G.R. No. 136448 November 3, 1999 b.

12% interest per annum counted from date of

plaintiff's invoices and computed on their respective
LIM TONG LIM, petitioner, amounts as follows:
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent. i. Accrued interest of P73,221.00
on Invoice No. 14407 for
P385,377.80 dated February 9,
1990;

PANGANIBAN, J.:
ii. Accrued interest for P27,904.02
on Invoice No. 14413 for
A partnership may be deemed to exist among parties who agree to borrow money to pursue a P146,868.00 dated February 13,
business and to divide the profits or losses that may arise therefrom, even if it is shown that 1990;
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 partner,
they are all liable for debts incurred by or on behalf of the partnership. The liability for a iii. Accrued interest of P12,920.00
contract entered into on behalf of an unincorporated association or ostensible corporation may on Invoice No. 14426 for
lie in a person who may not have directly transacted on its behalf, but reaped benefits from P68,000.00 dated February 19,
that contract. 1990;

The Case c. P50,000.00 as and for attorney's fees, plus

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;
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 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

1
 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
respondents 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
2
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. 21
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 . . . . Oviously, the ultimate undertaking of the
defendants was to divide the profits among themselves which is what a
partnership essentially is . . . . 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 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
The Issues Article 1767 of the Civil Code which provides:

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 LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats 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 Court's Ruling
Art. 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 Yao's
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;

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.
(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, Chua's FB Lady Anne Mel and Yao's 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.

3
 (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 petitioner's 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 court's 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
4
findings mentioned above nullified petitioner's 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 petitioner's 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.
Sec. 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
5
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 rapier's 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, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong
Lim have incurred the liabilities of general partners. I merely would wish to elucidate a bit,
albeit briefly, the liability of partners in a general partnership.
When a person by his act or deed represents himself as a partner in an existing partnership or
with one or more persons not actual partners, he is deemed an agent of such persons
consenting to such representation and in the same manner, if he were a partner, with respect to
persons who rely upon the representation. 1 The association formed by Chua, Yao and Lim,
should be, as it has been deemed, a de facto partnership with all the consequent obligations for
the purpose of enforcing the rights of third persons. The liability of general partners (in a
general partnership as so opposed to a limited partnership) is laid down in Article 1816 2
which posits that all partners shall be liable pro rata beyond the partnership assets for all the
contracts which may have been entered into in its name, under its signature, and by a person
authorized to act for the partnership. This rule is to be construed along with other provisions of
the Civil Code which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances — (1) where, by any wrongful act or omission of
any partner acting in the ordinary course of the business of the partnership or with the
authority of his co-partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as
the partner so acting or omitting to act; (2) where one partner acting within the scope of his
apparent authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of a third person
and the money or property so received is misapplied by any partner while it is in the custody
of the partnership 3 — consistently with the rules on the nature of civil liability in delicts and
quasi-delicts.

6
G.R. No. L-12541 August 28, 1959
ROSARIO U. YULO, assisted by her husband JOSE C. YULO, plaintiffs-appellants,
vs.
YANG CHIAO SENG, defendant-appellee.
Punzalan, Yabut, Eusebio & Tiburcio for appellants.
Augusto Francisco and Julian T. Ocampo for appellee.
LABRADOR, J.:
Appeal from the judgment of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, dismissing plaintiff's complaint as well as defendant's counterclaim. The appeal is
prosecuted by plaintiff.
The record discloses that on June 17, 1945, defendant Yang Chiao Seng wrote a letter to the
palintiff Mrs. Rosario U. Yulo, proposing the formation of a partnership between them to run
and operate a theatre on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila.
The principal conditions of the offer are (1) that Yang Chiao Seng guarantees Mrs. Yulo a
monthly participation of P3,000 payable quarterly in advance within the first 15 days of each
quarter, (2) that the partnership shall be for a period of two years and six months, starting from
July 1, 1945 to December 31, 1947, with the condition that if the land is expropriated or
rendered impracticable for the business, or if the owner constructs a permanent building
thereon, or Mrs. Yulo's right of lease is terminated by the owner, then the partnership shall be
terminated even if the period for which the partnership was agreed to be established has not
yet expired; (3) that Mrs. Yulo is authorized personally to conduct such business in the lobby
of the building as is ordinarily carried on in lobbies of theatres in operation, provided the said
business may not obstruct the free ingress and agrees of patrons of the theatre; (4) that after
December 31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but
if the partnership agreement is terminated before the lapse of one and a half years period under
any of the causes mentioned in paragraph (2), then Yang Chiao Seng shall have the right to
remove and take away all improvements that the partnership may place in the premises.
Pursuant to the above offer, which plaintiff evidently accepted, the parties executed a
partnership agreement establishing the "Yang & Company, Limited," which was to exist from
July 1, 1945 to December 31, 1947. It states that it will conduct and carry on the business of
operating a theatre for the exhibition of motion and talking pictures. The capital is fixed at
P100,000, P80,000 of which is to be furnished by Yang Chiao Seng and P20,000, by Mrs.
Yulo. All gains and profits are to be distributed among the partners in the same proportion as
their capital contribution and the liability of Mrs. Yulo, in case of loss, shall be limited to her
capital contribution (Exh. "B").
In June , 1946, they executed a supplementary agreement, extending the partnership for a
period of three years beginning January 1, 1948 to December 31, 1950. The benefits are to be
divided between them at the rate of 50-50 and after December 31, 1950, the showhouse
building shall belong exclusively to the second party, Mrs. Yulo.
The land on which the theatre was constructed was leased by plaintiff Mrs. Yulo from Emilia
Carrion Santa Marina and Maria Carrion Santa Marina. In the contract of lease it was
7
stipulated that the lease shall continue for an indefinite period of time, but that after one year
the lease may be cancelled by either party by written notice to the other party at least 90 days
before the date of cancellation. The last contract was executed between the owners and Mrs.
Yulo on April 5, 1948. But on April 12, 1949, the attorney for the owners notified Mrs. Yulo
of the owner's desire to cancel the contract of lease on July 31, 1949. In view of the above
notice, Mrs. Yulo and her husband brought a civil action to the Court of First Instance of
Manila on July 3, 1949 to declare the lease of the premises. On February 9, 1950, the
Municipal Court of Manila rendered judgment ordering the ejectment of Mrs. Yulo and Mr.
Yang. The judgment was appealed. In the Court of First Instance, the two cases were
afterwards heard jointly, and judgment was rendered dismissing the complaint of Mrs. Yulo
and her husband, and declaring the contract of lease of the premises terminated as of July 31,
1949, and fixing the reasonable monthly rentals of said premises at P100. Both parties
appealed from said decision and the Court of Appeals, on April 30, 1955, affirmed the
judgment.
On October 27, 1950, Mrs. Yulo demanded from Yang Chiao Seng her share in the profits of
the business. Yang answered the letter saying that upon the advice of his counsel he had to
suspend the payment (of the rentals) because of the pendency of the ejectment suit by the
owners of the land against Mrs. Yulo. In this letter Yang alleges that inasmuch as he is a
sublessee and inasmuch as Mrs. Yulo has not paid to the lessors the rentals from August,
1949, he was retaining the rentals to make good to the landowners the rentals due from Mrs.
Yulo in arrears (Exh. "E").
In view of the refusal of Yang to pay her the amount agreed upon, Mrs. Yulo instituted this
action on May 26, 1954, alleging the existence of a partnership between them and that the
defendant Yang Chiao Seng has refused to pay her share from December, 1949 to December,
1950; that after December 31, 1950 the partnership between Mrs. Yulo and Yang terminated,
as a result of which, plaintiff became the absolute owner of the building occupied by the Cine
Astor; that the reasonable rental that the defendant should pay therefor from January, 1951 is
P5,000; that the defendant has acted maliciously and refuses to pay the participation of the
plaintiff in the profits of the business amounting to P35,000 from November, 1949 to October,
1950, and that as a result of such bad faith and malice on the part of the defendant, Mrs. Yulo
has suffered damages in the amount of P160,000 and exemplary damages to the extent of
P5,000. The prayer includes a demand for the payment of the above sums plus the sum of
P10,000 for the attorney's fees.
In answer to the complaint, defendant alleges that the real agreement between the plaintiff and
the defendant was one of lease and not of partnership; that the partnership was adopted as a
subterfuge to get around the prohibition contained in the contract of lease between the owners
and the plaintiff against the sublease of the said property. As to the other claims, he denies the
same and alleges that the fair rental value of the land is only P1,100. By way of counterclaim
he alleges that by reason of an attachment issued against the properties of the defendant the
latter has suffered damages amounting to P100,000.
The first hearing was had on April 19, 1955, at which time only the plaintiff appeared. The
court heard evidence of the plaintiff in the absence of the defendant and thereafter rendered
judgment ordering the defendant to pay to the plaintiff P41,000 for her participation in the
business up to December, 1950; P5,000 as monthly rental for the use and occupation of the
building from January 1, 1951 until defendant vacates the same, and P3,000 for the use and
occupation of the lobby from July 1, 1945 until defendant vacates the property. This decision,
however, was set aside on a motion for reconsideration. In said motion it is claimed that
defendant failed to appear at the hearing because of his honest belief that a joint petition for
postponement filed by both parties, in view of a possible amicable settlement, would be
granted; that in view of the decision of the Court of Appeals in two previous cases between the
owners of the land and the plaintiff Rosario Yulo, the plaintiff has no right to claim the alleged
participation in the profit of the business, etc. The court, finding the above motion, well-
founded, set aside its decision and a new trial was held. After trial the court rendered the
decision making the following findings: that it is not true that a partnership was created
between the plaintiff and the defendant because defendant has not actually contributed the sum
mentioned in the Articles of Partnership, or any other amount; that the real agreement between
the plaintiff and the defendant is not of the partnership but one of the lease for the reason that
under the agreement the plaintiff did not share either in the profits or in the losses of the
business as required by Article 1769 of the Civil Code; and that the fact that plaintiff was
granted a "guaranteed participation" in the profits also belies the supposed existence of a
partnership between them. It. therefore, denied plaintiff's claim for damages or supposed
participation in the profits.
As to her claim for damages for the refusal of the defendant to allow the use of the supposed
lobby of the theatre, the court after ocular inspection found that the said lobby was very
narrow space leading to the balcony of the theatre which could not be used for business
purposes under existing ordinances of the City of Manila because it would constitute a hazard
and danger to the patrons of the theatre. The court, therefore, dismissed the complaint; so did
it dismiss the defendant's counterclaim, on the ground that the defendant failed to present
sufficient evidence to sustain the same. It is against this decision that the appeal has been
prosecuted by plaintiff to this Court.
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place,
she did not furnish any help or intervention in the management of the theatre. In the third
place, it does not appear that she has ever demanded from defendant any accounting of the
expenses and earnings of the business. Were she really a partner, her first concern should have
been to find out how the business was progressing, whether the expenses were legitimate,
whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts
that a partner should have done; all that she did was to receive her share of P3,000 a month,
which can not be interpreted in any manner than a payment for the use of the premises which
she had leased from the owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties
considered this offer as the real contract between them.
Plaintiff claims the sum of P41,000 as representing her share or participation in the business
from December, 1949. But the original letter of the defendant, Exh. "A", expressly states that
the agreement between the plaintiff and the defendant was to end upon the termination of the
right of the plaintiff to the lease. Plaintiff's right having terminated in July, 1949 as found by
the Court of Appeals, the partnership agreement or the agreement for her to receive a
participation of P3,000 automatically ceased as of said date.
We find no error in the judgment of the court below and we affirm it in toto, with costs against
plaintiff-appellant.
Paras C.J., Padilla, Bautista Angelo, Endencia, and Barrera, JJ., concur.

The first assignment of error imputed to the trial court is its order setting aside its former
decision and allowing a new trial. This assignment of error is without merit. As that parties
agreed to postpone the trial because of a probable amicable settlement, the plaintiff could not
take advantage of defendant's absence at the time fixed for the hearing. The lower court,
therefore, did not err in setting aside its former judgment. The final result of the hearing shown
by the decision indicates that the setting aside of the previous decision was in the interest of
justice.

In the second assignment of error plaintiff-appellant claims that the lower court erred in not
striking out the evidence offered by the defendant-appellee to prove that the relation between
him and the plaintiff is one of the sublease and not of partnership. The action of the lower
court in admitting evidence is justified by the express allegation in the defendant's answer that
the agreement set forth in the complaint was one of lease and not of partnership, and that the
partnership formed was adopted in view of a prohibition contained in plaintiff's lease against a
sublease of the property.

The most important issue raised in the appeal is that contained in the fourth assignment of
error, to the effect that the lower court erred in holding that the written contracts, Exhs. "A",
"B", and "C, between plaintiff and defendant, are one of lease and not of partnership. We have
gone over the evidence and we fully agree with the conclusion of the trial court that the
agreement was a sublease, not a partnership. The following are the requisites of partnership:
(1) two or more persons who bind themselves to contribute money, property, or industry to a
common fund; (2) intention on the part of the partners to divide the profits among themselves.
(Art. 1767, Civil Code.).

8
G.R. No. 159333 July 31, 2006
ARSENIO T. MENDIOLA, petitioner,
vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC
FOREST RESOURCES, PHILS., INC. and/or CELLMARK AB, respondents.
DECISION
PUNO, J.:
On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated January 30, 2003
and July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the ruling3 of the
National Labor Relations Commission (NLRC), which in turn set aside the July 30, 2001
Decision4 of the labor arbiter. The labor arbiter declared illegal the dismissal of petitioner
from employment and awarded separation pay, moral and exemplary damages, and attorney's
fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized
and existing under the laws of California, USA. It is a subsidiary of Cellulose Marketing
International, a corporation duly organized under the laws of Sweden, with principal office in
Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side Agreement on Representative Office known as
Pacific Forest Resources (Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM), effective
May 1, 1995, "assuming that Pacfor-Phils. is already approved by the Securities and Exchange
Commission [SEC] on the said date."6 The Side Agreement outlines the business relationship
of the parties with regard to the Philippine operations of Pacfor. Private respondent will
establish a Pacfor representative office in the Philippines, to be known as Pacfor Phils, and
petitioner ATM will be its President. Petitioner's base salary and the overhead expenditures of
the company shall be borne by the representative office and funded by Pacfor/ATM, since
Pacfor Phils. is equally owned on a 50-50 equity by ATM and Pacfor-usa.
On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to
transact business in the Philippines under the name of Pacfor or Pacfor Phils. 7 In its
application, private respondent Pacfor proposed to establish its representative office in the
Philippines with the purpose of monitoring and coordinating the market activities for paper
products. It also designated petitioner as its resident agent in the Philippines, authorized to
accept summons and processes in all legal proceedings, and all notices affecting the
corporation.8
In March 1997, the Side Agreement was amended through a "Revised Operating and Profit
Sharing Agreement for the Representative Office Known as Pacific Forest Resources
(Philippines),"9 where the salary of petitioner was increased to $78,000 per annum. Both
agreements show that the operational expenses will be borne by the representative office and
funded by all parties "as equal partners," while the profits and commissions will be shared
among them.
9
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor Phils.10 Private respondent Pacfor, through William
Gleason, its President, replied that petitioner is not a part-owner of Pacfor Phils. because the
latter is merely Pacfor-USA's representative office and not an entity separate and distinct from
Pacfor-USA. "It's simply a 'theoretical company' with the purpose of dividing the income 50-
50."11 Petitioner presumably knew of this arrangement from the start, having been the one to
propose to private respondent Pacfor the setting up of a representative office, and "not a
branch office" in the Philippines to save on taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint venture with
them. He alleged he would have been better off remaining as an independent agent or
representative of Pacfor-USA as ATM Marketing Corp.13 Had he known that no joint venture
existed, he would not have allowed Pacfor to take the profitable business of his own company,
ATM Marketing Corp.14 Petitioner raised other issues, such as the rentals of office furniture,
salary of the employees, company car, as well as commissions allegedly due him. The issues
were not resolved, hence, in October 2000, petitioner wrote Pacfor-USA demanding payment
of unpaid commissions and office furniture and equipment rentals, amounting to more than
one million dollars.15
On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn
over to it all papers, documents, files, records, and other materials in his or ATM Marketing
Corporation's possession that belong to Pacfor or Pacfor Phils.16 On December 18, 2000,
private respondent Pacfor also required petitioner to remit more than three hundred thousand-
peso Christmas giveaway fund for clients of Pacfor Phils.17 Lastly, private respondent Pacfor
withdrew all its offers of settlement and ordered petitioner to transfer title and turn over to it
possession of the service car.18
Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them
not to deal with Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc., dated
November 21, 2000, private respondent Pacfor stated:
Until further notice, please course all inquiries and communications for Pacific
Forest Resources (Philippines) to:
Pacific Forest Resources
200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax
Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the
offices of ATM Marketing Corporation at Room 504, Concorde Building, Legaspi
Village, Makati City, Philippines.19
In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December
2000, private respondent directed said client "to please communicate directly with us on any
further questions associated with these payments or any future business. Do not communicate
with [Pacfor] and/or [ATM]."20
Petitioner construed these directives as a severance of the "unregistered partnership" between
him and Pacfor, and the termination of his employment as resident manager of Pacfor Phils. 21
In a memorandum to the employees of Pacfor Phils., dated January 29, 2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all
records to them effective December 19, 2000. The company records were turned
over only on January 26, 2001. This means our jobs with Pacific Forest were
terminated effective December 19, 2000. I am concerned about your welfare. I
would like to help you by offering you to work with ATM Marketing Corporation.
Please let me know if you are interested.22
On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own
Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.'
office furniture and equipment and the service car. He also reiterated his demand for unpaid
commissions, and proposed to offset these with the remaining Christmas giveaway fund in his
possession.23 Furthermore, he did not renew the lease contract with Pulp and Paper, Inc., the
lessor of the office premises of Pacfor Phils., wherein he was the signatory to the lease
agreement.24
On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension
and ordered him to show cause why no disciplinary action should be taken against him.
Private respondent Pacfor charged petitioner with willful disobedience and serious misconduct
for his refusal to turn over the service car and the Christmas giveaway fund which he applied
to his alleged unpaid commissions. Private respondent also alleged loss of confidence and
gross neglect of duty on the part of petitioner for allegedly allowing another corporation
owned by petitioner's relatives, High End Products, Inc. (HEPI), to use the same telephone and
facsimile numbers of Pacfor, to possibly steal and divert the sales and business of private
respondent for HEPI's principal, International Forest Products, a competitor of private
respondent.25
Petitioner denied the charges. He reiterated that he considered the import of Pacfor President
William Gleason's letters as a "cessation of his position and of the existence of Pacfor Phils."
He likewise informed private respondent Pacfor that ATM Marketing Corp. now occupies
Pacfor Phils.' office premises,26 and demanded payment of his separation pay.27 On February
15, 2001, petitioner filed his complaint for illegal dismissal, recovery of separation pay, and
payment of attorney's fees with the NLRC.28
In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private respondent directed petitioner to explain why he
should not be disciplined for serious misconduct and conflict of interest. Private respondent
charged petitioner anew with serious misconduct for the latter's alleged act of fraud and
misrepresentation in authorizing the release of an additional peso salary for himself, besides
the dollar salary agreed upon by the parties. Private respondent also accused petitioner of
disloyalty and representation of conflicting interests for having continued using the Pacfor
Phils.' office for operations of HEPI. In addition, petitioner allegedly solicited business for
HEPI from a competitor company of private respondent Pacfor. 29
10
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal.
By directing petitioner to turn over all office records and materials, regardless of whether he
may have retained copies, private respondent Pacfor virtually deprived petitioner of his job by
the gradual diminution of his authority as resident manager. Petitioner's position as resident
manager whose duty, among others, was to maintain the security of its business transactions
and communications was rendered meaningless. The dispositive portion of the decision of the
Labor Arbiter reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering herein
respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to
compensate complainant Arsenio T. Mendiola separation pay equivalent to at least
one month for every year of service, whichever is higher (sic), as reinstatement is no
longer feasible by reason of the strained relations of the parties equivalent to five (5)
months in the amount of $32,000.00 plus the sum of P250,000.00; pay complainant
the sum of P500,000.00 as moral and exemplary damages and ten percent (10%) of
the amounts awarded as and for attorney's fees.
All other claims are dismissed for lack of basis.
SO ORDERED.30
Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20,
2001, the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack of
jurisdiction and lack of merit.31 It held there was no employer-employee relationship between
the parties. Based on the two agreements between the parties, it concluded that petitioner is
not an employee of private respondent Pacfor, but a full co-owner (50/50 equity).
The NLRC denied petitioner's Motion for Reconsideration.32
Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld
the ruling of the NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.
Hence, this appeal.34
Petitioner assigns the following errors:
A. The Respondent Court of Appeals committed reversible error and abused its
discretion in rendering judgment against petitioner since jurisdiction has been
acquired over the subject matter of the case as there exists employer-employee
relationship between the parties.
B. The Respondent Court of Appeals committed reversible error and abused its
discretion in ruling that jurisdiction over the subject matter cannot be waived and
may be alleged even for the first time on appeal or considered by the court motu
prop[r]io.35
The first issue is whether an employer-employee relationship exists between petitioner and
private respondent Pacfor.
Petitioner argues that he is an industrial partner of the partnership he formed with private
respondent Pacfor, and also an employee of the partnership. Petitioner insists that an industrial
partner may at the same time be an employee of the partnership, provided there is such an
agreement, which, in this case, is the "Side Agreement" and the "Revised Operating and Profit
Sharing Agreement." The Court of Appeals denied the appeal of petitioner, holding that "the
legal basis of the complaint is not employment but perhaps partnership, co-ownership, or
independent contractorship." Hence, the Labor Code cannot apply.
We hold that petitioner is an employee of private respondent Pacfor and that no partnership or
co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the firm capital and
of all property that may be acquired thereby and through the efforts of the members. 36 The
property or stock of the partnership forms a community of goods, a common fund, in which
each party has a proprietary interest.37 In fact, the New Civil Code regards a partner as a co-
owner of specific partnership property.38 Each partner possesses a joint interest in the whole of
partnership property. If the relation does not have this feature, it is not one of partnership. 39
This essential element, the community of interest, or co-ownership of, or joint interest in
partnership property is absent in the relations between petitioner and private respondent
Pacfor. Petitioner is not a part-owner of Pacfor Phils. William Gleason, private respondent
Pacfor's President established this fact when he said that Pacfor Phils. is simply a "theoretical
company" for the purpose of dividing the income 50-50. He stressed that petitioner knew of
this arrangement from the very start, having been the one to propose to private respondent
Pacfor the setting up of a representative office, and "not a branch office" in the Philippines to
save on taxes. Thus, the parties in this case, merely shared profits. This alone does not make a
partnership.40
Besides, a corporation cannot become a member of a partnership in the absence of express
authorization by statute or charter.41 This doctrine is based on the following considerations: (1)
that the mutual agency between the partners, whereby the corporation would be bound by the
acts of persons who are not its duly appointed and authorized agents and officers, would be
inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively; and, (2) that such an arrangement would improperly allow
corporate property to become subject to risks not contemplated by the stockholders when they
originally invested in the corporation.42 No such authorization has been proved in the case at
bar.
Be that as it may, we hold that on the basis of the evidence, an employer-employee
relationship is present in the case at bar. The elements to determine the existence of an
employment relationship are: (a) the selection and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal; and (d) the employer's power to control the
employee's conduct. The most important element is the employer's control of the employee's
conduct, not only as to the result of the work to be done, but also as to the means and methods
to accomplish it.43
In the instant case, all the foregoing elements are present. First, it was private respondent
Pacfor which selected and engaged the services of petitioner as its resident agent in the
11
Philippines. Second, as stipulated in their Side Agreement, private respondent Pacfor pays
petitioner his salary amounting to $65,000 per annum which was later increased to $78,000.
Third, private respondent Pacfor holds the power of dismissal, as may be gleaned through the
various memoranda it issued against petitioner, placing the latter on preventive suspension
while charging him with various offenses, including willful disobedience, serious misconduct,
and gross neglect of duty, and ordering him to show cause why no disciplinary action should
be taken against him.
Lastly and most important, private respondent Pacfor has the power of control over the means
and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual exercise
thereof. The principal consideration is whether the employer has the right to control the
manner of doing the work, and it is not the actual exercise of the right by interfering with the
work, but the right to control, which constitutes the test of the existence of an employer-
employee relationship.44 In the case at bar, private respondent Pacfor, as employer, clearly
possesses such right of control. Petitioner, as private respondent Pacfor's resident agent in the
Philippines, is, exactly so, only an agent of the corporation, a representative of Pacfor, who
transacts business, and accepts service on its behalf.
This right of control was exercised by private respondent Pacfor during the period of
November to December 2000, when it directed petitioner to turn over to it all records of
Pacfor Phils.; when it ordered petitioner to remit the Christmas giveaway fund intended for
clients of Pacfor Phils.; and, when it withdrew all its offers of settlement and ordered
petitioner to transfer title and turn over to it the possession of the service car. It was also
during this period when private respondent Pacfor sent letters to its clients in the Philippines,
particularly Intercontinental Paper Industries, Inc. and DAVCOR, advising them not to deal
with petitioner and/or Pacfor Phils. In its letter to DAVCOR, private respondent Pacfor replied
to the client's request for an invoice payment extension, and formulated a revised payment
program for DAVCOR. This is one unmistakable proof that private respondent Pacfor
exercises control over the petitioner.
Next, we shall determine if petitioner was constructively dismissed from employment.
The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and
would not quit however, private respondent Pacfor began to systematically deprive petitioner
of his duties and benefits to make him feel that his presence in the company was no longer
wanted. First, private respondent Pacfor directed petitioner to turn over to it all records of
Pacfor Phils. This would certainly make the work of petitioner very difficult, if not impossible.
Second, private respondent Pacfor ordered petitioner to remit the Christmas giveaway fund
intended for clients of Pacfor Phils. Then it ordered petitioner to transfer title and turn over to
it the possession of the service car. It also advised its clients in the Philippines, particularly
Intercontinental Paper Industries, Inc. and DAVCOR, not to deal with petitioner and/or Pacfor
Phils. Lastly, private respondent Pacfor appointed a new resident agent for Pacfor Phils. 45
Although there is no reduction of the salary of petitioner, constructive dismissal is still present
because continued employment of petitioner is rendered, at the very least, unreasonable. 46
There is an act of clear discrimination, insensibility or disdain by the employer that continued
employment may become so unbearable on the part of the employee so as to foreclose any
choice on his part except to resign from such employment. 47
The harassing acts of the private respondent are unjustified. They were undertaken when
petitioner sought clarification from the private respondent about his supposed 50% equity on
Pacfor Phils. Private respondent Pacfor invokes its rights as an owner. Allegedly, its issuance
of the foregoing directives against petitioner was a valid exercise of management prerogative.
We remind private respondent Pacfor that the exercise of management prerogative is not
absolute. "By its very nature, encompassing as it could be, management prerogative must be
exercised in good faith and with due regard to the rights of labor – verily, with the principles
of fair play at heart and justice in mind." The exercise of management prerogative cannot be
utilized as an implement to circumvent our laws and oppress employees. 48

As resident agent of private respondent corporation, petitioner occupied a position involving

trust and confidence. In the light of the strained relations between the parties, the full
restoration of an employment relationship based on trust and confidence is no longer possible.
He should be awarded separation pay, in lieu of reinstatement.

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003
Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20,
2001 Decision of the National Labor Relations Commission, are ANNULED and SET
ASIDE. The July 30, 2001 Decision of the Labor Arbiter is REINSTATED with the
MODIFICATION that the amount of P250,000.00 representing an alleged increase in
petitioner's salary shall be deducted from the grant of separation pay for lack of evidence.

SO ORDERED.

Sandoval-Gutierrez, Corona, Azcuna, Garcia, J.J., concur.

12
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:
13
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
14
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:
I been reduced to writing, it is to be considered as containing all such terms,
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)
15
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention
of the parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is
clearly stated that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement
was to establish a joint venture presented by the Lagdameo and Young Group on the ground
that it contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of
Court. According to them, the Lagdameo and Young Group never pleaded in their pleading
that the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have
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
16
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
17
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.
18
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
19
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.
G.R. No. 127347 November 25, 1999
ALFREDO N. AGUILA, JR., petitioner,
vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR,
respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated
November 29, 1990, which reversed the decision of the Regional Trial Court, Branch 273,
Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed the petition for
declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de
Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending
activities. Private respondent and her late husband, Ruben M. Abrogar, were the registered
owners of a house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina,
Metro Manila. On April 18, 1991, private respondent, with the consent of her late husband,
and A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of
Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the
above-described property from the FIRST PARTY [Felicidad S. Vda. de
Abrogar], and pursuant to this agreement, a Deed of Absolute Sale shall be
executed by the FIRST PARTY conveying the property to the SECOND
PARTY for and in consideration of the sum of Two Hundred Thousand
Pesos (P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the
option to repurchase the said property within a period of ninety (90) days
from the execution of this memorandum of agreement effective April 18,
1991, for the amount of TWO HUNDRED THIRTY THOUSAND
PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to
repurchase the said property within a period of ninety (90) days, the
FIRST PARTY is obliged to deliver peacefully the possession of the
property to the SECOND PARTY within fifteen (15) days after the
expiration of the said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges herself not to
file any lis pendens or whatever claims on the property nor shall be cause
the annotation of say claim at the back of the title to the said property;
20
(5) With the execution of the deed of absolute sale, the FIRST PARTY
warrants her ownership of the property and shall defend the rights of the
SECOND PARTY against any party whom may have any interests over
the property;
(6) All expenses for documentation and other incidental expenses shall be
for the account of the FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful possession of the
property to the SECOND PARTY after the expiration of the 15-day grace
period given in paragraph 3 above, the FIRST PARTY shall pay an
amount equivalent to Five Percent of the principal amount of TWO
HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and
for rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the
property within ninety (90) days period above-mentioned, this
memorandum of agreement shall be deemed cancelled and the Deed of
Absolute Sale, executed by the parties shall be the final contract
considered as entered between the parties and the SECOND PARTY shall
proceed to transfer ownership of the property above described to its name
free from lines and encumbrances. 2
On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale, 3 dated
June 11, 1991, wherein private respondent, with the consent of her late husband, sold the
subject property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000,00. In a
special power of attorney dated the same day, April 18, 1991, private respondent authorized
petitioner to cause the cancellation of TCT No. 195101 and the issuance of a new certificate of
title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject
property as provided in the Memorandum of Agreement. 4
Private respondent failed to redeem the property within the 90-day period as provided in the
Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned
above, petitioner caused the cancellation of TCT No. 195101 and the issuance of a new
certificate of title in the name of A.C. Aguila and Sons, Co. 5
Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C.
Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within
15 days after receipt of the letter and surrender its possession peacefully to A.C. Aguila &
Sons, Co. Otherwise, the latter would bring the appropriate action in court. 6
Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons,
Co. filed an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina,
Metro Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor
of A.C. Aguila & Sons, Co. on the ground that private respondent did not redeem the subject
property before the expiration of the 90-day period provided in the Memorandum of
Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig,
Metro Manila, then to the Court of Appeals, and later to this Court, but she lost in all the
cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale with the
Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged
that the signature of her husband on the deed of sale was a forgery because he was already
dead when the deed was supposed to have been executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for falsification
against petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a
resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiff's claim therefore that the Deed of Absolute Sale is a forgery
because they could not personally appear before Notary Public Lamberto
C. Nanquil on June 11, 1991 because her husband, Ruben Abrogar, died
on May 8, 1991 or one month and 2 days before the execution of the Deed
of Absolute Sale, while the plaintiff was still in the Quezon City Medical
Center recuperating from wounds which she suffered at the same vehicular
accident on May 8, 1991, cannot be sustained. The Court is convinced that
the three required documents, to wit: the Memorandum of Agreement, the
Special Power of Attorney, and the Deed of Absolute Sale were all signed
by the parties on the same date on April 18, 1991. It is a common and
accepted business practice of those engaged in money lending to prepare
an undated absolute deed of sale in loans of money secured by real estate
for various reasons, foremost of which is the evasion of taxes and
surcharges. The plaintiff never questioned receiving the sum of
P200,000.00 representing her loan from the defendant. Common sense
dictates that an established lending and realty firm like the Aguila & Sons,
Co. would not part with P200,000.00 to the Abrogar spouses, who are
virtual strangers to it, without the simultaneous accomplishment and
signing of all the required documents, more particularly the Deed of
Absolute Sale, to protect its interest.
xxx xxx xxx
WHEREFORE, foregoing premises considered, the case in caption is
hereby ORDERED DISMISSED, with costs against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-
appellant and defendant-appellee is indubitably an equitable mortgage.
Article 1602 of the New Civil Code finds strong application in the case at
bar in the light of the following circumstances.
First: The purchase price for the alleged sale with right to repurchase is
unusually inadequate. The property is a two hundred forty (240) sq. m. lot.
On said lot, the residential house of plaintiff-appellant stands. The
property is inside a subdivision/village. The property is situated in
21
Marikina which is already part of Metro Manila. The alleged sale took
place in 1991 when the value of the land had considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or
P833.33 per square meter for both the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides
that plaintiff-appellant is obliged to deliver peacefully the possession of
the property to the SECOND PARTY within fifteen (15) days after the
expiration of the said ninety (90) day grace period. Otherwise stated,
plaintiff-appellant is to retain physical possession of the thing allegedly
sold.
In fact, plaintiff-appellant retained possession of the property "sold" as if
they were still the absolute owners. There was no provision for
maintenance or expenses, much less for payment of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay
taxes on the property "sold". It is well-known that payment of taxes
accompanied by actual possession of the land covered by the tax
declaration, constitute evidence of great weight that a person under whose
name the real taxes were declared has a claim of right over the land.
It is well-settled that the presence of even one of the circumstances in
Article 1602 of the New Civil Code is sufficient to declare a contract of
sale with right to repurchase an equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is
unusually inadequate, has retained possession of the subject property and
has continued paying the realty taxes over the subject property,
(circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the
New Civil Code), it must be conclusively presumed that the transaction
the parties actually entered into is an equitable mortgage, not a sale with
right to repurchase. The factors cited are in support to the finding that the
Deed of Sale/Memorandum of Agreement with right to repurchase is in
actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase
was executed by reason of the loan extended by defendant-appellee to
plaintiff-appellant. The amount of loan being the same with the amount of
the purchase price.
xxx xxx xxx
Since the real intention of the party is to secure the payment of debt, now
deemed to be repurchase price: the transaction shall then be considered to
be an equitable mortgage.
 Being a mortgage, the transaction entered into by the parties is in the
nature of a pactum commissorium which is clearly prohibited by Article
2088 of the New Civil Code. Article 2088 of the New Civil Code reads:
Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged by way of security for the
payment of principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing pledged and
mortgaged in the event of non-payment of the principal obligation within
the stipulated period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to
plaintiff-appellant secured by a mortgage on the property of plaintiff-
appellant. The loan was payable within ninety (90) days, the period within
which plaintiff-appellant can repurchase the property. Plaintiff-appellant
will pay P230,000.00 and not P200,000.00, the P30,000.00 excess is the
interest for the loan extended. Failure of plaintiff-appellee to pay the
P230,000.00 within the ninety (90) days period, the property shall
automatically belong to defendant-appellee by virtue of the deed of sale
executed.
Clearly, the agreement entered into by the parties is in the nature of
pactum commissorium. Therefore, the deed of sale should be declared void
as we hereby so declare to be invalid, for being violative of law.
xxx xxx xxx
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET ASIDE. The questioned Deed of Sale and the
cancellation of the TCT No. 195101 issued in favor of plaintiff-appellant
and the issuance of TCT No. 267073 issued in favor of defendant-appellee
pursuant to the questioned Deed of Sale is hereby declared VOID and is
hereby ANNULLED. Transfer Certificate of Title No. 195101 of the
Registry of Marikina is hereby ordered REINSTATED. The loan in the
amount of P230,000.00 shall be paid within ninety (90) days from the
finality of this decision. In case of failure to pay the amount of
P230,000.00 from the period therein stated, the property shall be sold at
public auction to satisfy the mortgage debt and costs and if there is an
excess, the same is to be given to the owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co.,
against which this case should have been brought; (2) the judgment in the ejectment case is a
bar to the filing of the complaint for declaration of nullity of a deed of sale in this case; and (3)
22
the contract between A.C. Aguila & Sons, Co. and private respondent is a pacto de retro sale
and not an equitable mortgage as held by the appellate court.
The petition is meritorious.
Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed,
provided that "every action must be prosecuted and defended in the name of the real party in
interest." A real party in interest is one who would be benefited or injured by the judgment, or
who is entitled to the avails of the suit. 7 This ruling is now embodied in Rule 3, §2 of the
1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is not a
real party in interest in the case cannot be executed. 8 Hence, a complaint filed against such a
person should be dismissed for failure to state a cause of action. 9
Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and
distinct from that of each of the partners." The partners cannot be held liable for the
obligations of the partnership unless it is shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or illegal purposes. 10 In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being
used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject property is in
the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was executed
between private respondent, with the consent of her late husband, and A.C. Aguila & Sons,
Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which
should be impleaded in any litigation involving property registered in its name. A violation of
this rule will result in the dismissal of the complaint. 11 We cannot understand why both the
Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely
raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this action should
be prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint
against petitioner is DISMISSED.
SO ORDERED.
Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
G.R. No. 144214 July 14, 2003
LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE,
petitioners,
vs.
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and
CARMELITA C. RAMIREZ, respondents.
PANGANIBAN, J.:
A share in a partnership can be returned only after the completion of the latter's dissolution,
liquidation and winding up of the business.
The Case
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision1 and
the July 26, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR CV No. 41026. The
assailed Decision disposed as follows:
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992
rendered by the Regional Trial Court, Branch 148, Makati City is hereby SET
ASIDE and NULLIFIED and in lieu thereof a new decision is rendered ordering the
[petitioners] jointly and severally to pay and reimburse to [respondents] the amount
of P253,114.00. No pronouncement as to costs."4
Reconsideration was denied in the impugned Resolution.
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership
with a capital of P750,000 for the operation of a restaurant and catering business under the
name "Aquarius Food House and Catering Services."5 Villareal was appointed general
manager and Carmelito Jose, operations manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5,
1984. His capital contribution of P250,000 was paid by his parents, Respondents Cesar and
Carmelita Ramirez.6
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of
P250,000 was refunded to him in cash by agreement of the partners.7
In the same month, without prior knowledge of respondents, petitioners closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment were
deposited in the respondents' house for storage.8
23
On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer
interested in continuing their partnership or in reopening the restaurant, and that they were
accepting the latter's offer to return their capital contribution.9
On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also
reiterated the request for the return of their one-third share in the equity of the partnership. The
repeated oral and written requests were, however, left unheeded. 10
Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a
Complaint11 dated November 10, 1987, for the collection of a sum of money from petitioners.
In their Answer, petitioners contended that respondents had expressed a desire to withdraw
from the partnership and had called for its dissolution under Articles 1830 and 1831 of the
Civil Code; that respondents had been paid, upon the turnover to them of furniture and
equipment worth over P400,000; and that the latter had no right to demand a return of their
equity because their share, together with the rest of the capital of the partnership, had been
spent as a result of irreversible business losses.12
In their Reply, respondents alleged that they did not know of any loan encumbrance on the
restaurant. According to them, if such allegation were true, then the loans incurred by
petitioners should be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business. Respondents also alleged
that they expected the equipment and the furniture stored in their house to be removed by
petitioners as soon as the latter found a better location for the restaurant. 13
Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant
Furniture and Equipment14 on July 8, 1988. The furniture and the equipment stored in their
house were inventoried and appraised at P29,000.15 The display freezer was sold for P5,000
and the proceeds were paid to them.16
After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which
could be dissolved at any time. Petitioners clearly intended to dissolve it when they stopped
operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held there liable
as follows:18
"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against
the [petitioners] ordering the [petitioners] to pay jointly and severally the following:
(a) Actual damages in the amount of P250,000.00
(b) Attorney's fee in the amount of P30,000.00
(c) Costs of suit."
The CA Ruling
The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in
continuing the restaurant business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and because no sufficient
evidence was presented to show financial losses, the CA. computed their liability as follows:
"Consequently, since what has been proven is only the outstanding obligation of the
partnership in the amount of P240,658.00, although contracted by the partnership
before [respondents'] have joined the partnership but in accordance with Article
1826 of the New Civil Code, they are liable which must have to be deducted from
the remaining capitalization of the said partnership which is in the amount of
P1,000,000.00 resulting in the amount of P759,342.00, and in order to get the share
of [respondents], this amount of P759,342.00 must be divided into three (3) shares
or in the amount of P253,114.00 for each share and which is the only amount which
[petitioner] will return to [respondents'] representing the contribution to the
partnership minus the outstanding debt thereof."19
Hence, this Petition.20
Issues
In their Memorandum,21 petitioners submit the following issues for our consideration:
"9.1. Whether the Honorable Court of Appeals' decision ordering the distribution of
the capital contribution, instead of the net capital after the dissolution and
liquidation of a partnership, thereby treating the capital contribution like a loan, is in
accordance with law and jurisprudence;
"9.2. Whether the Honorable Court of Appeals' decision ordering the petitioners to
jointly and severally pay and reimburse the amount of [P]253,114.00 is supported by
the evidence on record; and
"9.3. Whether the Honorable Court of Appeals was correct in making [n]o
pronouncement as to costs."22
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents
for the latter's share in the partnership; (2) whether the CA's computation of P253,114 as
respondents' share is correct; and (3) whether the CA was likewise correct in not assessing
costs.
This Court's Ruling
The Petition has merit.
First Issue:
Share in Partnership
24
Both the trial and the appellate courts found that a partnership had indeed existed, and that it
was dissolved on March 1, 1987. They found that the dissolution took place when respondents
informed petitioners of the intention to discontinue it because of the former's dissatisfaction
with, and loss of trust in, the latter's management of the partnership affairs. These findings
were amply supported by the evidence on record. Respondents consequently demanded from
petitioners the return of their one-third equity in the partnership.
We hold that respondents have no right to demand from petitioners the return of their equity
share. Except as managers of the partnership, petitioners did not personally hold its equity or
assets. "The partnership has a juridical personality separate and distinct from that of each of
the partners."23 Since the capital was contributed to the partnership, not to petitioners, it is the
partnership that must refund the equity of the retiring partners. 24
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its total resources. In other words,
it can only pay out what it has in its coffers, which consists of all its assets. However, before
the partners can be paid their shares, the creditors of the partnership must first be
compensated.25 After all the creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners' shares.
Evidently, in the present case, the exact amount of refund equivalent to respondents' one-third
share in the partnership cannot be determined until all the partnership assets will have been
liquidated — in other words, sold and converted to cash — and all partnership creditors, if
any, paid. The CA's computation of the amount to be refunded to respondents as their share
was thus erroneous.
First, it seems that the appellate court was under the misapprehension that the total capital
contribution was equivalent to the gross assets to be distributed to the partners at the time of
the dissolution of the partnership. We cannot sustain the underlying idea that the capital
contribution at the beginning of the partnership remains intact, unimpaired and available for
distribution or return to the partners. Such idea is speculative, conjectural and totally without
factual or legal support.
Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the
changing fortunes of the business. In the present case, the financial statements presented
before the trial court showed that the business had made meager profits. 26 However, notable
therefrom is the omission of any provision for the depreciation 27 of the furniture and the
equipment. The amortization of the goodwill28 (initially valued at P500,000) is not reflected
either. Properly taking these non-cash items into account will show that the partnership was
actually sustaining substantial losses, which consequently decreased the capital of the
partnership. Both the trial and the appellate courts in fact recognized the decrease of the
partnership assets to almost nil, but the latter failed to recognize the consequent corresponding
decrease of the capital.
Second, the CA's finding that the partnership had an outstanding obligation in the amount of the court shall have power, for special reasons, to adjudge that either party shall pay
P240,658 was not supported by evidence. We sustain the contrary finding of the RTC, which the costs of an action, or that the same be divided, as may be equitable. No costs
had rejected the contention that the obligation belonged to the partnership for the following shall be allowed against the Republic of the Philippines unless otherwise provided
reason: by law."

"x x x [E]vidence on record failed to show the exact loan owed by the partnership to
its creditors. The balance sheet (Exh. '4') does not reveal the total loan. The
Agreement (Exh. 'A') par. 6 shows an outstanding obligation of P240,055.00 which
the partnership owes to different creditors, while the Certification issued by
Mercator Finance (Exh. '8') shows that it was Sps. Diogenes P. Villareal and
Luzviminda J. Villareal, the former being the nominal party defendant in the instant
case, who obtained a loan of P355,000.00 on Oct. 1983, when the original
partnership was not yet formed."
Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by
the partnership to Jesus Jose when he withdrew from the partnership.
Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for
special reasons," to decree otherwise. When a lower court is reversed, the higher court
normally does not award costs, because the losing party relied on the lower court's judgment
which is presumed to have been issued in good faith, even if found later on to be erroneous.
Unless shown to be patently capricious, the award shall not be disturbed by a reviewing
tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET
ASIDE. This disposition is without prejudice to proper proceedings for the accounting, the
liquidation and the distribution of the remaining partnership assets, if any. No pronouncement
as to costs.

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

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

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

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

Third Issue:
Costs

Section 1, Rule 142, provides:

"SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided

in these rules, costs shall be allowed to the prevailing party as a matter of course, but
25
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al.
and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the
tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1
that the unregistered partnership was subject to corporate income tax as distinguished from
profits derived from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax
liability of the unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as
CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30,
26
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners which like a corporation was subject to corporate
income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering
the circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "hem liable for corporate income tax under the Tax
Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of
the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT COMMISSIONER, TO
THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND
THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED
SALE TRANSACTIONS, THAT AN UNREGISTERED
PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS
LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE
EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE
PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE
PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in
Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with
their own personal funds they used in buying several real properties. They appointed their
brother to manage their properties with full power to lease, collect, rent, issue receipts, etc.
They had the real properties rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded
the payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the
terms corporation and partnership as used in sections 24 and 84 of said
Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed,
collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in,
or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships
(companies collectives), a tax upon such income equal to the sum of the
following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
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.
Pursuant to this article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent
in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and
then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It
was not a property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On
April 3, 1944, they purchased 21 lots for P18,000.00. This was soon
followed, on April 23, 1944, by the acquisition of another real estate for
27
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations
undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other
personal uses, of petitioners herein. The properties were leased separately
to several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of
one person, namely, Simeon Evangelists, with full power to lease, to
collect rents, to issue receipts, to bring suits, to sign letters and contracts,
and to indorse and deposit notes and checks. Thus, the affairs relative to
said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or,
to be exact, over fifteen (15) years, since the first property was acquired,
and over twelve (12) years, since Simeon Evangelists became the
manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation
therefor.
Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of
said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the
profits among themselves. Respondent commissioner and/ or his representative just assumed
these conditions to be present on the basis of the fact that petitioners purchased certain parcels
of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four
(24) lots showing that the purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. The character of habituality peculiar
to business transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the
same nor make any improvements thereon. In 1966, they bought another three (3) parcels of
land from one seller. It was only 1968 when they sold the two (2) parcels of land after which
they did not make any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15)
years. None of the circumstances are present in the case at bar. The co-ownership started only
in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should
be deemed a partnership or a co-ownership. Said article paragraphs 2 and
3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the
property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself establish
a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. This only means that, aside from
the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership,
the existence of a juridical personality different from that of the individual
partners, and the freedom to transfer or assign any interest in the property
by one with the consent of the others (Padilla, Civil Code of the
Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of
other circumstances showing a contrary intention cannot be considered a
partnership.
28
Persons who contribute property or funds for a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in
the business itself which the proceeds derived. (Elements of the Law of
Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in
respect thereto; nor does an agreement to share the profits and losses on
the sale of land create a partnership; the parties are only tenants in
common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a
single tract of realty, holding as tenants in common, and to divide the
profits of disposing of it, the brother and the other not being entitled to
share in plaintiffs commission, no partnership existed as between the three
parties, whatever their relation may have been as to third parties. (Magee
vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent
to form the same; (b) generally participating in both profits and losses; (c)
and such a community of interest, as far as third persons are concerned as
enables each party to make contract, manage the business, and dispose of
the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III
470.)
The common ownership of property does not itself create a partnership
between the owners, though they may use it for the purpose of making
gains; and they may, without becoming partners, agree among themselves
as to the management, and use of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App.
14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is
no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the
same a few years thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of any further tax liability
arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of
Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision
is hereby rendered relieving petitioners of the corporate income tax liability in this case,
without pronouncement as to costs.

SO ORDERED.

Cruz, Griño-Aquino and Medialdea, JJ., concur.

Narvasa, J., took no part.

29
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
Year
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
1949 — P87,860.00
the resolution of said court denying petitioners' motion for reconsideration of said decision.
1950 P24,657.65
The facts are stated in the decision of the Tax Court as follows:
1951 51,301.31
Julia Buñales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oña and her five children. In 1948, Civil1952Case No. 67,927.52
4519 was instituted in the Court of First Instance of Manila for the
1953
settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was 61,258.27
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-
1954the project
41, BIR rec.). On April 14, 1949, the administrator submitted 63,623.37
of partition, which was approved by the Court on May 16, 1949 (See
Exhibit K). Because three of the heirs, namely Luz, Virginia1955and Lorenzo, 100,786.00
Jr., all surnamed Oña, were still minors when the project of partition was
approved, Lorenzo T. Oña, their father and administrator of 1956
the estate, 175,028.68
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
30
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:
Investment Land Building
Account Account Account
P17,590.00
128,566.72 96,076.26
120,349.28 110,605.11
87,065.28 152,674.39
84,925.68 161,463.83
99,001.20 167,962.04
120,249.78 169,262.52
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)
31
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.
32
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.
33
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.

34
G.R. No. 126881 October 3, 2000
HEIRS OF TAN ENG KEE, petitioners,
vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its
President TAN ENG LAY, respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated
March 13, 1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No.
47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and
the complaint dismissed.
The facts are:
Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law
spouse of the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and
Elpidio, collectively known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against
the decedent's brother TAN ENG LAY on February 19, 1990. The complaint,3 docketed as
Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting,
liquidation and winding up of the alleged partnership formed after World War II between Tan
Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint4
impleading private respondent herein BENGUET LUMBER COMPANY, as represented by
Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated May
3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and
Tan Eng Lay, pooling their resources and industry together, entered into a partnership engaged
in the business of selling lumber and hardware and construction supplies. They named their
enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's death.
Petitioners herein averred that the business prospered due to the hard work and thrift of the
alleged partners. However, they claimed that in 1981, Tan Eng Lay and his children caused the
conversion of the partnership "Benguet Lumber" into a corporation called "Benguet Lumber
Company." The incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of
their rightful participation in the profits of the business. Petitioners prayed for accounting of
the partnership assets, and the dissolution, winding up and liquidation thereof, and the equal
division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12,
1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular
partnership;
35
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers
and/or partners in a business venture and/or particular partnership called Benguet
Lumber and as such should share in the profits and/or losses of the business venture
or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to
Benguet Lumber Co. Inc. and as such the heirs or legal representatives of the
deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer
and/or as partner in a particular partnership have descended to the plaintiffs who are
his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General
Manager of Benguet Lumber Company Inc. to render an accounting of all the assets
of Benguet Lumber Company, Inc. so the plaintiffs know their proper share in the
business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of
Benguet Lumber Company, Inc. until such time that said corporation is finally
liquidated are directed to submit the name of any person they want to be appointed
as receiver failing in which this Court will appoint the Branch Clerk of Court or
another one who is qualified to act as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the
expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996,
rendered the assailed decision reversing the judgment of the trial court. Petitioners' motion for
reconsideration7 was denied by the Court of Appeals in a Resolution8 dated October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng
Lay and Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding.
Petitioners complained that Exhibits "4" to "4-U" offered by the defendants before the trial
court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet
Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also
filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean,
Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a
private individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1,
wherein the charges were filed, rendered judgment9 dismissing the cases for insufficiency of
evidence.
In their assignment of errors, petitioners claim that:
I LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND
HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM
ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS
EVIDENCE; (C) THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D)
THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E)
THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP
(PAGE 13, DECISION).
II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON
THE SELF-SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT
BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG
KEE WAS ONLY AN EMPLOYEE THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF
BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP
JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY
RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY
WERE ALL LIVING AT THE BENGUET LUMBER COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE
COMMANDING THE EMPLOYEES OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE
SUPERVISING THE EMPLOYEES THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES
DETERMINING THE PRICES OF STOCKS TO BE SOLD TO THE
PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES
MAKING ORDERS TO THE SUPPLIERS (PAGE 18, DECISION).
IV
36
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS NO PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE
WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO
NOT KNOW WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS
BENGUET LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 16-17,
DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND
HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR
ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00
AND AS SUCH THE EXECUTION OF A PUBLIC INSTRUMENT CREATING
A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC
INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals
will not be disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it
must be emphasized, does not include review of factual issues. Thus:
Filing of petition with Supreme Court. — A party desiring to appeal by certiorari
from a judgment or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts whenever authorized by
law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth.11
[emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to
analyze the evidentiary basis on which the lower court rendered judgment. Review of factual
issues is therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are
contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is
manifestly mistaken, absurd, or impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the
case, and such findings are contrary to the admissions of both appellant and
appellee;
 (6) when the judgment of the Court of Appeals is premised on a misapprehension of
facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly
considered, will justify a different conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific
evidence on which they are based; and
(10) when the findings of fact of the Court of Appeals are premised on the absence
of evidence but such findings are contradicted by the evidence on record.12
In reversing the trial court, the Court of Appeals ruled, to wit:
We note that the Court a quo over extended the issue because while the plaintiffs
mentioned only the existence of a partnership, the Court in turn went beyond that by
justifying the existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing
between the parties, equal proprietary interest and the exercise by the parties equally
of the conduct of the business, thus:
xxx xxx xxx
We have the admission that the father of the plaintiffs was not a partner of the
Benguet Lumber before the war. The appellees however argued that (Rollo, p. 104;
Brief, p. 6) this is because during the war, the entire stocks of the pre-war Benguet
Lumber were confiscated if not burned by the Japanese. After the war, because of
the absence of capital to start a lumber and hardware business, Lay and Kee pooled
the proceeds of their individual businesses earned from buying and selling military
supplies, so that the common fund would be enough to form a partnership, both in
the lumber and hardware business. That Lay and Kee actually established the
Benguet Lumber in Baguio City, was even testified to by witnesses. Because of the
pooling of resources, the post-war Benguet Lumber was eventually established. That
the father of the plaintiffs and Lay were partners, is obvious from the fact that: (1)
they conducted the affairs of the business during Kee's lifetime, jointly, (2) they
were the ones giving orders to the employees, (3) they were the ones preparing
orders from the suppliers, (4) their families stayed together at the Benguet Lumber
compound, and (5) all their children were employed in the business in different
capacities.
xxx xxx xxx
It is obvious that there was no partnership whatsoever. Except for a firm name, there
was no firm account, no firm letterheads submitted as evidence, no certificate of
partnership, no agreement as to profits and losses, and no time fixed for the duration
37
of the partnership. There was even no attempt to submit an accounting
corresponding to the period after the war until Kee's death in 1984. It had no
business book, no written account nor any memorandum for that matter and no
license mentioning the existence of a partnership [citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The
certification dated March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the
only registered owner of the Benguet Lumber and Hardware. His application for
registration, effective 1954, in fact mentioned that his business started in 1945 until
1985 (thereafter, the incorporation). The deceased, Kee, on the other hand, was
merely an employee of the Benguet Lumber Company, on the basis of his SSS
coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to "4-U",
inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee;
precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay
was mentioned also as the proprietor.
xxx xxx xxx
We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be
constituted in any form, but when an immovable is constituted, the execution of a
public instrument becomes necessary. This is equally true if the capitalization
exceeds P3,000.00, in which case a public instrument is also necessary, and which is
to be recorded with the Securities and Exchange Commission. In this case at bar, we
can easily assume that the business establishment, which from the language of the
appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in
addition to the accumulation of real properties and to the fact that it is now a
compound. The execution of a public instrument, on the other hand, was never
established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only
Lay and the members of his family. There is no proof either that the capital assets of
the partnership, assuming them to be in existence, were maliciously assigned or
transferred by Lay, supposedly to the corporation and since then have been treated
as a part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of
the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a
room in the bunk house in Trinidad, but within the compound of the lumber
establishment, as testified to by Tandoc; 2) that both Lay and Kee were seated on a
table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that
both were supervising the laborers, as testified to by Victoria Choi; and 4) that
Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80 pieces
of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract,
either oral or written. However, if it involves real property or where the capital is
P3,000.00 or more, the execution of a contract is necessary; 2) the capacity of the
 parties to execute the contract; 3) money property or industry contribution; 4)
community of funds and interest, mentioning equality of the partners or one having a
proportionate share in the benefits; and 5) intention to divide the profits, being the
true test of the partnership. The intention to join in the business venture for the
purpose of obtaining profits thereafter to be divided, must be established. We cannot
see these elements from the testimonial evidence of the appellees.
As can be seen, the appellate court disputed and differed from the trial court which had
adjudged that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture.
In this connection, we have held that whether a partnership exists is a factual matter;
consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries
relative to the correctness of the assessment of the evidence by the court a quo.13 Inasmuch as
the Court of Appeals and the trial court had reached conflicting conclusions, perforce we must
examine the record to determine if the reversal was justified.
The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet
Lumber. A contract of partnership is defined by law as one where:
. . . two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.14
Thus, in order to constitute a partnership, it must be established that (1) two or more
persons bound themselves to contribute money, property, or industry to a common
fund, and (2) they intend to divide the profits among themselves.15 The agreement
need not be formally reduced into writing, since statute allows the oral constitution
of a partnership, save in two instances: (1) when immovable property or real rights
are contributed,16 and (2) when the partnership has a capital of three thousand pesos
or more.17 In both cases, a public instrument is required.18 An inventory to be
signed by the parties and attached to the public instrument is also indispensable to
the validity of the partnership whenever immovable property is contributed to the
partnership.19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture,
which it said is akin to a particular partnership.20 A particular partnership is distinguished
from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of
informal partnership, with no firm name and no legal personality. In a joint account,
the participating merchants can transact business under their own name, and can be
individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE
TRANSACTION, although the business of pursuing to a successful termination may
continue for a number of years; a partnership generally relates to a continuing
business of various transactions of a certain kind.21
38
A joint venture "presupposes generally a parity of standing between the joint co-ventures or
partners, in which each party has an equal proprietary interest in the capital or property
contributed, and where each party exercises equal rights in the conduct of the business."22
Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23 we
expressed the view that a joint venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal
definition, but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly
distinguishable from the partnership, since their elements are similar — community
of interest in the business, sharing of profits and losses, and a mutual right of
control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95
P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d.
242 [1955]). The main distinction cited by most opinions in common law
jurisdiction is that the partnership contemplates a general business with some degree
of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2
P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that under Philippine law, a joint venture
is a form of partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v.
Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the
articles of partnership but there is none. The alleged partnership, though, was never formally
organized. In addition, petitioners point out that the New Civil Code was not yet in effect
when the partnership was allegedly formed sometime in 1945, although the contrary may well
be argued that nothing prevented the parties from complying with the provisions of the New
Civil Code when it took effect on August 30, 1950. But all that is in the past. The net effect,
however, is that we are asked to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades us that the Court of Appeals
correctly reversed the decision of the trial court. The evidence presented by petitioners falls
short of the quantum of proof required to establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng
Lay, could have expounded on the precise nature of the business relationship between them. In
the absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly
contributed his resources to a common fund for the purpose of establishing a partnership. The
testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It
should be noted that it is not with the number of witnesses wherein preponderance lies;24 the
quality of their testimonies is to be considered. None of petitioners' witnesses could suitably
account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta
whose deceased wife was related to Matilde Abubo.25 He stated that when he met Tan Eng
Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I.
sheets supposedly owned by both brothers.26 Tan Eng Lay, however, denied knowledge of
this meeting or of the conversation between Peralta and his brother.27 Tan Eng Lay
consistently testified that he had his business and his brother had his, that it was only later on
that his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or
co-possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a
partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was
allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a
partnership is that the partners share in the profits and losses.29 Each has the right to demand
an accounting as long as the partnership exists.30 We have allowed a scenario wherein "[i]f
excellent relations exist among the partners at the start of the business and all the partners are
more interested in seeing the firm grow rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible."31 But in the situation in the case at bar, the
deferment, if any, had gone on too long to be plausible. A person is presumed to take ordinary
care of his concerns.32 As we explained in another case:
In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the
second place, she did not furnish any help or intervention in the management of the
theatre. In the third place, it does not appear that she has even demanded from
defendant any accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how the business was
progressing, whether the expenses were legitimate, whether the earnings were
correct, etc. She was absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of P3,000.00 a month,
which cannot be interpreted in any manner than a payment for the use of the
premises which she had leased from the owners. Clearly, plaintiff had always acted
in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"),
which shows that both parties considered this offer as the real contract between
them.33 [emphasis supplied]
A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng
Kee appeared never to have made any such demand for accounting from his brother, Tang Eng
Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of
payrolls purporting to show that Tan Eng Kee was an ordinary employee of Benguet Lumber,
as it was then called. The authenticity of these documents was questioned by petitioners, to the
extent that they filed criminal charges against Tan Eng Lay and his wife and children. As
aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-
U" in fact shows that Tan Eng Kee received sums as wages of an employee. In connection
therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each
other are not partners as to third persons;
39
(2) Co-ownership or co-possession does not of itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is a prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the
profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other
property by installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an
employee, not a partner. Even if the payrolls as evidence were discarded, petitioners would
still be back to square one, so to speak, since they did not present and offer evidence that
would show that Tan Eng Kee received amounts of money allegedly representing his share in
the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee,
received, if any, as his share in the profits of Benguet Lumber Company for any particular
period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the
profits of the business between themselves, which is one of the essential features of a
partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a
partnership from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were
commanding the employees; that both were supervising the employees; that both were the
ones who determined the price at which the stocks were to be sold; and that both placed orders
to the suppliers of the Benguet Lumber Company. They also point out that the families of the
brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a
privilege not extended to its ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated
powers and privileges granted in favor of Tan Eng Kee, were indicative of his being
a partner in Benguet Lumber for the following reasons:
 (i) even a mere supervisor in a company, factory or store gives orders and directions
to his subordinates. So long, therefore, that an employee's position is higher in rank,
it is not unusual that he orders around those lower in rank.

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

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

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

In the instant case, we find private respondent's arguments to be well-taken. Where

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

There being no partnership, it follows that there is no dissolution, winding up or liquidation to

speak of. Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of
Appeals is hereby AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing and Buena, JJ ., concur.

40
G.R. No. 31057 September 7, 1929
Loans on promissory notes.............. 4,258.55

ADRIANO ARBES, ET AL., plaintiffs-appellees, Salaries.................................... 1,095.00

vs.
VICENTE POLISTICO, ET AL., defendants-appellants. Miscellaneous............................... 1,686.10

Marcelino Lontok and Manuel dela Rosa for appellants. 85,012.90

Sumulong & Lavides for appellees.
VILLAMOR, J.:
This is an action to bring about liquidation of the funds and property of the association called
"Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants
were designated as president-treasurer, directors and secretary of said association.
It is well to remember that this case is now brought before the consideration of this court for
the second time. The first one was when the same plaintiffs appeared from the order of the
court below sustaining the defendant's demurrer, and requiring the former to amend their
complaint within a period, so as to include all the members of "Turnuhan Polistico & Co.,"
either as plaintiffs or as a defendants. This court held then that in an action against the officers
of a voluntary association to wind up its affairs and enforce an accounting for money and
property in their possessions, it is not necessary that all members of the association be made
parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case having been remanded to
the court of origin, both parties amend, respectively, their complaint and their answer, and by
agreement of the parties, the court appointed Amadeo R. Quintos, of the Insular Auditor's
Office, commissioner to examine all the books, documents, and accounts of "Turnuhan
Polistico & Co.," and to receive whatever evidence the parties might desire to present.
The commissioner rendered his report, which is attached to the record, with the following
resume:
Income:
Member's shares............................ 97,263.70
Credits paid................................ 6,196.55
Interest received........................... 4,569.45
Miscellaneous............................... 1,891.00
P109,620.70
Expenses:
Cash on hand........................................ 24,607.80
The defendants objected to the commissioner's report, but the trial court, having examined the
reasons for the objection, found the same sufficiently explained in the report and the evidence,
and accepting it, rendered judgment, holding that the association "Turnuhan Polistico & Co."
is unlawful, and sentencing the defendants jointly and severally to return the amount of
P24,607.80, as well as the documents showing the uncollected credits of the association, to the
plaintiffs in this case, and to the rest of the members of the said association represented by said
plaintiffs, with costs against the defendants.
The defendants assigned several errors as grounds for their appeal, but we believe they can all
be reduced to two points, to wit: (1) That not all persons having an interest in this association
are included as plaintiffs or defendants; (2) that the objection to the commissioner's report
should have been admitted by the court below.
As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the attorney of the
defendants, we are of opinion that, the trial court having examined all the evidence touching
the grounds for the objection and having found that they had been explained away in the
commissioner's report, the conclusion reached by the court below, accepting and adopting the
findings of fact contained in said report, and especially those referring to the disposition of the
association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings
of facts made by a referee appointed under the provisions of section 135 of the Code of Civil
Procedure stand upon the same basis, when approved by the Court, as findings made by the
judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under
section 140 of the Code of Civil Procedure it is made the duty of the court to render judgment
in accordance with the report of the referee unless the court shall unless for cause shown set
aside the report or recommit it to the referee. This provision places upon the litigant parties of
the duty of discovering and exhibiting to the court any error that may be contained therein."
The appellants stated the grounds for their objection. The trial examined the evidence and the
commissioner's report, and accepted the findings of fact made in the report. We find no
convincing arguments on the appellant's brief to justify a reversal of the trial court's
conclusion admitting the commissioner's findings.

Premiums to members....................... 68,146.25 There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs.
Baguio, 39 Phil., 962), but the appellants allege that because it is so, some charitable
Loans on real-estate....................... 9,827.00 institution to whom the partnership funds may be ordered to be turned over, should be

41
included, as a party defendant. The appellants refer to article 1666 of the Civil Code, which
provides:
A partnership must have a lawful object, and must be established for the common
benefit of the partners.
When the dissolution of an unlawful partnership is decreed, the profits shall be given
to charitable institutions of the domicile of the partnership, or, in default of such, to
those of the province.
Appellant's contention on this point is untenable. According to said article, no charitable
institution is a necessary party in the present case of determination of the rights of the parties.
The action which may arise from said article, in the case of unlawful partnership, is that for
the recovery of the amounts paid by the member from those in charge of the administration of
said partnership, and it is not necessary for the said parties to base their action to the existence
of the partnership, but on the fact that of having contributed some money to the partnership
capital. And hence, the charitable institution of the domicile of the partnership, and in the
default thereof, those of the province are not necessary parties in this case. The article cited
above permits no action for the purpose of obtaining the earnings made by the unlawful
partnership, during its existence as result of the business in which it was engaged, because for
the purpose, as Manresa remarks, the partner will have to base his action upon the partnership
contract, which is to annul and without legal existence by reason of its unlawful object; and it
is self evident that what does not exist cannot be a cause of action. Hence, paragraph 2 of the
same article provides that when the dissolution of the unlawful partnership is decreed, the
profits cannot inure to the benefit of the partners, but must be given to some charitable
institution.
We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear
explanation of the scope and spirit of the provision of the Civil Code which we are concerned.
Commenting on said article Manresa, among other things says:
When the subscriptions of the members have been paid to the management of the
partnership, and employed by the latter in transactions consistent with the purposes
of the partnership may the former demand the return of the reimbursement thereof
from the manager or administrator withholding them?
Apropos of this, it is asserted: If the partnership has no valid existence, if it is
considered juridically non-existent, the contract entered into can have no legal
effect; and in that case, how can it give rise to an action in favor of the partners to
judicially demand from the manager or the administrator of the partnership capital,
each one's contribution?
The authors discuss this point at great length, but Ricci decides the matter quite
clearly, dispelling all doubts thereon. He holds that the partner who limits himself to
demanding only the amount contributed by him need not resort to the partnership
contract on which to base his action. And he adds in explanation that the partner
makes his contribution, which passes to the managing partner for the purpose of
carrying on the business or industry which is the object of the partnership; or in
other words, to breathe the breath of life into a partnership contract with an
42
objection forbidden by law. And as said contrast does not exist in the eyes of the
law, the purpose from which the contribution was made has not come into existence,
and the administrator of the partnership holding said contribution retains what
belongs to others, without any consideration; for which reason he is not bound to
return it and he who has paid in his share is entitled to recover it.
But this is not the case with regard to profits earned in the course of the partnership,
because they do not constitute or represent the partner's contribution but are the
result of the industry, business or speculation which is the object of the partnership,
and therefor, in order to demand the proportional part of the said profits, the partner
would have to base his action on the contract which is null and void, since this
partition or distribution of the profits is one of the juridical effects thereof.
Wherefore considering this contract as non-existent, by reason of its illicit object, it
cannot give rise to the necessary action, which must be the basis of the judicial
complaint. Furthermore, it would be immoral and unjust for the law to permit a
profit from an industry prohibited by it.
Hence the distinction made in the second paragraph of this article of this Code,
providing that the profits obtained by unlawful means shall not enrich the partners,
but shall upon the dissolution of the partnership, be given to the charitable
institutions of the domicile of the partnership, or, in default of such, to those of the
province.
This is a new rule, unprecedented by our law, introduced to supply an obvious
deficiency of the former law, which did not describe the purpose to which those
profits denied the partners were to be applied, nor state what to be done with them.
The profits are so applied, and not the contributions, because this would be an
excessive and unjust sanction for, as we have seen, there is no reason, in such a case,
for depriving the partner of the portion of the capital that he contributed, the
circumstances of the two cases being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful partnership,
the amounts contributed are to be returned by the partners, because it only deals with
the disposition of the profits; but the fact that said contributions are not included in
the disposal prescribed profits, shows that in consequences of said exclusion, the
general law must be followed, and hence the partners should reimburse the amount
of their respective contributions. Any other solution is immoral, and the law will not
consent to the latter remaining in the possession of the manager or administrator
who has refused to return them, by denying to the partners the action to demand
them. (Manresa, Commentaries on the Spanish Civil Code, vol. XI, pp. 262-264)
The judgment appealed from, being in accordance with law, should be, as it is hereby,
affirmed with costs against the appellants; provided, however, the defendants shall pay the
legal interest on the sum of P24,607.80 from the date of the decision of the court, and
provided, further, that the defendants shall deposit this sum of money and other documents
evidencing uncollected credits in the office of the clerk of the trial court, in order that said
court may distribute them among the members of said association, upon being duly identified
in the manner that it may deem proper. So ordered.Avanceña, C.J., Johnson, Street, Johns,
Romualdez, and Villa-Real, JJ., concur.
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 ....................................................................................................
2. Gregoria Cristobal ...............................................................................................
3. Saturnina Silva ....................................................................................................
4. Guillermo Tapia ...................................................................................................
5. Jesus Legaspi ......................................................................................................
6. Jose Silva .............................................................................................................
7. Tomasa Mercado ................................................................................................
8. Julio Gatchalian ...................................................................................................
9. Emiliana Santiago ................................................................................................
10. Maria C. Legaspi ...............................................................................................
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;
P0.18 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
.18 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,
.08 a copy of which letter marked Exhibit B is enclosed and made a part hereof;
.13
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant
.15 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
.07 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
.08 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
.13 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
.13 December 29, 1934 is attached and marked Exhibit F and made part thereof;
.16
43
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;
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.

10. That to avoid embarrassment arising from the embargo of the property of the Exhibit E referred to in the stipulation is of the following tenor:
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 To whom it may concern:
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 I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify,
of the tax and penalties by monthly installments; 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
11. That plaintiff's request to pay the balance of the tax and penalties was granted by remaining is also shown to wit:
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; Purchaser Amount Address

1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.

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 2. Buenaventura Guzman ............................... .13 - Do -
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; 3. Maria Santiago ............................................ .17 - Do -

4. Gonzalo Javier .............................................. .14 - Do -

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, 5. Francisco Cabral .......................................... .13 - Do -
but that defendant in his letter dated August 1, 1935 overruled the protest and denied
the request for refund of the plaintiffs; 6. Maria C. Legaspi .......................................... .16 - Do -

14. That, in view of the failure of the plaintiffs to pay the monthly installments in 7. Emiliana Santiago ......................................... .13 - Do -
accordance with the terms and conditions of bond filed by them, the defendant in his
8. Julio Gatchalian ............................................ .13 - Do -
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 9. Jose Silva ...................................................... .07 - Do -
of distraint and levy issued against the plaintiffs on May 13, 1935;
10. Tomasa Mercado ....................................... .08 - Do -
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 11. Jesus Legaspi ............................................. .15 - Do -
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 12. Guillermo Tapia ........................................... .13 - Do -
of the income tax and penalties demanded by defendant as evidenced by income tax
13. Saturnina Silva ............................................ .08 - Do -
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

44
14. Gregoria Cristobal ....................................... .18 - Do - 10. Maria C. Legaspi
D-10 .16 4,100 960 3,140
......................................
15. Jose Gatchalian ............................................ .18 - Do -
11. Francisco Cabral
D-11 .13 3,325 360 2,965
......................................
2.00 Total cost of said
12. Gonzalo Javier
D-12 .14 3,325 360 2,965
..........................................
ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket. 13. Maria Santiago
D-13 .17 4,350 360 3,990
..........................................
Pulilan, Bulacan, P.I.
14. Buenaventura Guzman
D-14 .13 3,325 360 2,965
...........................
(Sgd.) JOSE GATCHALIAN
15. Mariano Santos
D-15 .14 3,325 360 2,965
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 2.00 50,000 td="">
ALL DATED JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF
INTERNAL REVENUE.
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
Exhibit Purchase Price Net community of property without a personality of its own; in the first case it is admitted that the
Name Expenses
No. Price Won prize 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
1. Jose Gatchalian the tax collectively or whether the latter should be prorated among them and paid individually.
D-1 P0.18 P4,425 P 480 3,945
..........................................

2. Gregoria Cristobal The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
D-2 .18 4,575 2,000 2,575 amended by section 2 of Act No. 3761, reading as follows:
......................................

3. Saturnina Silva SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
D-3 .08 1,875 360 1,515
............................................. total net income received in the preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account (cuenta en
4. Guillermo Tapia participacion), association or insurance company, organized in the Philippine
D-4 .13 3,325 360 2,965
..........................................
Islands, no matter how created or organized, but not including duly registered
5. Jesus Legaspi by Maria Cristobal general copartnership (compañias colectivas), a tax of three per centum upon such
D-5 .15 3,825 720 3,105 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
6. Jose Silva the Philippine Islands by every corporation, joint-stock company, partnership, joint
D-6 .08 1,875 360 1,515 account (cuenta en participacion), association, or insurance company organized,
....................................................
authorized, or existing under the laws of any foreign country, including interest on
7. Tomasa Mercado bonds, notes, or other interest-bearing obligations of residents, corporate or
D-7 .07 1,875 360 1,515 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
8. Julio Gatchalian by Beatriz the normal tax has been paid.
D-8 .13 3,150 240 2,910
Guzman .......
The gain derived or loss sustained from the sale or other disposition by a
9. Emiliana Santiago
D-9 .13 3,325 360 2,965 corporation, joint-stock company, partnership, joint account (cuenta en
...................................... participacion), association, or insurance company, or property, real, personal, or

45
 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.

46
G.R. No. 142612. July 29, 2005
OSCAR ANGELES and EMERITA ANGELES, Petitioners,
vs.
THE HON. SECRETARY OF JUSTICE and FELINO MERCADO, Respondents.
DECISION
CARPIO, J.:
The Case
certiorari1
This is a petition for to annul theletter-resolution2
dated 1 February 2000 of the
Secretary of Justice in Resolution No. 155.3 The Secretary of Justice affirmed the resolution4
in I.S. No. 96-939 dated 28 February 1997 rendered by the Provincial Prosecution Office of
the Department of Justice in Santa Cruz, Laguna ("Provincial Prosecution Office"). The
Provincial Prosecution Office resolved to dismiss the complaint for estafa filed by petitioners
Oscar and Emerita Angeles ("Angeles spouses") against respondent Felino Mercado
("Mercado").
Antecedent Facts
On 19 November 1996, the Angeles spouses filed a criminal complaint for estafa under Article
315 of the Revised Penal Code against Mercado before the Provincial Prosecution Office.
Mercado is the brother-in-law of the Angeles spouses, being married to Emerita Angeles’
sister Laura.
In their affidavits, the Angeles spouses claimed that in November 1992, Mercado convinced
them to enter into a contract of antichresis,5 colloquially known as sanglaang-perde, covering
eight parcels of land ("subject land") planted with fruit-bearing lanzones trees located in
Nagcarlan, Laguna and owned by Juana Suazo. The contract of antichresis was to last for five
years with ₱210,000 as consideration. As the Angeles spouses stay in Manila during weekdays
and go to Laguna only on weekends, the parties agreed that Mercado would administer the
lands and complete the necessary paperwork.6
After three years, the Angeles spouses asked for an accounting from Mercado. Mercado
explained that the subject land earned ₱46,210 in 1993, which he used to buy more lanzones
trees. Mercado also reported that the trees bore no fruit in 1994. Mercado gave no accounting
for 1995. The Angeles spouses claim that only after this demand for an accounting did they
discover that Mercado had put the contract of sanglaang-perde over the subject land under
Mercado and his spouse’s names.7 The relevant portions of the contract of sanglaang-perde,
signed by Juana Suazo alone, read:
xxx
Na alang-alang sa halagang DALAWANG DAAN AT SAMPUNG LIBONG PISO
(₱210,000), salaping gastahin, na aking tinanggap sa mag[-]asawa nila G. AT GNG. FELINO
MERCADO, mga nasa hustong gulang, Filipino, tumitira at may pahatirang sulat sa Bgy.
47
Maravilla, bayan ng Nagcarlan, lalawigan ng Laguna, ay aking ipinagbili, iniliwat at isinalin
sa naulit na halaga, sa nabanggit na mag[-] asawa nila G. AT GNG. FELINO MERCADO[,]
sa kanila ay magmamana, kahalili at ibang dapat pagliwatan ng kanilang karapatan, ang lahat
na ibubunga ng lahat na puno ng lanzones, hindi kasama ang ibang halaman na napapalooban
nito, ng nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal, sa takdang LIMA (5)
NA [sic] TAON, magpapasimula sa taong 1993, at magtatapos sa taong 1997, kaya’t
pagkatapos ng lansonesan sa taong 1997, ang pamomosision at pakikinabang sa lahat na puno
ng lanzones sa nabanggit na WALONG (8) Lagay na Lupang Cocal-Lanzonal ay
manunumbalik sa akin, sa akin ay magmamana, kahalili at ibang dapat pagliwatan ng aking
karapatan na ako ay walang ibabalik na ano pa mang halaga, sa mag[-] asawa nila G. AT
GNG. FELINO MERCADO.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na ako ay
bibigyan nila ng LIMA (5) na [sic] kaing na lanzones taon-taon sa loob ng LIMA (5) na [sic]
taon ng aming kasunduang ito.
Na ako at ang mag[-]asawa nila G. AT GNG. FELINO MERCADO ay nagkasundo na silang
mag[-]asawa nila G. AT GNG. FELINO MERCADO ang magpapaalis ng dapo sa puno ng
lansones taon-taon [sic] sa loob ng LIMA (5) [sic] taonng [sic] aming kasunduang ito.8
In his counter-affidavit, Mercado denied the Angeles spouses’ allegations. Mercado claimed
that there exists an industrial partnership, colloquially known as sosyo industrial, between him
and his spouse as industrial partners and the Angeles spouses as the financiers. This industrial
partnership had existed since 1991, before the contract of antichresis over the subject land. As
the years passed, Mercado used his and his spouse’s earnings as part of the capital in the
business transactions which he entered into in behalf of the Angeles spouses. It was their
practice to enter into business transactions with other people under the name of Mercado
because the Angeles spouses did not want to be identified as the financiers.
Mercado attached bank receipts showing deposits in behalf of Emerita Angeles and contracts
under his name for the Angeles spouses. Mercado also attached the minutes of the barangay
conciliation proceedings held on 7 September 1996. During the barangay conciliation
proceedings, Oscar Angeles stated that there was a written sosyo industrial agreement: capital
would come from the Angeles spouses while the profit would be divided evenly between
Mercado and the Angeles spouses.9
The Ruling of the Provincial Prosecution Office
On 3 January 1997, the Provincial Prosecution Office issued a resolution recommending the
filing of criminal information for estafa against Mercado. This resolution, however, was issued
without Mercado’s counter-affidavit.
Meanwhile, Mercado filed his counter-affidavit on 2 January 1997. On receiving the 3 January
1997 resolution, Mercado moved for its reconsideration. Hence, on 26 February 1997, the
Provincial Prosecution Office issued an amended resolution dismissing the Angeles spouses’
complaint for estafa against Mercado.
The Provincial Prosecution Office stated thus:
The subject of the complaint hinges on a partnership gone sour. The partnership was initially
unsaddled [with] problems. Management became the source of misunderstanding including
the accounting of profits, which led to further misunderstanding until it was revealed that the
contract with the orchard owner was only with the name of the respondent, without the names
of the complainants.
The accusation of "estafa" here lacks enough credible evidentiary support to sustain a prima
facie finding.
Premises considered, it is respectfully recommended that the complaint for estafa be
dismissed.
RESPECTFULLY SUBMITTED.10
The Angeles spouses filed a motion for reconsideration, which the Provincial Prosecution
Office denied in a resolution dated 4 August 1997.
The Ruling of the Secretary of Justice
On appeal to the Secretary of Justice, the Angeles spouses emphasized that the document
evidencing the contract of sanglaang-perde with Juana Suazo was executed in the name of the
Mercado spouses, instead of the Angeles spouses. The Angeles spouses allege that this
document alone proves Mercado’s misappropriation of their ₱210,000.
The Secretary of Justice found otherwise. Thus:
Reviewing the records of the case, we are of the opinion that the indictment of [Mercado] for
the crime of estafa cannot be sustained. [The Angeles spouses] failed to show sufficient proof
that [Mercado] deliberately deceived them in the "sanglaang perde" transaction. The document
alone, which was in the name of [Mercado and his spouse], failed to convince us that there
was deceit or false representation on the part of [Mercado] that induced the [Angeles spouses]
to part with their money. [Mercado] satisfactorily explained that the [Angeles spouses] do not
want to be revealed as the financiers. Indeed, it is difficult to believe that the [Angeles
spouses] would readily part with their money without holding on to some document to
evidence the receipt of money, or at least to inspect the document involved in the said
transaction. Under the circumstances, we are inclined to believe that [the Angeles spouses]
knew from the very start that the questioned document was not really in their names.
In addition, we are convinced that a partnership truly existed between the [Angeles spouses]
and [Mercado]. The formation of a partnership was clear from the fact that they contributed
money to a common fund and divided the profits among themselves. Records would show that
[Mercado] was able to make deposits for the account of the [Angeles spouses]. These deposits
represented their share in the profits of their business venture. Although the [Angeles spouses]
deny the existence of a partnership, they, however, never disputed that the deposits made by
[Mercado] were indeed for their account.
The transcript of notes on the dialogue between the [Angeles spouses] and [Mercado] during
the hearing of their barangay conciliation case reveals that the [Angeles spouses]
48
acknowledged their joint business ventures with [Mercado] although they assailed the manner
by which [Mercado] conducted the business and handled and distributed the funds. The
veracity of this transcript was not raised in issued [sic] by [the Angeles spouses]. Although the
legal formalities for the formation of a partnership were not adhered to, the partnership
relationship of the [Angeles spouses] and [Mercado] is evident in this case. Consequently,
there is no estafa where money is delivered by a partner to his co-partner on the latter’s
representation that the amount shall be applied to the business of their partnership. In case of
misapplication or conversion of the money received, the co-partner’s liability is civil in nature
(People v. Clarin, 7 Phil. 504)
WHEREFORE, the appeal is hereby DISMISSED.11
Hence, this petition.
Issues
The Angeles spouses ask us to consider the following issues:
1. Whether the Secretary of Justice committed grave abuse of discretion amounting to lack of
jurisdiction in dismissing the appeal of the Angeles spouses;
2. Whether a partnership existed between the Angeles spouses and Mercado even without any
documentary proof to sustain its existence;
3. Assuming that there was a partnership, whether there was misappropriation by Mercado of
the proceeds of the lanzones after the Angeles spouses demanded an accounting from him of
the income at the office of the barangay authorities on 7 September 1996, and Mercado failed
to do so and also failed to deliver the proceeds to the Angeles spouses;
4. Whether the Secretary of Justice should order the filing of the information for estafa against
Mercado.12
The Ruling of the Court
The petition has no merit.
Whether the Secretary of Justice Committed
Grave Abuse of Discretion
An act of a court or tribunal may constitute grave abuse of discretion when the same is
performed in a capricious or whimsical exercise of judgment amounting to lack of jurisdiction.
The abuse of discretion must be so patent and gross as to amount to an evasion of positive
duty, or to a virtual refusal to perform a duty enjoined by law, as where the power is exercised
in an arbitrary and despotic manner because of passion or personal hostility. 13
The Angeles spouses fail to convince us that the Secretary of Justice committed grave abuse of
discretion when he dismissed their appeal. Moreover, the Angeles spouses committed an error
in procedure when they failed to file a motion for reconsideration of the Secretary of Justice’s
resolution. A previous motion for reconsideration before the filing of a petition for certiorari
is necessary unless: (1) the issue raised is one purely of law; (2) public interest is involved; (3)
there is urgency; (4) a question of jurisdiction is squarely raised before and decided by the
lower court; and (5) the order is a patent nullity.14 The Angeles spouses failed to show that
their case falls under any of the exceptions. In fact, this present petition for certiorari is
dismissible for this reason alone.
Whether a Partnership Existed
Misappropriation by Mercado
The Secretary of Justice adequately explained the alleged misappropriation by Mercado: "The
document alone, which was in the name of [Mercado and his spouse], failed to convince us
that there was deceit or false representation on the part of [Mercado] that induced the [Angeles
spouses] to part with their money. [Mercado] satisfactorily explained that the [Angeles
spouses] do not want to be revealed as the financiers."15
Even Branch 26 of the Regional Trial Court of Santa Cruz, Laguna which decided the civil
case for damages, injunction and restraining order filed by the Angeles spouses against
Mercado and Leo Cerayban, stated:

Between Mercado and the Angeles Spouses
The Angeles spouses allege that they had no partnership with Mercado. The Angeles spouses
rely on Articles 1771 to 1773 of the Civil Code, which state that:
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.
xxx [I]t was the practice to have all the contracts of antichresis of their partnership secured in
[Mercado’s] name as [the Angeles spouses] are apprehensive that, if they come out into the
open as financiers of said contracts, they might be kidnapped by the New People’s Army or
their business deals be questioned by the Bureau of Internal Revenue or worse, their assets and
unexplained income be sequestered, as xxx Oscar Angeles was then working with the
government.16
Furthermore, accounting of the proceeds is not a proper subject for the present case.
For these reasons, we hold that the Secretary of Justice did not abuse his discretion in
dismissing the appeal of the Angeles spouses.

Failure to comply with the requirements of the preceding paragraph shall not affect the WHEREFORE, we AFFIRM the decision of the Secretary of Justice. The present petition for
liability of the partnership and the members thereof to third persons. certiorari is DISMISSED.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed SO ORDERED.
thereto, if an inventory of said property is not made, signed by the parties, and attached to the
public instrument. Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

The Angeles spouses’ position that there is no partnership because of the lack of a public
instrument indicating the same and a lack of registration with the Securities and Exchange
Commission ("SEC") holds no water. First, the Angeles spouses contributed money to the
partnership and not immovable property. Second, mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of a
partnership. The purpose of registration of the contract of partnership is to give notice to third
parties. Failure to register the contract of partnership does not affect the liability of the
partnership and of the partners to third persons. Neither does such failure to register affect the
partnership’s juridical personality. A partnership may exist even if the partners do not use the
words "partner" or "partnership."

Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract
showing a sosyo industrial or industrial partnership, contribution of money and industry to a
common fund, and division of profits between the Angeles spouses and Mercado.

Whether there was

49