Agency, Trusts, and Partnerships Page |1

G.R. Nos. 166299-300. December 13, 2005.* purports to establish the said “partnership/joint venture” is NOT a public
instrument and there was NO inventory of the immovable property duly
AURELIO K. LITONJUA, JR., petitioner, vs. EDUARDO K. LITONJUA, signed by the parties. As such, the said “Memorandum” . . . is null and void
SR., ROBERT T. YANG, ANGLO PHILS. MARITIME, INC., CINEPLEX,
for purposes of establishing the existence of a valid contract of partnership.
INC., DDM GARMENTS, INC., EDDIE K. LITONJUA SHIPPING Indeed, because of the failure to comply with the essential formalities of a
AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC., LITONJUA
valid contract, the purported “partnership/joint venture” is legally inexistent
SECURITIES, INC. (formerly E. K. Litonjua Sec), LUNETA THEATER,
and it produces no effect whatsoever. Necessarily, a void or legally inexistent
INC., E & L REALTY, (formerly E & L INT’L SHIPPING CORP.), FNP
contract cannot be the source of any contractual or legal right. Accordingly,
CO., INC., HOME ENTERPRISES, INC., BEAUMONT DEV. REALTY CO.,
the allegations in the complaint, including the actionable document attached
INC., GLOED LAND CORP., EQUITY TRADING CO., INC., 3D CORP.,
thereto, clearly demonstrates that [petitioner] has NO valid contractual or
“L” DEV. CORP, LCM THEATRICAL ENTERPRISES, INC., LITONJUA
legal right which could be violated by the [individual respondents] herein. As
SHIPPING CO. INC., MACOIL INC., ODEON REALTY CORP.,
a consequence, [petitioner’s] complaint does NOT state a valid cause of
SARATOGA REALTY, INC., ACT THEATER INC. (formerly General
action because NOT all the essential elements of a cause of action are
Theatrical & Film Exchange, INC.), AVENUE REALTY, INC., AVENUE present.”
THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF
PHILIPPINES), respondents. Same; Same; Same; Statute of Frauds; By force of the statute of frauds, an
agreement that by its terms is not to be performed within a year from the
Actions; Civil Law; Partnership; Words and Phrases; A contract of partnership
making thereof shall be unenforceable by action, unless the same, or some
is defined by the Civil Code as one where two or more persons bound
note or memorandum thereof, be in writing and subscribed by the party
themselves to contribute money, property, or industry to a common fund
charged.—It is at once apparent that what respondent Eduardo imposed
with the intention of dividing the profits among themselves.—A partnership upon himself under the above passage, if he indeed wrote Annex “A-1,” is a
exists when two or more persons agree to place their money, effects, labor,
promise which is not to be performed within one year from “contract”
and skill in lawful commerce or business, with the understanding that there execution on June 22, 1973. Accordingly, the agreement embodied in Annex
shall be a proportionate sharing of the profits and losses between them. A
“A-1” is covered by the Statute of Frauds and ergo unenforceable for non-
contract of partnership is defined by the Civil Code as one where two or
compliance therewith. By force of the statute of frauds, an agreement that
more persons bound themselves to contribute money, property, or industry
by its terms is not to be performed within a year from the making thereof
to a common fund with the intention of dividing the profits among
shall be unenforceable by action, unless the same, or some note or
themselves. A joint venture, on the other hand, is hardly distinguishable
memorandum thereof, be in writing and subscribed by the party charged.
from, and may be likened to, a partnership since their elements are similar,
Corollarily, no action can be proved unless the requirement exacted by the
i.e., community of interests in the business and sharing of profits and losses.
statute of frauds is complied with.
Being a form of partnership, a joint venture is generally governed by the law
on partnership. Same; Same; Same; Same; A complaint for delivery and accounting of
partnership property based on such void or legally non-existent actionable
Same; Same; Same; Petitioner’s complaint does not state a valid cause of
document is dismissible for failure to state a cause of action.—Per the Court’s
action because not all the essential elements of a cause of action are
own count, petitioner used in his complaint the mixed words “joint
present.—Given the foregoing perspective, what the appellate court wrote in
venture/partnership” nineteen (19) times and the term “partner” four (4)
its assailed Decision about the probative value and legal effect of Annex “A-
times. He made reference to the “law of joint venture/partnership [being
1” commends itself for concurrence: “Considering that the allegations in the
applicable] to the business relationship . . . between [him], Eduardo and
complaint showed that [petitioner] contributed immovable properties to the Bobby [Yang]” and to his “rights in all specific properties of their joint
alleged partnership, the “Memorandum” (Annex “A” of the complaint) which
venture/partnership.” Given this consideration, petitioner’s right of action

against respondents Eduardo and Yang doubtless pivots on the existence of
the partnership between the three of them, as purportedly evidenced by the
undated and unsigned Annex “A-1.” A void Annex “A-1,” as an actionable
document of partnership, would strip petitioner of a cause of action under
the premises. A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is
dismissible for failure to state of action. So, in gist, said the Court of Appeals.
The Court agrees.
PETITION for review on certiorari of the decision and resolution of the Court
of Appeals.
The facts are stated in the opinion of the Court.
Antonio R. Bautista & Partners for petitioner.
Emmanuel P.J. Tamase for respondent Robert T. Yang.
Ferrer & Balayan Law Offices for private respondent except Robert T.
Yang.
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner
Aurelio K. Litonjua, Jr. seeks to nullify and set aside the Decision of the Court
of Appeals (CA) dated March 31, 20041 in consolidated cases C.A. G.R. Sp.
No. 76987 and C.A. G.R. SP. No 78774 and its Resolution dated December
07, 2004,2 denying petitioner’s motion for reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K.
Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started
when, on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City,
Aurelio filed a suit against his brother Eduardo and herein respondent Robert
T. Yang (Yang) and several corporations for specific performance and
accounting. In his complaint,3 docketed as Civil Case No. 69235 and
eventually raffled to Branch 68 of the court,4 Aurelio alleged that, since June
1973, he and Eduardo are into a joint venture/partnership arrangement in
the Odeon Theater business which had expanded thru investment in
Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty Corporation
(operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands
Agency, Trusts, and Partnerships Page |2
and buildings, among other corporations. Yang is described in the complaint
as petitioner’s and Eduardo’s partner in their Odeon Theater investment.5
The same complaint also contained the following material averments:
“3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint
venture/partnership for the continuation of their family business and
common family funds . . . .
3.01.1This joint venture/[partnership] agreement was contained in a
memorandum addressed by Eduardo to his siblings, parents and other
relatives. Copy of this memorandum is attached hereto and made an integral
part as Annex “A” and the portion referring to [Aurelio] submarked as Annex
“A-1.”
3.02 It was then agreed upon between [Aurelio] and Eduardo that in
consideration of [Aurelio’s] retaining his share in the remaining family
businesses (mostly, movie theaters, shipping and land development) and
contributing his industry to the continued operation of these businesses,
[Aurelio] will be given P1 Million or 10% equity in all these businesses and
those to be subsequently acquired by them whichever is greater. . . .
4.01 . . . from 22 June 1973 to about August 2001, or [in] a span of 28
years, [Aurelio] and Eduardo had accumulated in their joint
venture/partnership various assets including but not limited to the corporate
defendants and [their] respective assets.
4.02 In addition . . . the joint venture/partnership . . . had also acquired
[various other assets], but Eduardo caused to be registered in the names of
other parties….
4.04 The substantial assets of most of the corporate defendants consist of
real properties . . . . A list of some of these real properties is attached hereto
and made an integral part as Annex “B.”
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became
sour so that [Aurelio] requested for an accounting and liquidation of his
share in the joint venture/partnership [but these demands for complete
accounting and liquidation were not heeded].
xxx xxx xxx

5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo
and/or the corporate defendants as well as Bobby [Yang], are transferring . .
. various real properties of the corporations belonging to the joint
venture/partnership to other parties in fraud of [Aurelio]. In consequence,
[Aurelio] is therefore causing at this time the annotation on the titles of
these real properties. . . a notice of lis pendens . . . .” (Emphasis in the
original; italics and words in bracket added.)
For ease of reference, Annex “A-1” of the complaint, which petitioner asserts
to have been meant for him by his brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married. . . . .
I am trying my best to mold you the way I work so you can follow the
pattern . . . . You will be the only one left with the company, among us
brothers and I will ask you to stay as I want you to run this office every time
I am away. I want you to run it the way I am trying to run it because I will
be all alone and I will depend entirely to you (sic). My sons will not be ready
to help me yet until about maybe 15/20 years from now. Whatever is left in
the corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two
will gamble the whole thing of what I have and what you are entitled to. . . .
. It will be you and me alone on this. If ever I pass away, I want you to take
care of all of this. You keep my share for my two sons are ready take over
but give them the chance to run the company which I have built.
xxx xxx x x x.
Because you will need a place to stay, I will arrange to give you first ONE
HUNDRED THOUSANDS PESOS: (P100,000.00) in cash or asset, like Lt.
Artiaga so you can live better there. The rest I will give you in form of stocks
which you can keep. This stock I assure you is good and saleable. I will also
gladly give you the share of Wack-Wack . . . and Valley Golf . . . because you
have been good. The rest will be in stocks from all the corporations which I
repeat, ten percent (10%) equity.”6
On December 20, 2002, Eduardo and the corporate respondents, as
defendants a quo, filed a joint ANSWER With Compulsory Counterclaim
denying under oath the material allegations of the complaint, more
particularly that portion thereof depicting petitioner and Eduardo as having
Agency, Trusts, and Partnerships Page |3
entered into a contract of partnership. As affirmative defenses, Eduardo, et
al., apart from raising a jurisdictional matter, alleged that the complaint
states no cause of action, since no cause of action may be derived from the
actionable document, i.e., Annex “A-1,” being void under the terms of Article
1767 in relation to Article 1773 of the Civil Code, infra. It is further alleged
that whatever undertaking Eduardo agreed to do, if any, under Annex “A-1,”
are unenforceable under the provisions of the Statute of Frauds.7
For his part, Yang—who was served with summons long after the other
defendants submitted their answer—moved to dismiss on the ground, inter
alia, that, as to him, petitioner has no cause of action and the complaint
does not state any.8 Petitioner opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative
Defenses.9 To this motion, petitioner interposed an Opposition with ex-Parte
Motion to Set the Case for Pre-trial.10
Acting on the separate motions immediately adverted to above, the trial
court, in an Omnibus Order dated March 5, 2003, denied the affirmative
defenses and, except for Yang, set the case for pre-trial on April 10, 2003.11
In another Omnibus Order of April 2, 2003, the same court denied the
motion of Eduardo, et al., for reconsideration12 and Yang’s motion to
dismiss. The following then transpired insofar as Yang is concerned:
“1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the
right to seek reconsideration of the April 2, 2003 Omnibus Order and to
pursue his failed motion to dismiss13 to its full resolution.
2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of
April 2, 2003, but his motion was denied in an Order of July 4, 2003.14
3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorari under Rule 65 of the Rules of Court, docketed as CA-G.R. SP
No. 78774,15 to nullify the separate orders of the trial court, the first
denying his motion to dismiss the basic complaint and, the second, denying
his motion for reconsideration.”
Earlier, Eduardo and the corporate defendants, on the contention that grave
abuse of discretion and injudicious haste attended the issuance of the trial
court’s aforementioned Omnibus Orders dated March 5, and April 2, 2003,

sought relief from the CA via similar recourse. Their petition for certiorari was
docketed as CA G.R. SP No. 76987.
Per its resolution dated October 2, 2003,16 the CA’s 14th Division ordered
the consolidation of CA-G.R.-SP No. 78774 with CA-G.R. SP No. 76987.
Following the submission by the parties of their respective Memoranda of
Authorities, the appellate court came out with the herein assailed Decision
dated March 31, 2004, finding for Eduardo and Yang, as lead petitioners
therein, disposing as follows:
“WHEREFORE, judgment is hereby rendered granting the issuance of the writ
of certiorari in these consolidated cases annulling, reversing and setting
aside the assailed orders of the court a quo dated March 5, 2003, April 2,
2003 and July 4, 2003 and the complaint filed by private respondent [now
petitioner Aurelio] against all the petitioners [now herein respondents
Eduardo, et al.] with the court a quo is hereby dismissed.
SO ORDERED.”17 (Emphasis in the original; words in bracket added.)
Explaining its case disposition, the appellate court stated, inter alia, that the
alleged partnership, as evidenced by the actionable documents, Annex “A”
and “A-1” attached to the complaint, and upon which petitioner solely
predicates his right/s allegedly violated by Eduardo, Yang and the corporate
defendants a quo is “void or legally inexistent.”
In time, petitioner moved for reconsideration but his motion was denied by
the CA in its equally assailed Resolution of December 7, 2004.18
Hence, petitioner’s present recourse, on the contention that the CA erred:
“A. When it ruled that there was no partnership created by the actionable
document because this was not a public instrument and immovable
properties were contributed to the partnership.
B. When it ruled that the actionable document did not create a demandable
right in favor of petitioner.
C. When it ruled that the complaint stated no cause of action against
[respondent] Robert Yang; and
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D. When it ruled that petitioner has changed his theory on appeal when all
that Petitioner had done was to support his pleaded cause of action by
another legal perspective/argument.”
The petition lacks merit.
Petitioner’s demand, as defined in the petitory portion of his complaint in the
trial court, is for delivery or payment to him, as Eduardo’s and Yang’s
partner, of his partnership/joint venture share, after an accounting has been
duly conducted of what he deems to be partnership/joint venture
property.19
A partnership exists when two or more persons agree to place their money,
effects, labor, and skill in lawful commerce or business, with the
understanding that there shall be a proportionate sharing of the profits and
losses between them.20 A contract of partnership is defined by the Civil
Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing
the profits among themselves.21 A joint venture, on the other hand, is
hardly distinguishable from, and may be likened to, a partnership since their
elements are similar, i.e., community of interests in the business and sharing
of profits and losses. Being a form of partnership, a joint venture is generally
governed by the law on partnership.22
The underlying issue that necessarily comes to mind in this proceedings is
whether or not petitioner and respondent Eduardo are partners in the
theatre, shipping and realty business, as one claims but which the other
denies. And the issue bearing on the first assigned error relates to the
question of what legal provision is applicable under the premises, petitioner
seeking, as it were, to enforce the actionable document—Annex “A-1”—
which he depicts in his complaint to be the contract of partnership/joint
venture between himself and Eduardo. Clearly, then, a look at the legal
provisions determinative of the existence, or defining the formal requisites,
of a partnership is indicated. Foremost of these are the following provisions
of the Civil Code:
“Art. 1771. A partnership may be constituted in any form, except where
immovable property or real rights are contributed thereto, in which case a
public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand
pesos or more, in money or property, shall appear in a public instrument,
which must be recorded in the Office of the Securities and Exchange
Commission.
Failure to comply with the requirement of the preceding paragraph shall not
affect the liability of the partnership and the members thereof to third
persons.
Art. 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by
the parties, and attached to the public instrument.”
Annex “A-1,” on its face, contains typewritten entries, personal in tone, but is
unsigned and undated. As an unsigned document, there can be no quibbling
that Annex “A-1” does not meet the public instrumentation requirements
exacted under Article 1771 of the Civil Code. Moreover, being unsigned and
doubtless referring to a partnership involving more than P3,000.00 in money
or property, Annex “A-1” cannot be presented for notarization, let alone
registered with the Securities and Exchange Commission (SEC), as called for
under the Article 1772 of the Code. And inasmuch as the inventory
requirement under the succeeding Article 1773 goes into the matter of
validity when immovable property is contributed to the partnership, the next
logical point of inquiry turns on the nature of petitioner’s contribution, if any,
to the supposed partnership.
The CA, addressing the foregoing query, correctly stated that petitioner’s
contribution consisted of immovables and real rights. Wrote that court:
“A further examination of the allegations in the complaint would show that
[petitioner’s] contribution to the so-called “partnership/joint venture” was his
supposed share in the family business that is consisting of movie theaters,
shipping and land development under paragraph 3.02 of the complaint. In
other words, his contribution as a partner in the alleged partnership/joint
venture consisted of immovable properties and real rights. . . .”23
Significantly enough, petitioner matter-of-factly concurred with the appellate
court’s observation that, prescinding from what he himself alleged in his
basic complaint, his contribution to the partnership consisted of his share in
the Litonjua family businesses which owned variable immovable properties.
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Petitioner’s assertion in his motion for reconsideration24 of the CA’s decision,
that “what was to be contributed to the business [of the partnership] was
[petitioner’s] industry and his share in the family [theatre and land
development] business” leaves no room for speculation as to what petitioner
contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under
Article 1773 of the Civil Code applies as long real property or real rights are
initially brought into the partnership. In short, it is really of no moment which
of the partners, or, in this case, who between petitioner and his brother
Eduardo, contributed immovables. In context, the more important
consideration is that real property was contributed, in which case an
inventory of the contributed property duly signed by the parties should be
attached to the public instrument, else there is legally no partnership to
speak of.
Petitioner, in an obvious bid to evade the application of Article 1773, argues
that the immovables in question were not contributed, but were acquired
after the formation of the supposed partnership. Needless to stress, the
Court cannot accord cogency to this specious argument. For, as earlier
stated, petitioner himself admitted contributing his share in the supposed
shipping, movie theatres and realty development family businesses which
already owned immovables even before Annex “A-1” was allegedly executed.
Considering thus the value and nature of petitioner’s alleged contribution to
the purported partnership, the Court, even if so disposed, cannot plausibly
extend Annex “A-1” the legal effects that petitioner so desires and pleads to
be given. Annex “A-1,” in fine, cannot support the existence of the
partnership sued upon and sought to be enforced. The legal and factual
milieu of the case calls for this disposition. A partnership may be constituted
in any form, save when immovable property or real rights are contributed
thereto or when the partnership has a capital of at least P3,000.00, in which
case a public instrument shall be necessary.25 And if only to stress what has
repeatedly been articulated, an inventory to be signed by the parties and
attached to the public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to it.
Given the foregoing perspective, what the appellate court wrote in its
assailed Decision26 about the probative value and legal effect of Annex “A-1”
commends itself for concurrence:

“Considering that the allegations in the complaint showed that [petitioner]
contributed immovable properties to the alleged partnership, the
“Memorandum” (Annex “A” of the complaint) which purports to establish the
said “partnership/joint venture” is NOT a public instrument and there was NO
inventory of the immovable property duly signed by the parties. As such, the
said “Memorandum” . . . is null and void for purposes of establishing the
existence of a valid contract of partnership. Indeed, because of the failure to
comply with the essential formalities of a valid contract, the purported
“partnership/joint venture” is legally inexistent and it produces no effect
whatsoever. Necessarily, a void or legally inexistent contract cannot be the
source of any contractual or legal right. Accordingly, the allegations in the
complaint, including the actionable document attached thereto, clearly
demonstrates that [petitioner] has NO valid contractual or legal right which
could be violated by the [individual respondents] herein.
As a consequence, [petitioner’s] complaint does NOT state a valid cause of
action because NOT all the essential elements of a cause of action are
present.” (Italics and words in bracket added.)
Likewise well-taken are the following complementary excerpts from the CA’s
equally assailed Resolution of December 7, 200427 denying petitioner’s
motion for reconsideration:
“Further, We conclude that despite glaring defects in the allegations in the
complaint as well as the actionable document attached thereto (Rollo, p.
191), the [trial] court did not appreciate and apply the legal provisions which
were brought to its attention by herein [respondents] in the their pleadings.
In our evaluation of [petitioner’s] complaint, the latter alleged inter alia to
have contributed immovable properties to the alleged partnership but the
actionable document is not a public document and there was no inventory of
immovable properties signed by the parties. Both the allegations in the
complaint and the actionable documents considered, it is crystal clear that
[petitioner] has no valid or legal right which could be violated by
[respondents].” (Words in bracket added.)
Under the second assigned error, it is petitioner’s posture that Annex “A-1,”
assuming its inefficacy or nullity as a partnership document, nevertheless
created demandable rights in his favor. As petitioner succinctly puts it in this
petition:
Agency, Trusts, and Partnerships Page |6
“43. Contrariwise, this actionable document, especially its above-quoted
provisions, established an actionable contract even though it may not be a
partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).
44. It may not be a contract of loan, or a mortgage or whatever, but surely
the contract does create rights and obligations of the parties and which
rights and obligations may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically labeled or
pigeonholed into a category of nominate contract does not mean it is void or
unenforceable.”
Petitioner has thus thrusted the notion of an innominate contract on this
Court—and earlier on the CA after he experienced a reversal of fortune
thereat—as an afterthought. The appellate court, however, cannot really be
faulted for not yielding to petitioner’s dubious stratagem of altering his
theory of joint venture/partnership to an innominate contract. For, at
bottom, the appellate court’s certiorari jurisdiction was circumscribed by
what was alleged to have been the order/s issued by the trial court in grave
abuse of discretion. As respondent Yang pointedly observed,28 since the
parties’ basic position had been well-defined, that of petitioner being that the
actionable document established a partnership/joint venture, it is on those
positions that the appellate court exercised its certiorari jurisdiction.
Petitioner’s act of changing his original theory is an impermissible practice
and constitutes, as the CA aptly declared, an admission of the untenability of
such theory in the first place.
“[Petitioner] is now humming a different tune . . . . In a sudden twist of
stance, he has now contended that the actionable instrument may be
considered an innominate contract. x x x Verily, this now changes
[petitioner’s] theory of the case which is not only prohibited by the Rules but
also is an implied admission that the very theory he himself . . . has adopted,
filed and prosecuted before the respondent court is erroneous.
Be that as it may . . . . . We hold that this new theory contravenes
[petitioner’s] theory of the actionable document being a partnership
document. If anything, it is so obvious we do have to test the sufficiency of
the cause of action on the basis of partnership law x x x.”29 (Emphasis in
the original; Words in bracket added).

But even assuming in gratia argumenti that Annex “A-1” partakes of a
perfected innominate contract, petitioner’s complaint would still be
dismissible as against Eduardo and, more so, against Yang. It cannot be
over-emphasized that petitioner points to Eduardo as the author of Annex
“A-1.” Withal, even on this consideration alone, petitioner’s claim against
Yang is doomed from the very start.
As it were, the only portion of Annex “A-1” which could perhaps be remotely
regarded as vesting petitioner with a right to demand from respondent
Eduardo the observance of a determinate conduct, reads:
“x x x You will be the only one left with the company, among us brothers
and I will ask you to stay as I want you to run this office everytime I am
away. I want you to run it the way I am trying to run it because I will be
alone and I will depend entirely to you, My sons will not be ready to help me
yet until about maybe 15/20 years from now. Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is greater.” (Italics
added)
It is at once apparent that what respondent Eduardo imposed upon himself
under the above passage, if he indeed wrote Annex “A-1,” is a promise
which is not to be performed within one year from “contract” execution on
June 22, 1973. Accordingly, the agreement embodied in Annex “A-1” is
covered by the Statute of Frauds and ergo unenforceable for non-compliance
therewith.30 By force of the statute of frauds, an agreement that by its
terms is not to be performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing and subscribed by the party charged. Corollarily, no
action can be proved unless the requirement exacted by the statute of frauds
is complied with.31
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million
or 10% equity of the family businesses supposedly promised by Eduardo to
give in the near future. Any suggestion that the stated amount or the equity
component of the promise was intended to go to a common fund would be
to read something not written in Annex “A-1.” Thus, even this angle alone
argues against the very idea of a partnership, the creation of which requires
two or more contracting minds mutually agreeing to contribute money,
Agency, Trusts, and Partnerships Page |7
property or industry to a common fund with the intention of dividing the
profits between or among themselves.32
In sum then, the Court rules, as did the CA, that petitioner’s complaint for
specific performance anchored on an actionable document of partnership
which is legally inexistent or void or, at best, unenforceable does not state a
cause of action as against respondent Eduardo and the corporate
defendants. And if no of action can successfully be maintained against
respondent Eduardo because no valid partnership existed between him and
petitioner, the Court cannot see its way clear on how the same action could
plausibly prosper against Yang. Surely, Yang could not have become a
partner in, or could not have had any form of business relationship with, an
inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide the logical
nexus that would tie Yang to him as his partner. In fact, attendant
circumstances would indicate the contrary. Consider:
“1. Petitioner asserted in his complaint that his so-called joint
venture/partnership with Eduardo was “for the continuation of their family
business and common family funds which were theretofore being mainly
managed by Eduardo.”33 But Yang denies kinship with the Litonjua family
and petitioner has not disputed the disclaimer.
2. In some detail, petitioner mentioned what he had contributed to the joint
venture/partnership with Eduardo and what his share in the businesses will
be. No allegation is made whatsoever about what Yang contributed, if any,
let alone his proportional share in the profits. But such allegation cannot,
however, be made because, as aptly observed by the CA, the actionable
document did not contain such provision, let alone mention the name of
Yang. How, indeed, could a person be considered a partner when the
document purporting to establish the partnership contract did not even
mention his name.
3. Petitioner states in par. 2.01 of the complaint that “[he] and Eduardo are
business partners in the [respondent] corporations,” while “Bobby is his and
Eduardo’s partner in their Odeon Theater investment’ (par. 2.03). This
means that the partnership between petitioner and Eduardo came first; Yang
became their partner in their Odeon Theater investment thereafter. Several
paragraphs later, however, petitioner would contradict himself by alleging
that his “investment and that of Eduardo and Yang in the Odeon theater

business has expanded through a reinvestment of profit income and direct
investments in several corporation including but not limited to [six] corporate
respondents” This simply means that the “Odeon Theatre business” came
before the corporate respondents. Significantly enough, petitioner refers to
the corporate respondents as “progeny” of the Odeon Theatre business.”34
Needless to stress, petitioner has not sufficiently established in his complaint
the legal vinculum whence he sourced his right to drag Yang into the fray.
The Court of Appeals, in its assailed decision, captured and formulated the
legal situation in the following wise:
“[Respondent] Yang, . . . is impleaded because, as alleged in the complaint,
he is a “partner” of [Eduardo] and the [petitioner] in the Odeon Theater
Investment which expanded through reinvestments of profits and direct
investments in several corporations, thus:
xxx xxx xxx
Clearly, [petitioner’s] claim against . . . Yang arose from his alleged
partnership with petitioner and the …respondent. However, there was NO
allegation in the complaint which directly alleged how the supposed
contractual relation was created between [petitioner] and . . .Yang. More
importantly, however, the foregoing ruling of this Court that the purported
partnership between [Eduardo] is void and legally inexistent directly affects
said claim against . . . Yang. Since [petitioner] is trying to establish his claim
against . . . Yang by linking him to the legally inexistent partnership . . . such
attempt had become futile because there was NOTHING that would
contractually connect [petitioner] and . . . Yang. To establish a valid cause of
action, the complaint should have a statement of fact upon which to connect
[respondent] Yang to the alleged partnership between [petitioner] and
respondent [Eduardo], including their alleged investment in the Odeon
Theater. A statement of facts on those matters is pivotal to the complaint as
they would constitute the ultimate facts necessary to establish the elements
of a cause of action against . . . Yang.”35
Pressing its point, the CA later stated in its resolution denying petitioner’s
motion for reconsideration the following:
“x x x Whatever the complaint calls it, it is the actionable document attached
to the complaint that is controlling. Suffice it to state, We have not ignored
Agency, Trusts, and Partnerships Page |8
the actionable document . . . As a matter of fact, We emphasized in our
decision . . . that insofar as [Yang] is concerned, he is not even mentioned in
the said actionable document. We are therefore puzzled how a person not
mentioned in a document purporting to establish a partnership could be
considered a partner.”36 (Words in bracket ours).
The last issue raised by petitioner, referring to whether or not he changed
his theory of the case, as peremptorily determined by the CA, has been
discussed at length earlier and need not detain us long. Suffice it to say that
after the CA has ruled that the alleged partnership is inexistent, petitioner
took a different tack. Thus, from a joint venture/partnership theory which he
adopted and consistently pursued in his complaint, petitioner embraced the
innominate contract theory. Illustrative of this shift is petitioner’s statement
in par. #8 of his motion for reconsideration of the CA’s decision combined
with what he said in par. # 43 of this petition, as follows:
“8. Whether or not the actionable document creates a partnership, joint
venture, or whatever, is a legal matter. What is determinative for purposes
of sufficiency of the complainant’s allegations, is whether the actionable
document bears out an actionable contract—be it a partnership, a joint
venture or whatever or some innominate contract . . . It may be noted that
one kind of innominate contract is what is known as du ut facias (I give that
you may do).37
43. Contrariwise, this actionable document, especially its above-quoted
provisions, established an actionable contract even though it may not be a
partnership. This actionable contract is what is known as an innominate
contract (Civil Code, Article 1307).”38
Springing surprises on the opposing party is offensive to the sporting idea of
fair play, justice and due process; hence, the proscription against a party
shifting from one theory at the trial court to a new and different theory in
the appellate court.39 On the same rationale, an issue which was neither
averred in the complaint cannot be raised for the first time on appeal.40 It is
not difficult, therefore, to agree with the CA when it made short shrift of
petitioner’s innominate contract theory on the basis of the foregoing basic
reasons.
Petitioner’s protestation that his act of introducing the concept of innominate
contract was not a case of changing theories but of supporting his pleaded
cause of action—that of the existence of a partnership—by another legal
 Agency, Trusts, and Partnerships Page |9

perspective/argument, strikes the Court as a strained attempt to rationalize Panganiban (Chairman), Sandoval-Gutierrez, Corona and Carpio-Morales,
an untenable position. Paragraph 12 of his motion for reconsideration of the JJ., concur.
CA’s decision virtually relegates partnership as a fall-back theory. Two
Petition denied, impugned decision and resolution affirmed.
paragraphs later, in the same notion, petitioner faults the appellate court for
reading, with myopic eyes, the actionable document solely as establishing a
partnership/joint venture. Verily, the cited paragraphs are a study of a party
hedging on whether or not to pursue the original cause of action or Note.—The Statute of Frauds applies only to executory contracts and not to
altogether abandoning the same, thus: contracts which are either partially or totally performed. (Averia vs. Averia,
436 SCRA 459 [2004])
“12. Incidentally, assuming that the actionable document created a
partnership between [respondent] Eduardo, Sr. and [petitioner], no ——o0o——
immovables were contributed to this partnership. x x x
Litonjua, Jr. vs. Litonjua, Sr., 477 SCRA 576, G.R. Nos. 166299-300
14. All told, the Decision takes off from a false premise that the actionable December 13, 2005
document attached to the complaint does not establish a contractual
relationship between [petitioner] and … Eduardo, Sr. and Roberto T Yang
simply because his document does not create a partnership or a joint
venture. This is . . . a myopic reading of the actionable document.”

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

WHEREFORE, the instant petition is DENIED and the impugned Decision and
Resolution of the Court of Appeals AFFIRMED.

Cost against the petitioner.

SO ORDERED.

G.R. No. 143340. August 15, 2001.*
LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs.
LAMBERTO T. CHUA, respondent.
Partnership; Contracts; 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.—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.
Hence, based on the intention of the parties, as gathered from the facts and
ascertained from their language and conduct, a verbal contract of
partnership may arise. The essential points that must be proven to show that
a partnership was agreed upon are (1) mutual contribution to a common
stock, and (2) a joint interest in the profits. Understandably so, in view of the
absence of a written contract of partnership between respondent and
Jacinto, respondent resorted to the introduction of documentary and
testimonial evidence to prove said partnership. The crucial issue to settle
then is whether or not the “Dead Man’s Statute” applies to this case so as to
render inadmissible respondent’s testimony and that of his witness,
Josephine.
Same; Evidence; Dead Man’s Statute; Requirements; The “Dead Man’s
Statute” provides that if one party to the alleged transaction is precluded
from testifying by death, insanity, or other mental disabilities, the surviving
party is not entitled to undue advantage of giving his own uncontradicted
and unexplained account of the transaction.—The “Dead Man’s Statute”
provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party
is not entitled to the undue advantage of giving his own uncontradicted and
unexplained account of the transaction. But before this rule can be
successfully invoked to bar the introduction of testimonial evidence, it is
necessary that: “1. The witness is a party or assignor of a party to a case or
persons in whose behalf a case is prosecuted. 2. The action is against an
executor or administrator or other representative of a deceased person or a
person of unsound mind; 3. The subject-matter of the action is a claim or
demand against the estate of such deceased person or against person of
unsound mind; 4. His testimony refers to any matter of fact which occurred
before the death of such deceased person or before such person became of
unsound mind.”
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 10
Same; Same; Same; Same; When it is the executor or administrator or
representatives of the estate that sets up the counterclaim, the plaintiff,
herein respondent, may testify to occurrences before the death of the
deceased to defeat the counterclaim.—Two reasons forestall the application
of the “Dead Man’s Statute” to this case. First, petitioners filed a compulsory
counterclaim against respondent in their answer before the trial court, and
with the filing of their counterclaim, petitioners themselves effectively
removed this case from the ambit of the “Dead Man’s Statute.” Well
entrenched is the rule that when it is the executor or administrator or
representatives of the estate that sets up the counterclaim, the plaintiff,
herein respondent, may testify to occurrences before the death of the
deceased to defeat the counterclaim. Moreover, as defendant in the
counterclaim, respondent is not disqualified from testifying as to matters of
fact occurring before the death of the deceased, said action not having been
brought against but by the estate or representatives of the deceased.
Same; Same; Words and Phrases; “Assignor” of a party means “assignor of a
cause of action which has arisen, and not the assignor of a right assigned
before any cause of action has arisen.”—The testimony of Josephine is not
covered by the “Dead Man’s Statute” for the simple reason that she is not “a
party or assignor of a party to a case or persons in whose behalf a case is
prosecuted.” Records show that respondent offered the testimony of
Josephine to establish the existence of the partnership between respondent
and Jacinto. Petitioners’ insistence that Josephine is the alter ego of
respondent does not make her an assignor because the term “assignor” of a
party means “assignor of a cause of action which has arisen, and not the
assignor of a right assigned before any cause of action has arisen.” Plainly
then, Josephine is merely a witness of respondent, the latter being the party
plaintiff.
Same; Dissolution; The Civil Code expressly provides that upon dissolution,
the partnership continues and its legal personality is retained until the
complete winding up of its business culminating in its termination.—With
regard to petitioners’ insistence that laches and/or prescription should have
extinguished respondent’s claim, we agree with the trial court and the Court
of Appeals that the action for accounting filed by respondent three (3) years
after Jacinto’s death was well within the prescribed period. The Civil Code
provides that an action to enforce an oral contract prescribes in six (6) years
while the right to demand an accounting for a partner’s interest as against
the person continuing the business accrues at the date of dissolution, in the

absence of any contrary agreement. Considering that the death of a partner
results in the dissolution of the partnership, in this case, it was after Jacinto’s
death that respondent as the surviving partner had the right to an account of
his interest as against petitioners. It bears stressing that while Jacinto’s
death dissolved the partnership, the dissolution did not immediately
terminate the partnership. The Civil Code expressly provides that upon
dissolution, the partnership continues and its legal personality is retained
until the complete winding up of its business, culminating in its termination.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Manuel T. Chan for petitioners.
Pacatang Law Office for respondent.
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court of the Decision1 of the Court of Appeals dated January 31, 2000 in the
case entitled “Lamberto T. Chua vs. Lilibeth Sunga Chan and Cecilia Sunga”
and of the Resolution dated May 23, 2000 denying the motion for
reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga
(hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a
complaint against Lilibeth Sunga Chan (hereafter petitioner Lilibeth) and
Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of
the deceased Jacinto L. Sunga (hereafter Jacinto), for “Winding Up of
Partnership Affairs, Accounting, Appraisal and Recovery of Shares and
Damages with Writ of Preliminary Attachment” with the Regional Trial Court,
Branch 11, Sindangan, Zamboanga del Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with
Jacinto in the distribution of Shellane Liquefied Petroleum Gas (LPG) in
Manila. For business convenience, respondent and Jacinto allegedly agreed
to register the business name of their partnership, SHELLITE GAS
APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole
proprietorship. Respondent allegedly delivered his initial capital contribution
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 11
of P100,000.00 to Jacinto while the latter in turn produced P100,000.00 as
his counterpart contribution, with the intention that the profits would be
equally divided between them. The partnership allegedly had Jacinto as
manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife
of respondent, Erlinda Sy. As compensation, Jacinto would receive a
manager’s fee or remuneration of 10% of the gross profit and Josephine
would receive 10% of the net profits, in addition to her wages and other
remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its
business operation went quite well and was profitable. Respondent claimed
that he could attest to the success of their business because of the volume
of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas
Shell Petroleum Corporation. While Jacinto furnished respondent with the
merchandise inventories, balance sheets and net worth of Shellite from 1977
to 1989, respondent however suspected that the amount indicated in these
documents were understated and undervalued by Jacinto and Josephine for
their own selfish reasons and for tax avoidance.
Upon Jacinto’s death in the later part of 1989, his surviving wife, petitioner
Cecilia and particularly his daughter, petitioner Lilibeth, took over the
operations, control, custody, disposition and management of Shellite without
respondent’s consent. Despite respondent’s repeated demands upon
petitioners for accounting, inventory, appraisal, winding up and restitution of
his net shares in the partnership, petitioners failed to comply. Petitioner
Lilibeth allegedly continued the operations of Shellite, converting to her own
use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out
of alibis and reasons to evade respondent’s demands, she disbursed out of
the partnership funds the amount of P200,000.00 and partially paid the same
to respondent. Petitioner Lilibeth allegedly informed respondent that the
P200,000.00 represented partial payment of the latter’s share in the
partnership, with a promise that the former would make the complete
inventory and winding up of the properties of the business establishment.
Despite such commitment, petitioners allegedly failed to comply with their
duty to account, and continued to benefit from the assets and income of
Shellite to the damage and prejudice of respondent.

On December 19, 1992, petitioners filed a Motion to Dismiss on the ground
that the Securities and Exchange Commission (SEC) in Manila, not the
Regional Trial Court in Zamboanga del Norte had jurisdiction over the action.
Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form
and substance denied the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory
Counterclaims, contending that they are not liable for partnership shares,
unreceived income/profits, interests, damages and attorney’s fees, that
respondent does not have a cause of action against them, and that the trial
court has no jurisdiction over the nature of the action, the SEC being the
agency that has original and exclusive jurisdiction over the case. As
counterclaim, petitioner sought attorney’s fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on
the ground that the claim for winding up of partnership affairs, accounting
and recovery of shares in partnership affairs, accounting and recovery of
shares in partnership assets/properties should be dismissed and prosecuted
against the estate of deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for
lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari,
Prohibition and Mandamus with the Court of Appeals docketed as CA-G.R. SP
No. 32499 questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to
Suspend Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-
trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of
merit.
On January 16, 1995, this Court denied the petition for review, on certiorari
filed by petitioner, “as petitioners failed to show that a reversible error was
committed by the appellate court.”2
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 12
On February 20, 1995, entry of judgment was made by the Clerk of Court
and the case was remanded to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference
and set the hearing of the case on January 17, 1996.
Respondent presented his evidence while petitioners were considered to
have waived their right to present evidence for their failure to attend the
scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for
respondent. The dispositive portion of the Decision reads:
“WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under
accounting procedures and standards of the properties, assets, income and
profits of the Shellite Gas Appliance Center since the time of death of Jacinto
L. Sunga, from whom they continued the business operations including all
businesses derived from the Shellite Gas Appliance Center; submit an
inventory, and appraisal of all these properties, assets, income, profits, etc.
to the Court and to plaintiff for approval or disapproval;
(2) ORDERING them to return and restitute to the partnership any and all
properties, assets, income and profits they misapplied and converted to their
own use and advantage that legally pertain to the plaintiff and account for
the properties mentioned in pars. A and B on pages 4-5 of this petition as
basis;
(3) DIRECTING them to restitute and pay to the plaintiff 1/2 shares and
interest of the plaintiff in the partnership of the listed properties, assets and
good will (sic) in schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and
profits from the partnership from 1988 to May 30, 1992, when the plaintiff
learned of the closure of the store the sum of P35,000.00 per month, with
legal rate of interest until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate
its business activities pursuant to law, after delivering to the plaintiff all the
1/2 interest, shares, participation and equity in the partnership, or the value

thereof in money or money’s worth, if the properties are not physically
divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust
and in bad faith and hold them liable to the plaintiff the sum of P50,000.00
as moral and exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as
attorney’s (sic) and P25,000.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED.”3
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court,
appealing the case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The
dispositive portion of the Decision reads:
“WHEREFORE, the instant appeal is dismissed. The appealed decision is
AFFIRMED in all respects.”4
On May 23, 2000, the Court of Appeals denied the motion for reconsideration
filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
“1. The Court of Appeals erred in making a legal conclusion that there
existed a partnership between respondent Lamberto T. Chua and the late
Jacinto L. Sunga upon the latter’s invitation and offer and that upon his
death the partnership assets and business were taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches
and/or prescription did not apply in the instant case. Petitioners question the
correctness of the finding of the trial court and the Court of Appeals that a
partnership existed between respondent and Jacinto from 1977 until Jacinto’s
death. In the absence of any written document to show such partnership
between respondent and Jacinto, petitioners argue that these courts were
proscribed from hearing the testimonies of respondent and
3. The Court of Appeals erred in making the legal conclusion that there was
competent and credible evidence to warrant the finding of a partnership, and
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 13
assuming arguendo that indeed there was a partnership, the finding of highly
exaggerated amounts or values in the partnership assets and profits.”5
Petitioners question the correctness of the finding of the trial court and the
Court of Appeals that a partnership existed between respondent and Jacinto
from 1977 until Jacinto’s death. In the ansence of any written document to
show such partnership between respondent and Jacinto, petitioners argue
that these courts were proscribed from hearing the testimonies of
respondent and his witness, Josephine, to prove the alleged partnership
three years after Jacinto’s death. To support this argument, petitioners
invoke the “Dead Man’s Statute” or “Survivorship Rule” under Section 23,
Rule 130 of the Rules of Court that provides:
“SEC. 23. Disqualification by reason of death or insanity of adverse party.—
Parties or assignors of parties to a case, or persons in whose behalf a case is
prosecuted, against an executor or administrator or other representative of a
deceased person, or against a person of unsound mind, upon a claim or
demand against the estate of such deceased person, or against such person
of unsound mind, cannot testify as to any matter of fact occurring before the
death of such deceased person or before such person became of unsound
mind.”
Petitioners thus implore this Court to rule that the testimonies of respondent
and his alter ego, Josephine, should not have been admitted to prove certain
claims against a deceased person (Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public
instrument shall be necessary.6 Hence, based on the intention of the parties,
as gathered from the facts and ascertained from their language and conduct,
a verbal contract of partnership may arise.7 The essential points that must
be proven to show that a partnership was agreed upon are (1) mutual
contribution to a common stock, and (2) a joint interest in the profits.8
Understandably so, in view of the absence of a written contract of
partnership between respondent and Jacinto, respondent resorted to the
introduction of documentary and testimonial evidence to prove said
partnership. The crucial issue to settle then is whether or not the “Dead
Man’s Statute” applies to this case so as to render inadmissible respondent’s
testimony and that of his witness, Josephine.

The “Dead Man’s Statute” provides that if one party to the alleged
transaction is precluded from testifying by death, insanity, or other mental
disabilities, the surviving party is not entitled to the undue advantage of
giving his own uncontradicted and unexplained account of the transaction.9
But before this rule can be successfully invoked to bar the introduction of
testimonial evidence, it is necessary that:
“1. The witness is a party or assignor of a party to a case or persons in
whose behalf a case is prosecuted.
2. The action is against an executor or administrator or other representative
of a deceased person or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate
of such deceased person or against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death
of such deceased person or before such person became of unsound mind.”10
Two reasons forestall the application of the “Dead Man’s Statute” to this
case.
First, petitioners filed a compulsory counterclaim11 against respondent in
their answer before the trial court, and with the filing of their counterclaim,
petitioners themselves effectively removed this case from the ambit of the
“Dead Man’s Statute.”12 Well entrenched is the rule that when it is the
executor or administrator or representatives of the estate that sets up the
counterclaim, the plaintiff, herein respondent, may testify to occurrences
before the death of the deceased to defeat the counterclaim.13 Moreover, as
defendant in the counterclaim, respondent is not disqualified from testifying
as to matters of fact occurring before the death of the deceased, said action
not having been brought against but by the estate or representatives of the
deceased.14
Second, the testimony of Josephine is not covered by the “Dead Man’s
Statute” for the simple reason that she is not “a party or assignor of a party
to a case or persons in whose behalf a case is prosecuted.” Records show
that respondent offered the testimony of Josephine to establish the existence
of the partnership between respondent and Jacinto. Petitioners’ insistence
that Josephine is the alter ego of respondent does not make her an assignor
because the term “assignor” of a party means “assignor of a cause of action
which has arisen, and not the assignor of a right assigned before any cause
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 14
of action has arisen.”15 Plainly then, Josephine is merely a witness of
respondent, the latter being the party plaintiff.
We are not convinced by petitioners’ allegation that Josephine’s testimony
lacks probative value because she was allegedly coerced by respondent, her
brother-in-law, to testify in his favor. Josephine merely declared in court that
she was requested by respondent to testify and that if she were not
requested to do so she would not have testified. We fail to see how we can
conclude from this candid admission that Josephine’s testimony is involuntary
when she did not in any way categorically say that she was forced to be a
witness of respondent. Also, the fact that Josephine is the sister of the wife
of respondent does not diminish the value of her testimony since relationship
per se, without more, does not affect the credibility of witnesses.16
Petitioners’ reliance alone on the “Dead Man’s Statute” to defeat
respondent’s claim cannot prevail over the factual findings of the trial court
and the Court of Appeals that a partnership was established between
respondent and Jacinto. Based not only on the testimonial evidence, but the
documentary evidence as well, the trial court and the Court of Appeals
considered the evidence for respondent as sufficient to prove the formation
of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial.
By the weight of judicial precedents, a factual matter like the finding of the
existence of a partnership between respondent and Jacinto cannot be
inquired into by this Court on review.17 This Court can no longer be tasked
to go over the proofs presented by the parties and analyze, assess and
weigh them to ascertain if the trial court and the appellate court were correct
in according superior credit to this or that piece of evidence of one party or
the other.18 It must be also pointed out that petitioners failed to attend the
presentation of evidence of respondent. Petitioners cannot now turn to this
Court to question the admissibility and authenticity of the documentary
evidence of respondent when petitioners failed to object to the admissibility
of the evidence at the time that such evidence was offered.19
With regard to petitioners’ insistence that laches and/or prescription should
have extinguished respondent’s claim, we agree with the trial court and the
Court of Appeals that the action for accounting filed by respondent three (3)
years after Jacinto’s death was well within the prescribed period. The Civil
Code provides that an action to enforce an oral contract prescribes in six (6)
 A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 15

years20 while the right to demand an accounting for a partner’s interest as might be distinguished from the winding up, of its businesses. (Sy vs. Court
against the person continuing the business accrues at the date of dissolution, of Appeals, 313 SCRA 328 [1999])
in the absence of any contrary agreement.21 Considering that the death of a
The partnership although dissolved, continues to exist until its termination, at
partner results in the dissolution of the partnership,22 in this case, it was
after Jacinto’s death that respondent as the surviving partner had the right which time the winding up of its affairs should have been completed and the
net partnership assets are partitioned and distributed to the partners. (Sy vs.
to an account of his interest as against petitioners. It bears stressing that
Court of Appeals, 313 SCRA 328 [1999])
while Jacinto’s death dissolved the partnership, the dissolution did not
immediately terminate the partnership. The Civil Code23 expressly provides ——o0o—— Sunga-Chan vs. Chua, 363 SCRA 249, G.R. No. 143340 August
that upon dissolution, the partnership continues and its legal personality is 15, 2001
retained until the complete winding up of its business, culminating in its
termination.24

In a desperate bid to cast doubt on the validity of the oral partnership

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

WHEREFORE, in view of the foregoing, the petition is DENIED and the

appealed decision is AFFIRMED.

SO ORDERED.

Melo (Chairman), Vitug, Panganiban and Sandoval-Gutierrez, JJ., concur.

Petition denied, judgment affirmed.

Notes.—Dissolution of a partnership is the change in the relation of the

parties caused by any partner ceasing to be associated in the carrying on, as

No. L-24193. June 28, 1968.
MAURICIO AGAD, plaintiff-appellant, vs. SEVERINO MABATO &
MABATO & AGAD COMPANY, defendants-appellees.
Civil law; Partnership; How partnership may be constituted.—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. 1771, Civil Code). A contract of partnership is void, whenever
immovable property is contributed thereto, if inventory of said property is not
made, signed by the parties, and attached to the public instrument (Art.
1773, Id.).
APPEAL from an order of the Court of First Instance of Davao.
The facts are stated in the opinion of the Court.
Angeles, Maskariño & Associates for plaintiff-appeldant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of
the Court of First Instance of Davao, we are called upon to determine the
applicability of Article 1773 of our Civil Code to the contract of partnership on
which the complaint herein is based.
Alleging that he and defendant Severino Mabato are—pursuant to a public
instrument dated August 29, 1952, copy of which is attached to the
complaint as Annex “A”—partners in a fishpond business, to the capital of
which Agad contributed P1,000, with the right to receive 50% of the profits;
that from 1952 up to and including 1956, Mabato who handled the
partnership funds, had yearly rendered accounts of the operations of the
partnership; and that, despite repeated demands, Mabato had failed and
refused to render accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed on June 9,
1964, that judgment be rendered sentencing Mabato to pay him (Agad) the
sum of P14,000, as his share in the profits of the partnership for the period
from 1957 to 1963, in addition to P1,000 as attorney’s fees, and ordering the
dissolution of the partnership, as well as the winding up of its affairs by a
receiver to be appointed therefor.
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 16
In his answer, Mabato admitted the formal allegations of the complaint and
denied the existence of said partnership, upon the ground that the contract
therefor had not been perfected, despite the execution of Annex “A”,
because Agad had allegedly failed to give his P1,000 contribution to the
partnership capital. Mabato prayed, therefore, that the complaint be
dismissed; that Annex “A” be declared void and initio; and that Agad be
sentenced to pay actual, moral and exemplary damages, as well as
attorney’s fess.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the
complaint states no cause of action and that the lower court had no
jurisdiction over the subject matter of the case, because it involves
principally the determination of rights over public lands. After due hearing,
the court issued the order appealed from, granting the motion to dismiss the
complaint for failure to state a cause of action. This conclusion was
predicated upon the theory that the contract of partnership, Annex “A”, is
null and void, pursuant to Art. 1773 of our Civil Code, because an inventory
of the fishpond referred in said instrument had not been attached thereto. A
reconsideration of this order having been denied, Agad brought the matter to
us for review by record on appeal.
Articles 1771 and 1773 of said Code provide:
“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. 1773. A contract of partnership is void, whenever immovable property
is contributed thereto, if inventory of said property is not made, signed by
the parties, and attached to the public instrument.”
The issue before us hinges on whether or not “immovable property or real
rights” have been contributed to the partnership under consideration.
Mabato alleged and the lower court held that the answer should be in the
affirmative, because “it is really inconceivable how a partnership engaged in
the fishpond business could -exist without said fishpond property (being)
contributed to the partnership.” It should be noted, however, that, as stated
in Annex “A” the partnership was established “to operate a fishpond”, not to
“engage in a fishpond business”. Moreover, none of the partners contributed
either a f ishpond or a real right to any fishpond. Their contributions were
 A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 17

limited to the sum of P1,000 each. Indeed, Paragraph 4 of Annex “A”

provides:

“That the capital of the said partnership is Two Thousand (P2,000.00) Pesos
Philippine Currency, of which One Thousand (P1,000.00) pesos has been
contributed by Severino Mabato and One Thousand (P1,000.00) Pesos has
been contributed by Mauricio Agad.

x x x x”

The operation of the fishpond mentioned in Annex “A” was the purpose of
the partnership. Neither said f ishpond nor a real right thereto was
contributed to the partnership or became part of the capital thereof, even if
a fishpond or a real right thereto could become part of its assets.

WHEREFORE, we find that said Article 1773 of the Civil Code is not in point
and that, the order appealed from should be, as it is hereby set aside and
the case remanded to the lower court for further proceedings, with the costs
of this instance against defendant-appellee, Severino Mabato. It is so
ordered.

Reyes, J.B.L.. Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and

Fernando, JJ., concur.

Order set aside and case remanded to lower court for further proceedings.

Note.—In the absence of a valid cause, a partner cannot withdraw from a

partnership agreement (before its expiration) for his own personal profit at
the expense of the partnership (Lichauco v. Soriano, 26 Phil. 593).

As to how partnership profits are determined, see De la Rosa v. Ortega

Gocotay, 48 Phil. 605. Agad vs. Mabato, 23 SCRA 1223, No. L-24193 June
28, 1968

G.R. No. 134559. December 9, 1999.*
ANTONIA TORRES assisted by her husband, ANGELO TORRES and
EMETERIA BARING, petitioners, vs. COURT OF APPEALS and
MANUEL TORRES, respondents.
Civil Law; Contracts; Partnership; The contract manifested the intention of
the parties to form a partnership.—Under the above-quoted Agreement,
petitioners would contribute property to the partnership in the form of land
which was to be developed into a subdivision; while respondent would give,
in addition to his industry, the amount needed for general expenses and
other costs. Furthermore, the income from the said project would be divided
according to the stipulated percentage. Clearly, the contract manifested the
intention of the parties to form a partnership.
Same; Same; Same; Courts are not authorized to extricate parties from the
necessary consequences of their acts, and the fact that the contractual
stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations.—Under Article 1315 of the Civil Code,
contracts bind the parties not only to what has been expressly stipulated, but
also to all necessary consequences thereof. x x x It is undisputed that
petitioners are educated and are thus presumed to have understood the
terms of the contract they voluntarily signed. If it was not in consonance
with their expectations, they should have objected to it and insisted on the
provisions they wanted. Courts are not authorized to extricate parties from
the necessary consequences of their acts, and the fact that the contractual
stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations. They cannot now disavow the relationship
formed from such agreement due to their supposed misunderstanding of its
terms.
Same; Same; Same; Parties cannot adopt inconsistent positions in regard to
a contract and courts will not tolerate, much less approve, such practice.—
Petitioners themselves invoke the allegedly void contract as basis for their
claim that respondent should pay them 60 percent of the value of the
property. They cannot in one breath deny the contract and in another
recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts will not
tolerate, much less approve, such practice.
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 18
Same; Same; Sale; Consideration, more properly denominated as cause, can
take different forms, such as the prestation or promise of a thing or service
by another.—Petitioners also contend that the Joint Venture Agreement is
void under Article 1422 of the Civil Code, because it is the direct result of an
earlier illegal contract, which was for the sale of the land without valid
consideration. This argument is puerile. The Joint Venture Agreement clearly
states that the consideration for the sale was the expectation of profits from
the subdivision project. Its first stipulation states that petitioners did not
actually receive payment for the parcel of land sold to respondent.
Consideration, more properly denominated as cause, can take different
forms, such as the prestation or promise of a thing or service by another.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Delfin V. Nacua for petitioners.
Zosa & Quijano Law Offices for private respondent.
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their
acts. That the terms of a contract turn out to be financially disadvantageous
to them will not relieve them of their obligations therein. The lack of an
inventory of real property will not ipso facto release the contracting partners
from their respective obligations to each other arising from acts executed in
accordance with their agreement.
The Case
The Petition for Review on Certiorari before us assails the March 5,1998
Decision1 of the Court of Appeals2 (CA) in CA-GR CV No. 42378 and its June
25, 1998 Resolution denying reconsideration. The assailed Decision affirmed
the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-
21208, which disposed as follows:
“WHEREFORE, for all the foregoing considerations, the Court, finding for the
defendant and against the plaintiffs, orders the dismissal of the plaintiff’s
complaint. The counterclaims of the defendant are likewise ordered
dismissed. No pronouncement as to costs.”3
The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a
“joint venture agreement” with Respondent Manuel Torres for the
development of a parcel of land into a subdivision. Pursuant to the contract,
they executed a Deed of Sale covering the said parcel of land in favor of
respondent, who then had it registered in his name. By mortgaging the
property, respondent obtained from Equitable Bank a loan of P40,000 which,
under the Joint Venture Agreement, was to be used for the development of
the subdivision.4 All three of them also agreed to share the proceeds from
the sale of the subdivided lots.
The project did not push through, and the land was subsequently foreclosed
by the bank.
According to petitioners, the project failed because of “respondent’s lack of
funds or means and skills.” They add that respondent used the loan not for
the development of the subdivision, but in furtherance of his own company,
Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement
the Agreement. With the said amount, he was able to effect the survey and
the subdivision of the lots. He secured the Lapu Lapu City Council’s approval
of the subdivision project which he advertised in a local newspaper. He also
caused the construction of roads, curbs and gutters. Likewise, he entered
into a contract with an engineering firm for the building of sixty low-cost
housing units and actually even set up a model house on one of the
subdivision lots. He did all of these for a total expense of P85,000.
Respondent claimed that the subdivision project failed, however, because
petitioners and their relatives had separately caused the annotations of
adverse claims on the title to the land, which eventually scared away
prospective buyers.
Despite his requests, petitioners refused to cause the clearing of the claims,
thereby forcing him to give up on the project.5
Subsequently, petitioners filed a criminal case for estafa against respondent
and his wife, who were however acquitted. Thereafter, they filed the present
civil case which, upon respondent’s motion, was later dismissed by the trial
court in an Order dated September 6, 1982. On appeal, however, the
appellate court remanded the case for further proceedings. Thereafter, the
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 19
RTC issued its assailed Decision, which, as earlier stated, was affirmed by the
CA.
Hence, this Petition.6
Ruling of the Court of Appeals
In affirming the trial court, the Court of Appeals held that petitioners and
respondent had formed a partnership for the development of the subdivision.
Thus, they must bear the loss suffered by the partnership in the same
proportion as their share in the profits stipulated in the contract. Disagreeing
with the trial court’s pronouncement that losses as well as profits in a joint
venture should be distributed equally,7 the CA invoked Article 1797 of the
Civil Code which provides:
“Article 1797—The losses and profits shall be distributed in conformity with
the agreement. If only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in the same
proportion.”
The CA elucidated further:
“In the absence of stipulation, the share of each partner in the profits and
losses shall be in proportion to what he may have contributed, but the
industrial partner shall not be liable for the losses.
As for the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances. If besides his services he has
contributed capital, he shall also receive a share in the profits in proportion
to his capital.”
The Issue
Petitioners impute to the Court of Appeals the following error:
“x x x [The] Court of Appeals erred in concluding that the transaction x x x
between the petitioners and respondent was that of a joint
venture/partnership, ignoring outright the provision of Article 1769, and
other related provisions of the Civil Code of the Philippines.”8
The Court’s Ruling
The Petition is bereft of merit.

Main Issue:
Existence of a Partnership
Petitioners deny having formed a partnership with respondent. They contend
that the Joint Venture Agreement and the earlier Deed of Sale, both of which
were the bases of the appellate court’s finding of a partnership, were void.
In the same breath, however, they assert that under those very same
contracts, respondent is liable for his failure to implement the project.
Because the agreement entitled them to receive 60 percent of the proceeds
from the sale of the subdivision lots, they pray that respondent pay them
damages equivalent to 60 percent of the value of the property.9
The pertinent portions of the Joint Venture Agreement read as follows:
“KNOW ALL MEN BY THESE PRESENTS:
“This AGREEMENT, is made and entered into at Cebu City, Philippines, this
5th day of March, 1969, by and between MR. MANUEL R. TORRES, x x x the
FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS EMETERIA
BARING, xxx the SECOND PARTY:
W I T N E S S E T H:
“That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY,
this property located at Lapu-Lapu City, Island of Mactan, under Lot No.
1368 covering TCT No. T-0184 with a total area of 17,009 square meters, to
be subdivided by the FIRST PARTY;
“Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:
TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the
execution of this contract for the property entrusted by the SECOND PARTY,
for sub-division projects and development purposes;
“NOW THEREFORE, for and in consideration of the above covenants and
promises herein contained the respective parties hereto do hereby stipulate
and agree as follows:
“ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated
March 5,1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED
THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700 square
meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 20
the FIRST PARTY, but the SECOND PARTY did not actually receive the
payment.
“SECOND: That the SECOND PARTY, had received from the FIRST PARTY,
the necessary amount of TWENTY THOUSAND (P20,000.00) pesos,
Philippine currency, for their personal obligations and this particular amount
will serve as an advance payment from the FIRST PARTY for the property
mentioned to be sub-divided and to be deducted from the sales.
“THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY,
the interest and the principal amount involving the amount of TWENTY
THOUSAND (P20,000.00) Pesos, Philippine Currency, until the sub-division
project is terminated and ready for sale to any interested parties, and the
amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will
be deducted accordingly.
“FOURTH: That all general expense[s] and all cost[s] involved in the sub-
division project should be paid by the FIRST PARTY, exclusively and all the
expenses will not be deducted from the sales after the development of the
subdivision project.
“FIFTH: That the sales of the sub-divided lots will be divided into SIXTY
PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM 40% for
the FIRST PARTY, and additional profits or whatever income deriving from
the sales will be divided equally according to the x x x percentage [agreed
upon] by both parties.
“SIXTH: That the intended sub-division project of the property involved will
start the work and all improvements upon the adjacent lots will be
negotiated in both parties[’] favor and all sales shall [be] decided by both
parties.
“SEVENTH: That the SECOND PARTIES, should be given an option to get
back the property mentioned provided the amount of TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency, borrowed by the SECOND PARTY,
will be paid in full to the FIRST PARTY, including all necessary improvements
spent by the FIRST PARTY, and the FIRST PARTY will be given a grace
period to turnover the property mentioned above.
“That this AGREEMENT shall be binding and obligatory to the parties who
executed same freely and voluntarily for the uses and purposes therein
stated.”10

A reading of the terms embodied in the Agreement indubitably shows the
existence of a partnership pursuant to Article 1767 of the Civil Code, which
provides:
“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.”
Under the above-quoted Agreement, petitioners would contribute property to
the partnership in the form of land which was to be developed into a
subdivision; while respondent would give, in addition to his industry, the
amount needed for general expenses and other costs. Furthermore, the
income from the said project would be divided according to the stipulated
percentage. Clearly, the contract manifested the intention of the parties to
form a partnership.11
It should be stressed that the parties implemented the contract. Thus,
petitioners transferred the title to the land to facilitate its use in the name of
the respondent. On the other hand, respondent caused the subject land to
be mortgaged, the proceeds of which were used for the survey and the
subdivision of the land. As noted earlier, he developed the roads, the curbs
and the gutters of the subdivision and entered into a contract to construct
low-cost housing units on the property.
Respondent’s actions clearly belie petitioners’ contention that he made no
contribution to the partnership. Under Article 1767 of the Civil Code, a
partner may contribute not only money or property, but also industry.
Petitioners Bound by
Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to
what has been expressly stipulated, but also to all necessary consequences
thereof, as follows:
“ART. 1315. Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage and law.”
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 21
It is undisputed that petitioners are educated and are thus presumed to have
understood the terms of the contract they voluntarily signed. If it was not in
consonance with their expectations, they should have objected to it and
insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary
consequences of their acts, and the fact that the contractual stipulations may
turn out to be financially disadvantageous will not relieve parties thereto of
their obligations. They cannot now disavow the relationship formed from
such agreement due to their supposed misunderstanding of its terms.
Alleged Nullity of the
Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under Article 1773
of the Civil Code, which provides:
“ART. 1773. A contract of partnership is void, whenever immovable property
is contributed thereto, if an inventory of said property is not made, signed by
the parties, and attached to the public instrument.”
They contend that since the parties did not make, sign or attach to the public
instrument an inventory of the real property contributed, the partnership is
void.
We clarify. First, Article 1773 was intended primarily to protect third persons.
Thus, the eminent Arturo M. Tolentino states that under the aforecited
provision which is a complement of Article 1771,12 “the execution of a public
instrument would be useless if there is no inventory of the property
contributed, because without its designation and description, they cannot be
subject to inscription in the Registry of Property, and their contribution
cannot prejudice third persons. This will result in fraud to those who contract
with the partnership in the belief [in] the efficacy of the guaranty in which
the immovables may consist. Thus, the contract is declared void by the law
when no such inventory is made.” The case at bar does not involve third
parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for
their claim that respondent should pay them 60 percent of the value of the
property.13 They cannot in one breath deny the contract and in another
recognize it, depending on what momentarily suits their purpose. Parties
 A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 22

cannot adopt inconsistent positions in regard to a contract and courts will not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from
considering the Joint Venture Agreement an ordinary contract from which
the parties’ rights and obligations to each other may be inferred and
enforced.
Partnership Agreement Not the Result
of an Earlier Illegal Contract
to him, petitioners failed to give any reason why we should disregard the
factual findings of the appellate court relieving him of fault. Verily, factual
issues cannot be resolved in a petition for review under Rule 45, as in this
case. Petitioners have not alleged, not to say shown, that their Petition
constitutes one of the exceptions to this doctrine.18 Accordingly, we find no
reversible error in the CA’s ruling that petitioners are not entitled to
damages.
WHEREFORE, the Petition is hereby DENIED and the challenged Decision
AFFIRMED. Costs against petitioners.

Petitioners also contend that the Joint Venture Agreement is void under SO ORDERED.
Article 142214 of the Civil Code, because it is the direct result of an earlier
Melo (Chairman), Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
illegal contract, which was for the sale of the land without valid
consideration. Petition denied, judgment affirmed.

This argument is puerile. The Joint Venture Agreement clearly states that the
consideration for the sale was the expectation of profits from the subdivision
project. Its first stipulation states that petitioners did not actually receive
payment for the parcel of land sold to respondent. Consideration, more
properly denominated as cause, can take different forms, such as the
prestation or promise of a thing or service by another.15
Note.—The three final stages of a partnership are (1) dissolution; (2)
winding-up; and (3) termination. (Idos vs. Court of Appeals, 296 SCRA 194
[1998]) Torres vs. Court of Appeals, 320 SCRA 428, G.R. No. 134559
December 9, 1999

In this case, the cause of the contract of sale consisted not in the stated
peso value of the land, but in the expectation of profits from the subdivision
project, for which the land was intended to be used. As explained by the trial
court, “the land was in effect given to the partnership as [petitioner’s]
participation therein. x x x There was therefore a consideration for the sale,
the [petitioners] acting in the expectation that, should the venture come into
fruition, they [would] get sixty percent of the net profits.”

Liability of the Parties

Claiming that respondent was solely responsible for the failure of the
subdivision project, petitioners maintain that he should be made to pay
damages equivalent to 60 percent of the value of the property, which was
their share in the profits under the Joint Venture Agreement.

We are not persuaded. True, the Court of Appeals held that petitioners’ acts
were not the cause of the failure of the project.16 But it also ruled that
neither was respondent responsible therefor.17 In imputing the blame solely

No. L-25532. February 28, 1969.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WILLIAM
J. SUTER and THE COURT OF TAX APPEALS, respondents.
Partnership; Where respondent company in the case at bar is considered a
particular partnership and not universal.—The respondent company was not
a universal partnership, but a particular one. As appears f rom Articles 1674
and 1675 of the Spanish Civil Code of 1889 (law in force when firm
organized in 1947), a universal partnership requires either that the object of
the association be all the present property of the partners, as contributed by
them to the common fund, or else “all that the partners may acquire by their
industry or work during the existence of the partnership.” Respondent
company was not such a universal partnership, since the contributions of the
partners were fixed sums of money and neither one of them was an
industrial partner. It follows that respondent company was not a partnership
that spouses were forbidden to enter by Article 1677 of the Civil Code of
1889. Nor could the subsequent marriage of the partners operate to dissolve
it, such marriage not being one of the causes provided for that purpose
either by the Spanish Civil Code or the Code of Commerce.
Same; Where marriage of partners does not make the company a single
proprietorship.—The capital contributions of respondents-partners were
separately owned and contributed by them before their marriage; and after
they were joined in wedlock, such contributions remained their respective
separate property under the Spanish Civil Code.
Same; Partnership has distinct and separate personality from that of its
partners; Section 24 of Internal Revenue Code is exception to the rule.—The
basic tenet of ,the Spanish and Philippine law is that the partnership has a
juridical personality of its own, distinct and separate from that of its partners,
the bypassing of the existence of the limited partnership as a taxpayer can
only be done by ignoring or disregarding clear statutory mandates and basic
principles of our law. The limited partnership’s separate individuality makes it
impossible to equate its income with that of the component members. True,
section 24 of the Internal Revenue Code merges registered general
copartnerships with the personality of the individual partners for income tax
purposes. But this rule is exceptional in its disregard of a cardinal tenet of
our partnership laws, and can not be extended by mere implication to limited
partnerships.
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 23
Same; Taxation; Change in membership does not remove partnership from
coverage of section 24.—The limited partnership is not a mere business
conduit of the partner-spouses; it was organized for legitimate business
purposes; it conducted its own- dealings with its customers prior to
appellee’s marriage, and had been filing its own income tax returns as such
independent entity. The change in its membership, brought about by the
marriage of the partners and their subsequent acquisition of all interest
therein. is no ground for withdrawing the partnership from the coverage of
Section 24 of the tax code, requiring it to pay income tax. As far as the
records show, the partners did not enter into matrimony and thereafter buy
the interests of the remaining partner with the premeditated scheme or
design to use the partnership as a business conduit to dodge the to laws.
Regularity, not otherwise, is presumed. The limited partnership is taxable on
its income and to require that income to be included in the indiviual tax
return of respondent is to overstretch the letter and intent of the law.
Same; Same; Members and not firm are taxable in case of compañias
colectivas.—In fact, it would even conflict with what it specifically provides in
its Section 24: for the appellant’s stand results in equal treatment, taxwise,
of a general copartnership (compania colectiva) and a limited partnership,
when the code plainly differentiates the two. Thus, the code taxes the latter
on its income, but not the former, because it is in the case of compañias
colectivas that the members, and not the firm, are taxable in their individual
capacities for any dividend or share of the profit derived from the duly
registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris
on the N.I.R.C., As Amended, Vol. 1, pp. 88–89).
Same; Same; Income of limited partnership forming part of the conjugal
partnership is not wholly correct.—That the income of the limited partnership
is actually or constructively the income of the spouses and forms part of the
conjugal partnership of gains is not wholly correct. The fruits of the wife’s
paraphernal become conjugal only when no longer needed to defray ,the
expenses for the administration and preservation of the paraphernal capital
of the wife. Then again, the appellant’s argument erroneously conf ines itself
to the question of the legal personality of the limited partnership since the
law taxes the income of ‘even joint accounts that have no personality of their
own. (Agapito v. Molo, 59 Phil. 779; People’s Bank v. Register of Deeds of
Manila, 60 Phil. 167; V. Evangelista v. Collector of Internal Revenue, 102
Phil. 140; Collector v. Batangas Transportation Co., 102 Phil. 822.)

Same; Same; What is taxable is income of both spouses, not the conjugal
partnership.—Appellant is, likewise, mistaken in that it assumes that the
conjugal partnership of gains is a taxable unit, which it is not. What is
taxable is the “income of both spouses” (Section 45 [d]) in their individual
capacities. Though the amount of income (income of the conjugal
partnernership vis-a-vis the joint income of husband and wife) may be the
same for a given taxable year, their consequences would ,be different, as
their contributions in the business partnership are not .the same.
Same; Same; Revenue code does not authorize consolidation of income of
limited partnership and income of spouses.—The diff erence in tax rates
between the income of the limited partnership being consolidated with, and
when split from the income of the spouses, is not a justification for requiring
consolidation; the revenue code, as it presently stands, does not authorize it,
and even bars it by requiring the limited partnership .to pay tax on its own
income.
PETITION for review of a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo
R. Rosete and Special Attorneys B. Gatdula, Jr. and T. Temprosa, Jr. for
petitioner.
A.S. Monzon, Gutierrez, Farrales & Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named “William J. Suter ‘Morcoin’ Co., Ltd.," was
formed on 30 September 1947 by herein respondent William J. Suter, as the
general partner, and Julia Spirig and Gustav Carlson, as the limited partners.
The partners contributed, respectively, P20,000.00, P18,000.00 and
P2,000.00 to the partnership. On 1 October 1947, the limited partnership
was registered with the Securities and Exchange Commission. The firm
engaged, among other activities, in the importation, marketing, distribution
and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories.- It had an office and held
itself out as a limited partnership, handling and carrying merchandise, using
invoices, bills and letterheads bearing its trade-name, maintaining its own
books of accounts and bank accounts, and had a quota allocation with the
Central Bank.
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 24
In 1948, however, general partner Suter and limited partner Spirig got
married and, thereafter, on 18 December 1948, limited partner Carlson sold
his share in the partnership to Suter and his wife. The sale was duly
recorded with the Securities and Exchange Commission on 20 December
1948.
The limited partnership had been filing its income tax returns as a
corporation, without objection by the herein petitioner, Commissioner of
Internal Revenue, until in 1959 when the latter, in an assessment,
consolidated the income of the firm and the individual incomes of the
partnersspouses Suter and Spirig, resulting in a determination of a deficiency
income tax against respondent Suter in the amount of P2,678.06 for 1954
and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation
and withdrawal, as not in accordance with law, but his request was denied.
Unable to secure a reconsideration, he appealed to the Court of Tax Appeals.
which court, after trial, rendered a decision, on 11 November 1965, reversing
that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of
Internal Revenue, of the tax court’s aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter
“Morcoin” Co., Ltd. should be disregarded for income tax purposes,
considering that respondent William J. Suter and his wife, Julia Spirig Suter,
actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the
partners, respondent William J. Suter and Julia Spirig Suter, and the
subsequent sale to them by the remaining partner, Gustav Carlson, of his
participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the
marriage of Suter and Spirig and their subsequent acquisition of the interests
of remaining partner Carlson in the partnership dissolved the limited
partnership, and if they did not, the fiction of juridical personality of the
partnership should be disregarded for income tax purposes because the
spouses have exclusive ownership and control of the business; consequently,
the income tax return of respondent Suter for the years in question should
have included his and his wife’s individual incomes and that of the limited

partnership, in accordance with Section 45 (d) of the National Internal
Revenue Code, which provides as follows:
"(d) Husband and wife.—In the case of married persons, whether citizens,
residents or non-residents, only one consolidated return for the taxable year
shall be filed by either spouse to cover the income of both spouses; x x x.”
In refutation of the foregoing, respondent Suter maintains, as the Court of
Tax Appeals held, that his marriage with limited partner Spirig and their
acquisition of Carlson’s interests in the partnership in 1948 is not a ground
for dissolution of the partnership, either in the Code of Commerce or in the
New Civil Code, and that since its juridical personality had not been affected
and since, as a limited partnership, as contradistinguished from a duly
registered general partnership, it is taxable on its income similarly with
corporations, Suter was not bound to include in his individual return the
income of the limited partnership.
We find the Commissioner’s appeal unmeritorious.
The thesis that the limited partnership, William J. Suter “Morcoin” Co., Ltd.,
has been dissolved by operation of law because of the marriage of the only
general partner, William J. Suter, to the originally limited partner, Julia Spirig,
one year after the partnership was organized is rested by the appellant upon
the opinion of now Senator Tolentino in Commentaries and Jurisprudence on
Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as
follows:
“‘A husband and a wife may not enter into a contract of general
copartnership, because under the Civil Code, which applies in the absence of
express provision in the Code of Commerce, persons prohibited from making
donations to each other are prohibited from entering into universal
partnerships. (2 Echaverri, 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership. (1 Guy
de Montella 58)' "
The petitioner-appellant has evidently failed to observe the fact that William
J. Suter “Morcoin” Co., Ltd. was not a universal partnership, but a particular
one. As appears from Articles 1674 and 1675 of the Spanish Civil Code of
1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the
association be all the present property of the partners, as contributed by
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 25
them to the common fund, or else “all that the partners may acquire by their
industry or work during the existence of the partnership”. William J. Suter
“Morcoin” Co., Ltd. was not such a universal partnership, since the
contributions of the partners were fixed sums of money, P20,000.00 by
William Suter and P18,000.00 by Julia Spirig, and neither one of them was
an industrial partner. It follows that William J. Suter “Morcoin” Co., Ltd. was
not a partnership that spouses were forbidden to enter by Article 1677 of the
Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. José Casán, in his
Derecho Civil, 7th Edition, 1952, Volume 4, page 546, footnote 1, says with
regard to the prohibition contained in the aforesaid Article 1677:
“Los cónyuges, según esto, no pueden celebrar entre sí el contrato de
sociedad universal, pero 6 podrán constituir Sociedad particular? Aunque el
punto ha sido muy debatido, nos inclinamos a la tesis permisiva de los
contratos de sociedad particular entre esposos, ya que ningun precepto de
nuestro Codigo los prohibe, y hay que estar a la norma general según !a que
toda persona es capaz para contratar mientras no sea declarado incapaz por
la ley. La jurisprudencia de la Dirección de los Registros fue favorable a esta
misma tesis en su resolución de 3 de febrero de 1936, mas parece cambiar
de rumbo en la de 9 de marzo de 1943."
Nor could the subsequent marriage of the partners ate to dissolve it, such
marriage not being one of the causes provided for that purpose either by the
Spanish Civil Code or the Code of Commerce.
The appellant’s view, that by the marriage of both partners the company
became a single proprietorship, is equally erroneous. The capital
contributions of partners William J. Suter and Julia Spirig were separately
owned and contributed by them before their marriage; and after they were
joined in wedlock, such contributions remained their respective separate
property under the Spanish Civil Code (Article 1396):
“The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; x x x,”
Thus, the individual interest of each consort in William J. Suter “Morcoin”
Co., Ltd. did not become common property of both after their marriage in
1948.

It being a basic tenet of the Spanish and Philippine law that the partnership
has a juridical personality of its own, distinct and separate from-that of its
partners (unlike American and English law that does not recognize such
separate juridical personality), the bypassing of the existence of the limited
partnership as a taxpayer can only be done by ignoring or disregarding clear
statutory mandates and basic principles of our law, The limited partnership’s
separate individuality makes it .impossible to equate its income with that of
the component members. True, section 24 of the Internal Revenue Code
merges registered general co-partnerships (compañias colectivas) with the
personality of the individual partners for income tax purposes. But this rule is
exceptional in its disregard of a cardinal tenet of our partnership laws, and
can not be extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs.
University of the Visayas, L-13554, Resolution of 30 October 1964, and
Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the
fiction of legal personality of the corporations involved therein are not
applicable to the present case. In the cited cases, the corporations were
already subject to tax when the fiction of their corporate personality was
pierced; in the present case, to do so would exempt the limited partnership
from income taxation but would throw the tax burden upon the partners-
spouses in their individual capacities. The corporations, in the cases cited,
merely served as business conduits or alter egos of the stockholders, a factor
that justified a disregard of their corporate personalities for tax purposes.
This is not true in the present case. Here, the limited partnership is not a
mere business conduit of the partner-spouses; it was organized for legitimate
business purposes; it conducted its own dealings with its customers prior to
appellee’s marriage, and had been filing its own income tax returns as such
independent entity. The change in its membership, brought about by the
marriage of the partners and their subsequent acquisition of all interest
therein, is no ground for withdrawing the partnership from the coverage of
Section 24 of the tax code, requiring it to pay income tax. As far as the
records show, the partners did not enter into matrimony and thereafter buy
the interests of the remaining partner with the premeditated scheme or
design to use the partnership as a business conduit to dodge the tax laws.
Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to
require that income to be included in the individual tax return of respondent
Suter is to overstretch the letter and intent of the law. In fact, it would even
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 26
conflict with what it specifically provides in its Section 24: for the appellant
Commissioner’s stand results in equal treatment, taxwise, of a general
copartnership (compañia colectiva) and a limited partnership, when the code
plainly differentiates the two. Thus, the code taxes the latter on its income,
but not the f ormer, because it is in the case of compañias colectivas that the
members, and not the firm, are taxable in their individual capacities for any
dividend or share of the profit derived from the duly registered general
partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As
Amended, Vol. 1, pp. 88–89).
But it is argued that the income of the limited partnership is actually or
constructively the income of the spouses and forms part of the conjugal
partnership of gains. This is not wholly correct. As pointed out in Agapito vs.
Molo, 50 Phil. 779, and People’s Bank vs. Register of Deeds of Manila, 60
Phil. 167, the fruits of the wife’s parapherna become conjugal only when no
longer needed to defray the expenses for the administration and
preservation of the paraphernal capital of the wife. Then again, the
appellant’s argument erroneously confines itself to the question of the legal
personality of the limited partnership, which is not essential to the income
taxability of the partnership since the law taxes the income of even joint
accounts that have no personality of their own.1 Appellant is, likewise,
mistaken in that it assumes that the conjugal partnership of gains is a
taxable unit, which it is not. What is taxable is the “income of both spouses”
(Section 45 [d]) in their individual capacities. Though the amount of income
(income of the conjugal partnership vis-a-vis the joint income of husband
and wife) may be the same for a given taxable year, their consequences
would be different, as their contributions in the business partnership are not
the same.
The difference in tax rates between the income of the limited partnership
being consolidated with, and when split from the income of the spouses, is
not a justification for requiring consolidation; the revenue code, as it
presently stands, does not authorize it, and even bars it by requiring the
limited partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby
affirmed. No costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando,
Capistrano and Teehankee, JJ., concur.
 A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 27

Barredo, J., did not take part.

Decision affirmed.

Note.—See the annotation on “Piercing the Veil of Corporate Fiction” under

A.D. Santos vs. Vasquez, L-23586, March 20, 1968, 22 SCRA 1156, 1159–
1163. Commissioner of Internal Revenue vs. Suter, 27 SCRA 152, No. L-
25532 February 28, 1969

[No. 35469. March 17, 1932]
E. S. LYONS, plaintiff and appellant, vs. C. W. ROSENSTOCK,
Executor of the Estate of Henry W. Elser, deceased, defendant and
appellee.
1.PRINCIPAL AND AGENT; RATIFICATION OF ACT OF AGENT; RIGHTS
INCIDENT TO OWNERSHIP.—Where one of two individuals who had been
associated in certain real estate deals, owing a sum of money to his
associate, invested it in the shares of a new company promoted by himself,
and this action was ratified by the associate, to whom the shares were
accordingly issued, no legal or equitable rights, other than those ordinarily
incident to ownership, can be deduced from the transaction in favor of the
owner thus acquiring such shares.
2.ID.; AGENT'S LIABILITY FOR INTEREST ON, MONEY OF HIS
CONSTITUENT.—Under article 1724 of the Civil Code and article 264 of the
Code of Commerce, an agent is liable for interest on funds belonging to his
principal (constituent) which have been applied by the agent to unauthorized
uses.
3.EQUITY; TRUSTS; FOLLOWING TRUST FUNDS; WHEN CASE GOVERNED
BY ORDINARY RULE OF CIVIL LIABILITY.—The doctrine developed in the
courts of England and the United States relative to the pursuing of trust
funds is conversant with rights deducible from the application, by a person in
a trust relation with another, of specific property belonging to such other
person to some unauthorized purpose. The fact that one of two coöwners
subjects their joint property to a contingent liability which results in no
damage does not create a trust in favor of the other, and the liability thereby
incurred must be determined in conformity with the principles of the civil law
properly applicable to the case.
4.ID.; ID.; ID.; ID.; CASE AT BAR.—Where two individuals had been jointly
associated in various real estate deals, one of them, while the other was
away, bought a valuable piece of property with a view to the promotion of a
suburban development, and as he expected that his absent former associate
would come into this deal and contribute some capital to the purchase and
development of the property, he subjected a piece of mortgaged property
owned by them jointly to a second mortgage, to secure against loss a surety
company which had been induced to sign a note with the active promoter to
secure a loan necessary to complete the first payment on the property
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 28
purchased. After the second individual returned to Manila he consented for
this second mortgage (which had been executed under a sufficient power of
attorney) to remain upon the property until it was paid off, as was presently
done. Held, that the use to which the joint property was thus subjected did
not create a trust in favor of the second individual, with the effect of making
him a co-partner in the ownership of the property purchased as aforesaid.
APPEAL from a judgment of the Court of First Instance of Manila.
Concepcion, J.
The facts are stated in the opinion of the court.
Harvey & O'Brien for appellant.
DeWitt, Perkins & Brady for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of the City of Manila,
by E. S. Lyons against C. W. Rosenstock, as executor of the estate of H. W.
Elser, deceased, consequent upon the taking of an appeal by the executor
from the allowance of the claim sued upon by the committee on claims in
said estate. The purpose of the action is to recover four hundred forty-six
and two thirds shares of the stock of J. K. Pickering & Co., Ltd., together
with the sum of about P125,000, representing the dividends which accrued
on said stock prior to October 21, 1926, with lawful interest. Upon hearing
the cause the trial court absolved the defendant executor from the
complaint, and the plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of
the City of Manila where he was engaged during the years with which we are
here concerned in buying, selling, and administering real estate. In several
ventures which he had made in buying and selling property of this kind the
plaintiff, E. S. Lyons, had joined with him, the profits being shared by the
two in equal parts. In April, 1919, Lyons, whose regular vocation was that of
a missionary, or missionary agent, of the Methodist Episcopal Church, went
on leave to the United States and was gone for nearly a year and a half,
returning on September 21, 1920. On the eve of his departure Elser made a
written statement showing that Lyons was, at that time, half owner with
Elser of three particular pieces of real property. Concurrently with this act
Lyons executed in favor of Elser a general power of attorney empowering
him to manage and dispose of said properties at will and to represent Lyons

fully and amply, to the mutual advantage of both. During the absence of
Lyons two of the pieces of- property above referred to were sold by Elser,
leaving in his hands a single piece of property located at 616-618 Carriedo
Street, in the City of Manila, containing about 282 square meters of land,
with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land,
containing about 1,500,000 square meters, near the City of Manila, and he
discerned therein a fine opportunity for the promotion and development of a
suburban improvement. This property, which will be herein referred to as the
San Juan Estate, was offered by its owners for P570,000. To afford a little
time for maturing his plans, Elser purchased an option on this property for
P5,000, and when this option was about to expire without his having been
able to raise the necessary funds, he paid P15,000 more for an extension of
the option, with the understanding in both cases that, in case the option
should be exercised, the amounts thus paid should be credited as part of the
first payment. The amounts paid for this option and its extension were
supplied by Elser entirely from his own funds. In the end he was able from
his own means, and with the assistance which he obtained from others, to
acquire said estate. The amount required for the first payment was
P150,000, and as Elser had available only about P120,000, including the
P20,000 advanced upon the option, it was necessary to raise the remainder
by obtaining a loan for P50,000. This amount was finally obtained from a
Chinese merchant of the city named Uy Siuliong. This loan was secured
through Uy Cho Yee, a son of the lender; and in order to get the money it
was necessary for Elser not only to give a personal note signed by himself
and his two associates in the projected enterprise, but also by the Fidelity &
Surety Company. The money thus raised was delivered to Elser by Uy
Siuliong on June 24, 1920. With this money and what he already had in bank
Elser purchased the San Juan Estate on or about June 28, 1920. For the
purpose of the further development of the property a limited partnership
had, about this time, been organized by Elser and three associates, under
the name of J. K. Pickering & Company; and when the transfer of the
property was effected the deed was made directly to this company. As Elser
was the principal capitalist in the enterprise he received by far the greater
number of the shares issued, his portion amounting in the beginning .to
3,290 shares.
While these negotiations were coming to a head, Elser contemplated and
hoped that Lyons might be induced to come in with him and supply part of
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 29
the means necessary to carry the enterprise through. In this connection it
appears that on May 20, 1920, Elser wrote Lyons a letter, informing him that
he had made an offer f or a big subdivision and that, if it should be acquired
and Lyons would come in, the two would be well fixed. (Exhibit M-5.) On
June 3, 1920, eight days before the first option expired, Elser cabled Lyons
that he had bought the San Juan Estate and thought it advisable for Lyons to
resign (Exhibit M-13), meaning that he should resign his position with the
mission board in New York. On the same date he wrote Lyons a letter
explaining some details of the purchase, and added "Have advised in my
cable that you resign and I hope you can do so immediately and will come
and join me on the lines we have so often spoken about. * * * There is
plenty of business for us all now and I believe we have started something
that will keep us going for some time." In one or more communications prior
to this, Elser had sought to impress Lyons with the idea that he should raise
all the money he could for the purpose of giving the necessary assistance in
future deals in real estate.
The enthusiasm of Elser did not communicate itself in any marked degree to
Lyons, and found him averse from joining in the purchase of the San Juan
Estate. In fact upon this visit of Lyons to the United States a grave doubt
had arisen as to whether he would ever return to Manila, and it was only in
the summer of 1920 that the board of missions of his church prevailed upon
him to return to Manila and resume his position as managing treasurer and
one of its trustees. Accordingly, on June 21, 1920, Lyons wrote a letter from
New York thanking Elser for his offer to take Lyons into his new project and
adding that from the standpoint of making money, he had passed up a good
thing.
One source of embarrassment which had operated on Lyons to bring him to
the resolution to stay out of this venture, was that the board of missions was
averse to his engaging in business activities other than those in which the
church was concerned; and some of Lyons' missionary associates had
apparently been criticizing his independent commercial activities. This fact
was dwelt upon in the letter above-mentioned. Upon receipt of this letter
Elser was of course informed that it would be out of the question to expect
assistance from Lyons in carrying out the San Juan project. No further efforts
to this end were therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan
Estate, his books showed that he was indebted to Lyons to the extent of,

possibly, P11,669.72, which had accrued to Lyons from profits and earnings
derived f rom other properties; and when the J. K. Pickering & Company was
organized and stock issued, Elser indorsed to Lyons 200 of the shares
allocated to himself, as he then believed that Lyons would be one of his
associates in the deal. It will be noted that the par value of these 200 shares
was more than P8,000 in excess of the amount which Elser in fact owed to
Lyons; and when the latter returned to the Philippine Islands, he accepted
these shares and sold them for his own benefit. It seems to be supposed in
the appellant's brief that the transfer of these shares to Lyons by Elser
supplies some sort of basis for the present action, or at least strengthens the
considerations involved in a feature of the case to be presently explained.
This view is manifestly untenable, since the ratification of the transaction by
Lyons and the appropriation by him of the shares which were issued to him
leaves no ground whatever for treating the transaction as a source of further
equitable rights in Lyons. We should perhaps add that after Lyons' return to
the Philippine Islands he acted for a time as one of the members of the
board of directors of the J. K. Pickering & Company, his qualification for this
office being derived precisely from the ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It
will be remembered that, when Elser obtained the loan of P50,000 to
complete the amount needed for the first payment on the San Juan Estate,
the lender, Uy Siuliong, insisted that he should procure the signature of the
Fidelity & Surety Co. on the note to be given for said loan. But before signing
the note with Elser and his associates, the Fidelity & Surety Co. insisted upon
having security for the liability thus assumed by it. To meet this requirement
Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in the
property owned by himself and Lyons on Carriedo Street. This mortgage was
executed on June 30, 1920, at which time Elser expected that Lyons would
come in on the purchase of the San Juan Estate. But when he learned from
the letter from Lyons of July 21, 1920, that the latter had determined not to
come into this deal, Elser began to cast around for means to relieve the
Carriedo property of the encumbrance which he had placed upon it. For this
purpose, on September 9, 1920, he addressed a letter to the Fidelity &
Surety Co., asking it to permit him to substitute a property owned by himself
at 644 M. H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering
& Company, in lieu of the Carriedo property, as security. The Fidelity &
Surety Co. agreed to the proposition; and on September 15, 1920, Elser
executed in favor of the Fidelity & Surety Co. a new mortgage on the M. H.
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 30
del Pilar property and delivered the same, with 1,000 shares of J. K.
Pickering & Company, to said company. The latter thereupon in turn
executed a cancellation of the mortgage on the Carriedo property and
delivered it to Elser. But notwithstanding the fact that these documents were
executed and delivered, the new mortgage and the release of the old were
never registered; and on September 25, 1920, thereafter, Elser returned the
cancellation of the mortgage on the Carriedo property and took back from
the Fidelity & Surety Co. the new mortgage on the M. H. del Pilar property,
together with the 1,000 shares of the J. K. Pickering & Company which he
had delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the
fact that Lyons had arrived in Manila on September 21, 1920, and shortly
thereafter, in the course of a conversation with Elser told him to let the
Carriedo mortgage remain on the property ("Let the Carriedo mortgage
ride"). Mrs. Elser testified to the conversation in which Lyons used the words
above quoted, and as that conversation supplies the most reasonable
explanation of Elser's recession from his purpose of relieving the Carriedo
property, the trial court was, in our opinion, well justified in accepting as a
proven fact the consent of Lyons for the mortgage to remain on the Carriedo
property. This concession was not only reasonable under the circumstances,
in view of the abundant solvency of Elser, but in view of the further fact that
Elser had given to Lyons 200 shares of the stock of the J. K. Pickering & Co.,
having a value of nearly P8,000 in excess of the indebtedness which Elser
had owed to Lyons upon statement of account. The trial court found in effect
that the excess value of these shares over Elser's actual indebtedness was
conceded by Elser to Lyons in consideration of the assistance that had been
derived from the mortgage placed upon Lyons' interest in the Carriedo
property. Whether the agreement was reached exactly upon this precise line
of thought is of little moment, but the relations of the parties had been such
that it was to be expected that Elser would be generous; and he could
scarcely have failed to take account of the use he had made of the joint
property of the two.
As the development of the San Juan Estate was a success from the start,
Elser paid the note of P50,000 to Uy Siuliong on January 18, 1921, although
it was not due until more than five months later. It will thus be seen that the
mortgaging of the Carriedo property never resulted in damage to Lyons to
the extent of a single cent; and although the court refused to allow the
defendant to prove that Elser was solvent at this time in an amount much

greater than the entire encumbrance placed upon the property, it is evident
that the risk imposed upon Lyons was negligible. It is also plain that no
money actually deriving from this mortgage was ever applied to the purchase
of the San Juan Estate. What really happened was that Elser merely
subjected the property to a contingent liability, and no actual liability ever
resulted therefrom. The financing of the purchase of the San Juan Estate,
apart from the modest financial participation of his three associates in the
San Juan deal, was the work of Elser accomplished entirely upon his own
account.
The case for the plaintiff supposes that, when Elser placed a mortgage for
P50,000 upon the equity of redemption in the Carriedo property, Lyons, as
half owner of said property, became, as it were, involuntarily the owner of an
undivided interest in the property acquired partly by that money; and it is
insisted for him that, in consideration of this fact, he is entitled to the four
hundred forty-six and two-thirds shares of J. K. Pickering & Company, with
the earnings thereon, as claimed in his complaint.
Lyons tells us that he did not know until after Elser's death that the money
obtained from Uy Siuliong in the manner already explained had been used to
help finance the purchase of the San Juan Estate. He seems to have
supposed that the Carriedo property had been mortgaged to aid in putting
through another deal, namely, the purchase of a property referred to in the
correspondence as the "Ronquillo property"; and in this connection a letter of
Elser of the latter part of May, 1920, can be quoted in which he uses this
language:
"As stated in cablegram I have arranged for P50,000 loan on Carriedo
property. Will use part of the money for Ronquillo buy (P60,000) if the owner
comes through."
Other correspondence shows that Elser had apparently been trying to buy
the Ronquillo property, and Lyons leads us to infer that he thought that the
money obtained by mortgaging the Carriedo property had been used in the
purchase of this property. It doubtless appeared so to him in the retrospect,
but certain considerations show that he was inattentive to the contents of
the quotation from the letter above given. He had already been informed
that, although Elser was angling for the Ronquillo property, its price had
gone up, thus introducing a doubt as to whether he would get it; and the
quotation above given shows that the intended use of the money obtained
A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 31
by mortgaging the Carriedo property was that only part of the P50,000 thus
obtained would be used in this way, if the deal went through. Naturally,
upon the arrival of Lyons in September, 1920, one of his first inquiries would
have been, if he did not know before, what was the status of the proposed
trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser
cabled Lyons something to this effect: "I have mortgaged the property on
Carriedo Street, secured by my personal note, You are amply protected. I
wish you to join me in the San Juan Subdivision. Borrow all money you can."
Lyons says that no such cablegram was received by him, and we consider
this point of fact of little moment, since the proof shows that Lyons knew
that the Carriedo mortgage had been executed, and after his arrival in Manila
he consented for the mortgage to remain on the property until it was paid
off, as shortly occurred. It may well be that Lyons did not at first clearly
understand all the ramifications of the situation, but he knew enough, we
think, to apprise him of the material factors in the situation, and we concur
in the conclusion of the trial court that Elser did not act in bad faith and was
guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our
opinion, untenable. If Elser had used any money .actually belonging to Lyons
in this deal, he would under article 1724 of the Civil Code and article 264 of
the Code of Commerce, be obligated to pay interest upon the money so
applied to his own use. Under the law prevailing in this jurisdiction a trust
does not ordinarily attach with respect to property acquired by a person who
uses money belonging to another (Martinez vs. Martinez, 1 Phil., 647;
Enriquez vs. Olaguer, 25 Phil., 641). Of course, if an actual relation of
partnership had existed in the money used, the case might be different; and
much emphasis is laid in the appellant's brief upon the relation of partnership
which, it is claimed, existed. But there was clearly no general relation of
partnership between the parties; and the most that can be said is that Elser
and Lyons had been coparticipants in various transactions in real estate. No
objection can be made to the use of the word partnership as a term
descriptive of the relation in those particular transactions, but it must be
remembered that it was in each case a particular partnership, under article
1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate,
was not acting for any partnership composed of himself and Lyons, and the
law cannot be distorted into a proposition which would make Lyons a
participant in this deal contrary to his express determination.
 A g e n c y , T r u s t s , a n d P a r t n e r s h i p s P a g e | 32

It seems to be supposed that the doctrines of equity worked out in the

jurisprudence of England and the United States with reference to trusts
supply a basis for this action. The doctrines referred to operate, however,
only where money belonging to one person is used by another for the
acquisition of property which should belong to both; and it takes but little
discernment to see that the situation here involved is not one for the
application of that doctrine, for no money belonging to Lyons or any
partnership composed of Elser and Lyons was in fact used by Elser in the
purchase of the San Juan Estate. Of course, if any damage had been caused
to Lyons by the placing of the mortgage upon the equity of redemption in
the Carriedo property, Elser's estate would be liable for such damage. But it
is evident that Lyons was not prejudiced by that act.

The appellee insists that the trial court committed error in admitting the
testimony of Lyons upon matters that passed between him and Elser while
the latter was still alive. While the admission of this testimony was of
questionable propriety, any error made by the trial court on this point was
error without injury, and the determination of the question is not necessary
to this decision. We therefore pass the point without further discussion.

The judgment appealed from will be affirmed, and it is so ordered, with costs
against the appellant.

Avanceña, C. J., Johnson, Malcolm, Villamor, Villa-Real, and Imperial, JJ.,

concur.

Judgment affirmed. Lyons vs. Rosenstock, 56 Phil. 632, No. 35469 March 17,
1932