and additional evidence if
necessary.

Exhibit E referred to in the stipulation is of the following tenor:

To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the
11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and
for the amount indicated below and the part of may share remaining is also shown to wit:

A
d
Purchas dr
Amount
er e
s
s

P
ul
il
1.
a
Mariano
n,
Santos ..
P0.14 B
...............
ul
...............
a
...........
c
a
n.

2.
Buenave
-
ntura
D
Guzman .13
o
...............
-
...............
.
3. Maria
-
Santiago
D
............... .17
o
...............
-
..............

4.
Gonzalo -
Javier .... D
.14
............... o
............... -
............

5.
Francisc
-
o
D
Cabral ... .13
o
...............
-
...............
.........

6. Maria
C. -
Legaspi . D
.16
............... o
............... -
...........

7.
Emiliana -
Santiago D
.13
............... o
............... -
...........

8. Julio
Gatchali -
an .......... D
.13
............... o
............... -
....

9. Jose
Silva ...... -
............... D
.07
............... o
............... -
...

10. -
Tomasa D
.08
Mercado o
............... -
...............
.........

11.
Jesus -
Legaspi . D
.15
............... o
............... -
..............

12.
Guillerm
-
o
D
Tapia ..... .13
o
...............
-
...............
........

13.
Saturnin
-
a
D
Silva ...... .08
o
...............
-
...............
........

14.
Gregoria -
Cristobal D
.18
............... o
............... -
.........

15. Jose
Gatchali -
an .......... D
.18
............... o
............... -
....

T
ot
al
c
o
2.00 st
of
s
ai
d
 ticket; and that, therefore, the persons named above are entitled to the parts of whatever
prize that might be won by said ticket.

Pulilan, Bulacan, P.I.

(Sgd.) JOSE GATCHALIAN

And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:

RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED

JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

E
x N
E
h e
x
i t
p
b
Na Purchase Price e
i p
me Price Won n
t r
s
i
e
N z
s
o e
.

1.
Jos
e
Gat
3
chal P
D ,
ian . 4
- P0.18 P4,425 9
....... 8
1 4
....... 0
5
.......
.......
.......
......

2.
Gre
gori
a
2 2
Cris
D , ,
toba
- .18 4,575 0 5
l .....
2 0 7
.......
0 5
.......
.......
.......
.....
3.
Sat
urni
na
1
Silv
D 3 ,
a ....
- .08 1,875 6 5
.......
3 0 1
.......
5
.......
.......
.......
......

4.
Guil
lerm
o
2
Tapi
D 3 ,
a ....
- .13 3,325 6 9
.......
4 0 6
.......
5
.......
.......
.......
...

5.
Jes
us
Leg
3
aspi
D 7 ,
by
- .15 3,825 2 1
Mari
5 0 0
a
5
Cris
toba
l .....
....

6.
Jos
e
Silv
1
a ....
D 3 ,
.......
- .08 1,875 6 5
.......
6 0 1
.......
5
.......
.......
.......
......
7.
To
mas
a
1
Mer
D 3 ,
cad
- .07 1,875 6 5
o ....
7 0 1
.......
5
.......
.......
.......
.......

8.
Juli
o
Gat
2
chal
D 2 ,
ian
- .13 3,150 4 9
by
8 0 1
Bea
0
triz
Guz
man
.......

9.
Emil
iana
San 2
tiag D 3 ,
o .... - .13 3,325 6 9
....... 9 0 6
....... 5
.......
.......
......

10.
Mari
a C.
Leg 3
D
aspi 9 ,
-
....... .16 4,100 6 1
1
....... 0 4
0
....... 0
.......
.......
...
11.
Fra
ncis
co
2
Cab D
3 ,
ral .. -
.13 3,325 6 9
....... 1
0 6
....... 1
5
.......
.......
.......
.

12.
Gon
zalo
Javi 2
D
er .. 3 ,
-
....... .14 3,325 6 9
1
....... 0 6
2
....... 5
.......
.......
.....

13.
Mari
a
San
3
tiag D
3 ,
o .... -
.17 4,350 6 9
....... 1
0 9
....... 3
0
.......
.......
.......
...

14.
Bue
nav
entu 2
D
ra 3 ,
-
Guz .13 3,325 6 9
1
man 0 6
4
....... 5
.......
.......
......
15.
Mari
ano
San 2
D
tos . 3 ,
-
....... .14 3,325 6 9
1
....... 0 6
5
....... 5
.......
.......
....

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The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to
the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own; in the first case it is admitted that the partnership thus formed is
liable for the payment of income tax, whereas if there was merely a community of property, they are
exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter
should be prorated among them and paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:

SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all sources by every corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association or insurance
company, organized in the Philippine Islands, no matter how created or organized, but not
including duly registered general copartnership (compañias colectivas), a tax of three per
centum upon such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar year from all sources
within the Philippine Islands by every corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance company organized, authorized,
or existing under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however, That
nothing in this section shall be construed as permitting the taxation of the income derived
from dividends or net profits on which the normal tax has been paid.

The gain derived or loss sustained from the sale or other disposition by a corporation, joint-
stock company, partnership, joint account (cuenta en participacion), association, or
insurance company, or property, real, personal, or mixed, shall be ascertained in accordance
with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred
and thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six.
 The foregoing tax rate shall apply to the net income received by every taxable corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
insurance company in the calendar year nineteen hundred and twenty and in each year
thereafter.

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt
from the payment of income tax under the law. But according to the stipulation facts the plaintiffs
organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the
amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office
of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize,
the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.

Avanceña, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in
the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo
T. Oña the surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo
T. Oña, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they
received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned,
two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T.
Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p.
74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
 Ye Investme Land Buildin
ar
nt g

Account Accou Accou

nt nt

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)

decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the
Tax Code. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

 1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co.,
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE

PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN
 NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS
FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED
USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,

THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales thereof in real properties and
securities," as a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years
herein involved, some of the said properties were sold at considerable profit, and that with said
profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It
is likewise admitted that all the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-
owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to
continue holding said shares under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil
Code from that of unregistered partnerships which are considered as "corporations" under Sections
24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of that
of its members. Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in common
law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial
operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. ... . (7A Merten's Law of
Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture

or other unincorporated organization, through or by means of which
any business, financial operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
ours.)

For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore, clear to
our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue,
G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently,
We consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the
partnership should be limited to the income derived from the acquisition and sale of
real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties
but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision
of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that

the herein petitioners have formed an unregistered partnership and,
therefore, have to be taxed as such, it might be recalled that the
petitioners in their individual income tax returns reported their shares
of the profits of the unregistered partnership. We think it only fair and
equitable that the various amounts paid by the individual petitioners
as income tax on their respective shares of the unregistered
partnership should be deducted from the deficiency income tax found
by this Honorable Court against the unregistered partnership. (page
7, Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the other
way around. The partnership profits distributable to the partners (petitioners herein)
should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been
 correctly assessed. Since the individual income tax liabilities of petitioners are not in
issue in this proceeding, it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is
argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since they paid their individual
income taxes, they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay
the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be
reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the
State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.

Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

Reyes, J.B.L. and Teehankee, JJ., concur in the result.

Castro, J., took no part.

Concepcion, C.J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.

OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

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

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

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

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

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

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

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

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

We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

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

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

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

sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,

en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

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

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

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

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

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

Co-owership distinguished from partnership.—We find that the case at bar is

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

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

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

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.

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

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

SO ORDERED.

Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

Concepcion, Jr., is on leave.

 THIRD DIVISION

[G.R. No. 136448. November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES,

INC., respondent.

DECISION
PANGANIBAN, J.:

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

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed.[2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing the unpaid price of the floats not covered
by said Agreement;

b. 12% interest per annum counted from date of plaintiffs invoices and computed on
their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February
9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February
13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February
19, 1990;

c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per
appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration of the nets during
the pendency of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds
of the sale paid for by plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in
effect, the plaintiff attached its own properties. It [was] for this reason also that this
Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff
to serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may
be entitled to in this case will have to be satisfied from the amount of P900,000.00 as
this amount replaced the attached nets and floats. Considering, however, that the total
judgment obligation as computed above would amount to only P840,216.92, it would be
inequitable, unfair and unjust to award the excess to the defendants who are not entitled
to damages and who did not put up a single centavo to raise the amount
of P900,000.00 aside from the fact that they are not the owners of the nets and
floats. For this reason, the defendants are hereby relieved from any and all liabilities
arising from the monetary judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged
in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the
agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as
shown by a Certification from the Securities and Exchange Commission.[5] On September 20, 1990,
the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching
the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro
Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of the
nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have
waived his right to cross-examine witnesses and to present evidence on his behalf, because of his
failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at
a public auction. Philippine Fishing Gear Industries won the bidding and deposited with the said
court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing
Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.[10] The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in
the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or
Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao.[11]

The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit and
loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial fishing x x
x.Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. By a contract of partnership,
two or more persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among themselves (Article 1767,
New Civil Code).[13]

Hence, petitioner brought this recourse before this Court.[14]

The Issues

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

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

AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT
OF PETITIONER LIMS GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats purchased
from respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao
could be deemed to have entered into a partnership.

This Courts Ruling

The Petition is devoid of merit.

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

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

Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed
of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne Mel and
Yaos FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch
72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c) declaration of ownership of
fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided
to engage in a fishing business, which they started by buying boats worth P3.35 million, financed
by a loan secured from Jesus Lim who was petitioners brother. In their Compromise Agreement,
they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats,
and to divide equally among them the excess or loss. These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term common fund under Article
1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like
credit or industry. That the parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but
also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
 Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds from the sales and operations thereof
would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to the
rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes beyond
the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

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

Petitioner Was a Partner, Not a Lessor

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

Corporation by Estoppel

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

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may
be estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives
or agents do so without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is himself regarded as
the principal, possessed of all the right and subject to all the liabilities of a principal, a person
acting or purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred from denying
its corporate existence in a suit brought against the alleged corporation. In such case, all those
who benefited from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be
paid for the nets it sold. The only question here is whether petitioner should be held jointly[18]liable
with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the
name of the ostensible corporation should be held liable. Since his name does not appear on any
of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the
boat which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation.However,
having reaped the benefits of the contract entered into by persons with whom he previously had
an existing relationship, he is deemed to be part of said association and is covered by the scope of
the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v.
Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position , entraps and destroys the other. It is,
rather, a contest in which each contending party fully and fairly lays before the court the
facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections
of form and technicalities of procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality, when
it deserts its proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be no vested rights in
technicalities.

Third Issue: Validity of Attachment

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

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 75875 December 15, 1989

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

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

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE

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

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

LUCIANO E. SALAZAR, petitioner,

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

Belo, Abiera & Associates for petitioners in 75875.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

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

The antecedent facts can be summarized as follows:

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

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

3. Articles of Incorporation

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

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors,

which shall consist of nine individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation, three of the nine directors
shall be designated by American-Standard, and the other six shall be designated by
the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.

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

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

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

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

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

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

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

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

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

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM

EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER
OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
 III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT
THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)

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

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual

agreements entered into by stockholders and the replacement of the conditions of
such agreements with terms never contemplated by the stockholders but merely
dictated by the CA .

11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of
the control of a corporation. (pp. 14-15, Rollo-75975-76)

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

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE

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

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE

PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)

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

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

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

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly
stated that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisionswhich states:

xxx xxx xxx

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

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

The parol evidence Rule under Rule 130 provides:

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

reduced to writing, it is to be considered as containing all such terms, and therefore,
there can be, between the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing, except in the following
cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.

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

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

xxx xxx xxx

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

It has been ruled:

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

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

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

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

An examination of the Agreement shows that certain provisions were included to

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

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

xxx xxx xxx

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

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.

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

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

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

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

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the

parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from
each other but are divisible into groups representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of determining
how closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is a close-
held corporation. Surely, appellants cannot honestly claim that Saniwares is a public
issue or a widely held corporation.

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

As correctly held by the SEC Hearing Officer:

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

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

Paragraph 2 refers to pooling and voting agreements in particular. Does this

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

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

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

As in other joint venture companies, the extent of ASI's participation in the

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

Having entered into a well-defined contractual relationship, it is imperative that the

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

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

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

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

Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to
vote their additional equity pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner Salazar
adds that this right if granted to the ASI Group would not necessarily mean a violation of the Anti-
Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:

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

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

The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact
hardly distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a mutual
right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v.
Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d.
12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common
law jurisdictions is that the partnership contemplates a general business with some
degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P.
2d. 500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking. (Art. 1783,
Civil Code). It would seem therefore that under Philippine law, a joint venture is a
form of partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v.
Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to
a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

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

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

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

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would
be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly
stated by the appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.

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

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

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."

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

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

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

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

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

The Lawphil Project - Arellano Law Foundation

 THIRD DIVISION

AURELIO K. LITONJUA, JR., G.R. NOS. 166299-300

Petitioner,

- versus
Present:
EDUARDO K. LITONJUA, SR.,
ROBERT T. YANG, ANGLO
PHILS. MARITIME, INC., PANGANIBAN, J., Chairman
SANDOVAL- GUTIERREZ,
CINEPLEX, INC., DDM
CORONA,
GARMENTS, INC., EDDIE K.
CARPIO MORALES and
LITONJUA SHIPPING GARCIA, JJ.
AGENCY, INC., EDDIE K.
LITONJUA SHIPPING CO.,
INC., LITONJUA SECURITIES, Promulgated:
INC. (formerly E. K. Litonjua
Sec), LUNETA THEATER, INC.,
E & L REALTY, (formerly E & L December 13, 2005
INTL SHIPPING CORP.), FNP
CO., INC., HOME
ENTERPRISES, INC.,
BEAUMONT DEV. REALTY CO.,
INC., GLOED LAND CORP.,
EQUITY TRADING CO., INC.,
3D CORP., L DEV. CORP, LCM
THEATRICAL ENTERPRISES,
INC., LITONJUA SHIPPING
CO. INC., MACOIL INC.,
ODEON REALTY CORP.,
SARATOGA REALTY, INC.,
ACT THEATER INC. (formerly
General Theatrical & Film
Exchange, INC.), AVENUE
REALTY, INC., AVENUE
 THEATER, INC. and LVF
PHILIPPINES, INC.,
(Formerly VF PHILIPPINES),
Respondents.
x-------------------------------------------------x

DECISION
GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner
Aurelio K. Litonjua, Jr. seeks to nullify and set aside the Decision of the Court
of Appeals (CA) dated March 31, 2004[1] in consolidated cases C.A. G.R. Sp.
No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December
07, 2004,[2] denying petitioners motion for reconsideration.

The recourse is cast against the following factual backdrop:

Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K.

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

3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration
of [Aurelios] retaining his share in the remaining family businesses (mostly, movie
theaters, shipping and land development) and contributing his industry to the
continued operation of these businesses, [Aurelio] will be given P1 Million or 10%
equity in all these businesses and those to be subsequently acquired by them
whichever is greater. . . .

4.01 from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio]
and Eduardo had accumulated in their joint venture/partnership various assets
including but not limited to the corporate defendants and [their] respective assets.

4.02 In addition . . . the joint venture/partnership had also acquired [various other
assets], but Eduardo caused to be registered in the names of other parties.

xxx xxx xxx

4.04 The substantial assets of most of the corporate defendants consist of real
properties . A list of some of these real properties is attached hereto and made an
integral part as Annex B.
xxx xxx xxx

5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour
so that [Aurelio] requested for an accounting and liquidation of his share in the joint
venture/partnership [but these demands for complete accounting and liquidation
were not heeded].

xxx xxx xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or
the corporate defendants as well as Bobby [Yang], are transferring . . . various real
properties of the corporations belonging to the joint venture/partnership to other
parties in fraud of [Aurelio]. In consequence, [Aurelio] is therefore causing at this
time the annotation on the titles of these real properties a notice of lis
pendens .(Emphasis in the original; underscoring and words in bracket added.)

For ease of reference, Annex A-1 of the complaint, which petitioner asserts
to have been meant for him by his brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
 You have now your own life to live after having been married. .
I am trying my best to mold you the way I work so you can follow the pattern . You
will be the only one left with the company, among us brothers and I will ask you to
stay as I want you to run this office every time I am away. I want you to run it the
way I am trying to run it because I will be all alone and I will depend entirely to
you (sic). My sons will not be ready to help me yet until about maybe 15/20 years
from now. Whatever is left in the corporation, I will make sure that you get ONE
MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is
greater. We two will gamble the whole thing of what I have and what you are
entitled to. . It will be you and me alone on this. If ever I pass away, I want you to
take care of all of this. You keep my share for my two sons are ready take over but
give them the chance to run the company which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give you first ONE
HUNDRED THOUSANDS PESOS: (P100, 000.00) in cash or asset, like Lt.
Artiaga so you can live better there. The rest I will give you in form of stocks which
you can keep. This stock I assure you is good and saleable. I will also gladly give
you the share of Wack-Wack and Valley Golf because you have been good. The
rest will be in stocks from all the corporations which I repeat, ten percent (10%)
equity. [6]

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

defendants a quo, filed a joint ANSWER With Compulsory
Counterclaim denying under oath the material allegations of the complaint,
more particularly that portion thereof depicting petitioner and Eduardo as
having entered into a contract of partnership. As affirmative defenses,
Eduardo, et al., apart from raising a jurisdictional matter, alleged that the
complaint states no cause of action, since no cause of action may be derived
from the actionable document, i.e., Annex A-1, being void under the terms
of Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further
alleged that whatever undertaking Eduardo agreed to do, if any, under
Annex A-1, are unenforceable under the provisions of the Statute of
Frauds.[7]

For his part, Yang - who was served with summons long after the other
defendants submitted their answer moved to dismiss on the ground, inter
alia, that, as to him, petitioner has no cause of action and the complaint does
not state any.[8] Petitioner opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative
Defenses.[9] To this motion, petitioner interposed an Opposition with ex-
Parte Motion to Set the Case for Pre-trial.[10]

Acting on the separate motions immediately adverted to above, the

trial court, in an Omnibus Order dated March 5, 2003, denied the affirmative
defenses and, except for Yang, set the case for pre-trial on April 10, 2003.[11]

In another Omnibus Order of April 2, 2003, the same court denied the
motion of Eduardo, et al., for reconsideration[12] and Yangs motion to dismiss.
The following then transpired insofar as Yang is concerned:
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek
reconsideration of the April 2, 2003 Omnibus Order and to pursue his failed motion to dismiss[13] to
its full resolution.

2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2, 2003,
but his motion was denied in an Order of July 4, 2003.[14]

3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorariunder Rule 65 of the Rules of Court, docketed as CA-G.R. SP No. 78774,[15] to
nullify the separate orders of the trial court, the first denying his motion to dismiss the basic
complaint and, the second, denying his motion for reconsideration.

Earlier, Eduardo and the corporate defendants, on the contention that

grave abuse of discretion and injudicious haste attended the issuance of the
trial courts aforementioned Omnibus Orders dated March 5, and April 2, 2003,
sought relief from the CA via similar recourse. Their petition
for certiorari was docketed as CA G.R. SP No. 76987.

Per its resolution dated October 2, 2003,[16] the CAs 14th Division
ordered the consolidation of CA G.R. SP No. 78774 with CA G.R. SP No.
76987.

Following the submission by the parties of their respective Memoranda

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

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

Hence, petitioners present recourse, on the contention that the CA erred:

A. When it ruled that there was no partnership created by the actionable document
because this was not a public instrument and immovable properties were
contributed to the partnership.

B. When it ruled that the actionable document did not create a demandable right in
favor of petitioner.

C. When it ruled that the complaint stated no cause of action against [respondent]
Robert Yang; and

D. When it ruled that petitioner has changed his theory on appeal when all that
Petitioner had done was to support his pleaded cause of action by another legal
perspective/argument.

The petition lacks merit.

Petitioners demand, as defined in the petitory portion of his complaint

in the trial court, is for delivery or payment to him, as Eduardos and Yangs
 partner, of his partnership/joint venture share, after an accounting has
been duly conducted of what he deems to be partnership/joint venture
property.[19]

A partnership exists when two or more persons agree to place their

money, effects, labor, and skill in lawful commerce or business, with the
understanding that there shall be a proportionate sharing of the profits and
losses between them.[20] A contract of partnership is defined by the Civil
Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of
dividing the profits among themselves.[21] A joint venture, on the other
hand, is hardly distinguishable from, and may be likened to, a partnership
since their elements are similar, i.e., community of interests in the business
and sharing of profits and losses. Being a form of partnership, a joint
venture is generally governed by the law on partnership.[22]

The underlying issue that necessarily comes to mind in this

proceedings is whether or not petitioner and respondent Eduardo are
partners in the theatre, shipping and realty business, as one claims but which
the other denies. And the issue bearing on the first assigned error relates to
the question of what legal provision is applicable under the premises,
petitioner seeking, as it were, to enforce the actionable document - Annex A-
1 - which he depicts in his complaint to be the contract of partnership/joint
venture between himself and Eduardo. Clearly, then, a look at the legal
provisions determinative of the existence, or defining the formal requisites,
of a partnership is indicated. Foremost of these are the following provisions
of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument
shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be
recorded in the Office of the Securities and Exchange Commission.

Failure to comply with the requirement of the preceding paragraph shall not affect
the liability of the partnership and the members thereof to third persons.
 Art. 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the
parties, and attached to the public instrument.

Annex A-1, on its face, contains typewritten entries, personal in tone,

but is unsigned and undated. As an unsigned document, there can be no
quibbling that Annex A-1 does not meet the public instrumentation
requirements exacted under Article 1771 of the Civil Code. Moreover, being
unsigned and doubtless referring to a partnership involving more than
P3,000.00 in money or property, Annex A-1cannot be presented for
notarization, let alone registered with the Securities and Exchange
Commission (SEC), as called for under the Article 1772 of the Code. And
inasmuch as the inventory requirement under the succeeding Article 1773
goes into the matter of validity when immovable property is contributed to
the partnership, the next logical point of inquiry turns on the nature of
petitioners contribution, if any, to the supposed partnership.

The CA, addressing the foregoing query, correctly stated that

petitioners contribution consisted of immovables and real rights. Wrote that
court:
A further examination of the allegations in the complaint would show that
[petitioners] contribution to the so-called partnership/joint venture was his
supposed share in the family business that is consisting of movie theaters, shipping
and land development under paragraph 3.02 of the complaint. In other words, his
contribution as a partner in the alleged partnership/joint venture consisted of
immovable properties and real rights. .[23]

Significantly enough, petitioner matter-of-factly concurred with the

appellate courts observation that, prescinding from what he himself alleged
in his basic complaint, his contribution to the partnership consisted of his
share in the Litonjua family businesses which owned variable immovable
properties. Petitioners assertion in his motion for reconsideration[24] of the
CAs decision, that what was to be contributed to the business [of the
partnership] was [petitioners] industry and his share in the family [theatre
and land development] business leaves no room for speculation as to what
petitioner contributed to the perceived partnership.
 Lest it be overlooked, the contract-validating inventory requirement
under Article 1773 of the Civil Code applies as long real property or real
rights are initially brought into the partnership. In short, it is really of no
moment which of the partners, or, in this case, who between petitioner and
his brother Eduardo, contributed immovables. In context, the more
important consideration is that real property was contributed, in which case
an inventory of the contributed property duly signed by the parties should
be attached to the public instrument, else there is legally no partnership to
speak of.

Petitioner, in an obvious bid to evade the application of Article 1773,

argues that the immovables in question were not contributed, but were
acquired after the formation of the supposed partnership. Needless to stress,
the Court cannot accord cogency to this specious argument. For, as earlier
stated, petitioner himself admitted contributing his share in the supposed
shipping, movie theatres and realty development family businesses which
already owned immovables even before Annex A-1 was allegedly executed.

Considering thus the value and nature of petitioners alleged

contribution to the purported partnership, the Court, even if so disposed,
cannot plausibly extend Annex A-1 the legal effects that petitioner so
desires and pleads to be given. Annex A-1, in fine, cannot support the
existence of the partnership sued upon and sought to be enforced. The legal
and factual milieu of the case calls for this disposition. A partnership may be
constituted in any form, save when immovable property or real rights are
contributed thereto or when the partnership has a capital of at
least P3,000.00, in which case a public instrument shall be necessary.[25]And
if only to stress what has repeatedly been articulated, an inventory to be
signed by the parties and attached to the public instrument is
also indispensable to the validity of the partnership whenever immovable
property is contributed to it.

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

Likewise well-taken are the following complementary excerpts from the CAs
equally assailed Resolution of December 7, 2004[27] denying petitioners
motion for reconsideration:

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

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

[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now
contended that the actionable instrument may be considered an innominate
contract. xxx Verily, this now changes [petitioners] theory of the case which is not
only prohibited by the Rules but also is an implied admission that the very theory
he himself has adopted, filed and prosecuted before the respondent court is
erroneous.

Be that as it may . . We hold that this new theory contravenes [petitioners] theory of the
actionable document being a partnership document. If anything, it is so obvious we
do have to test the sufficiency of the cause of action on the basis of partnership law
xxx.[29] (Emphasis in the original; Words in bracket added).

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

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

It is at once apparent that what respondent Eduardo imposed upon himself

under the above passage, if he indeed wrote Annex A-1, is a promise
which is not to be performed within one year from contract execution
on June 22, 1973. Accordingly, the agreement embodied in Annex A-
1 is covered by the Statute of Frauds and ergo unenforceable for non-
compliance therewith.[30] By force of the statute of frauds, an
agreement that by its terms is not to be performed within a year from
the making thereof shall be unenforceable by action, unless the same,
or some note or memorandum thereof, be in writing and subscribedby
the party charged. Corollarily, no action can be proved unless the
requirement exacted by the statute of frauds is complied with.[31]
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million
or 10% equity of the family businesses supposedly promised by
Eduardo to give in the near future. Any suggestion that the stated
amount or the equity component of the promise was intended to go to
a common fund would be to read something not written in Annex A-
1. Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more contracting
minds mutually agreeing to contribute money, property or industry to
a common fund with the intention of dividing the profits between or
among themselves.[32]
In sum then, the Court rules, as did the CA, that petitioners complaint for
specific performance anchored on an actionable document of partnership
which is legally inexistent or void or, at best, unenforceable does not state a
cause of action as against respondent Eduardo and the corporate defendants.
And if no of action can successfully be maintained against respondent
Eduardo because no valid partnership existed between him and petitioner,
the Court cannot see its way clear on how the same action could plausibly
prosper against Yang. Surely, Yang could not have become a partner in, or
could not have had any form of business relationship with, an inexistent
partnership.

As may be noted, petitioner has not, in his complaint, provide the logical
nexus that would tie Yang to him as his partner. In fact, attendant
circumstances would indicate the contrary. Consider:
1. Petitioner asserted in his complaint that his so-called joint venture/partnership with
Eduardo was for the continuation of their family business and common family funds which
were theretofore being mainly managed by Eduardo. [33] But Yang denies kinship with the
Litonjua family and petitioner has not disputed the disclaimer.

2. In some detail, petitioner mentioned what he had contributed to the joint

venture/partnership with Eduardo and what his share in the businesses will be. No
allegation is made whatsoever about what Yang contributed, if any, let alone his
proportional share in the profits. But such allegation cannot, however, be made because, as
aptly observed by the CA, the actionable document did not contain such provision, let alone
mention the name of Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even mention his name.

3. Petitioner states in par. 2.01 of the complaint that [he] and Eduardo are business partners
in the [respondent] corporations, while Bobby is his and Eduardos partner in their Odeon
Theater investment (par. 2.03). This means that the partnership between petitioner and
Eduardo came first; Yang became their partner in their Odeon Theater investment
thereafter. Several paragraphs later, however, petitioner would contradict himself by
alleging that his investment and that of Eduardo and Yang in the Odeon theater business
has expanded through a reinvestment of profit income and direct investments in several
corporation including but not limited to [six] corporate respondents This simply means that
the Odeon Theatre business came before the corporate respondents. Significantly enough,
petitioner refers to the corporate respondents as progeny of the Odeon Theatre business.[34]

Needless to stress, petitioner has not sufficiently established in his complaint

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

xxx xxx xxx

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

Pressing its point, the CA later stated in its resolution denying

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

The last issue raised by petitioner, referring to whether or not he

changed his theory of the case, as peremptorily determined by the CA, has
been discussed at length earlier and need not detain us long. Suffice it to
say that after the CA has ruled that the alleged partnership is inexistent,
petitioner took a different tack. Thus, from a joint venture/partnership theory
which he adopted and consistently pursued in his complaint, petitioner
embraced the innominate contract theory. Illustrative of this shift is
petitioners statement in par. #8 of his motion for reconsideration of the CAs
decision combined with what he said in par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership, joint
venture, or whatever, is a legal matter. What is determinative for purposes of
sufficiency of the complainants allegations, is whether the actionable document
bears out an actionable contract be it a partnership, a joint venture or whatever or
some innominate contract It may be noted that one kind of innominate contract is
what is known as du ut facias (I give that you may do).[37]

43. Contrariwise, this actionable document, especially its above-quoted

provisions, established an actionable contract even though it may not be a
partnership. This actionable contract is what is known as an innominate contract
(Civil Code, Article 1307).[38]

Springing surprises on the opposing party is offensive to the sporting idea of

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

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

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

Cost against the petitioner.

SO ORDERED.