Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-66653 June 19, 1986
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
PARAS, J.:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent
Court of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of
Internal Revenue" which ordered petitioner Commissioner of Internal Revenue to grant in favor
of private respondent Burroughs Limited, tax credit in the sum of P172,058.90, representing
erroneously overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the
Philippines through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village,
Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for authority to remit
to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14,
1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to
its head office the amount of P6,499,999.30 computed as follows:
Amount applied for remittance................................ P7,647,058.00
Deduct: 15% branch profit
remittance tax ..............................................1,147,058.70
Net amount actually remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund
or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit
remittance tax, computed as follows:
Profits actually remitted .........................................P6,499,999.30

Remittance tax rate .......................................................15%

Branch profit remittance taxdue thereon ......................................................P 974,999.89
Branch profit remittance
tax paid .............................................................Pl,147,058.70
Less: Branch profit remittance
tax as above computed................................................. 974,999.89
Total amount refundable........................................... P172,058.81
On February 24, 1981, private respondent filed with respondent court, a petition for review,
docketed as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of
P172,058.81.
On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which
reads
ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a tax
credit in favor of petitioner Burroughs Limited the amount of P 172,058.90. Without
pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant
petition before this Court with the prayers as herein earlier stated upon the sole issue of
whether the tax base upon which the 15% branch profit remittance tax shall be imposed under
the provisions of section 24(b) of the Tax Code, as amended, is the amount applied for
remittance on the profit actually remitted after deducting the 15% profit remittance tax. Stated
differently is private respondent Burroughs Limited legally entitled to a refund of the
aforementioned amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b)
(2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a
branch to its head office shall be subject to a tax of fifteen per cent (15 %) ...

In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of
Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean
that "the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the
profit actually remitted abroad and not on the total branch profits out of which the remittance
is to be made. " The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your query as to the tax
base upon which the 15% branch profits remittance tax provided for under
Section 24 (b) (2) of the 1977 Tax Code shall be imposed, please be advised that
the 15% branch profit tax shall be imposed on the branch profits actually
remitted abroad and not on the total branch profits out of which the remittance
is to be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an
overpayment in the amount of P172,058.90 which is the difference between the remittance tax
actually paid of Pl,147,058.70 and the remittance tax that should have been paid of
P974,999,89, computed as follows
Profits actually remitted......................................... P6,499,999.30
Remittance tax rate.............................................................. 15%
Remittance tax due................................................... P974,999.89
is well-taken. As correctly held by respondent Court in its assailed decisionRespondent concedes at least that in his ruling dated January 21, 1980 he held
that under Section 24 (b) (2) of the Tax Code the 15% branch profit remittance
tax shall be imposed on the profit actually remitted abroad and not on the total
branch profit out of which the remittance is to be made. Based on such ruling
petitioner should have paid only the amount of P974,999.89 in remittance tax
computed by taking the 15% of the profits of P6,499,999.89 in remittance tax
actually remitted to its head office in the United States, instead of
Pl,147,058.70, on its net profits of P7,647,058.00. Undoubtedly, petitioner has
overpaid its branch profit remittance tax in the amount of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because Memorandum
Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January
21, 1980. The said memorandum circular states
Considering that the 15% branch profit remittance tax is imposed and collected
at source, necessarily the tax base should be the amount actually applied for by
the branch with the Central Bank of the Philippines as profit to be remitted
abroad.

Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the
Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the
branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82
dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the
National Internal Revenue Code which providesSec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner shag not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is
based, or (c) where the taxpayer acted in bad faith. (ABS-CBN Broadcasting
Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a retroactive
application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of
the substantial amount of P172,058.90. And, insofar as the enumerated exceptions are
concerned, admittedly, Burroughs Limited does not fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Feria, Fernan, Alampay and Gutierrez, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-25532

February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the 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 and 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.
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
partners-spouses 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; ....
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 contra distinguished 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 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. Jose Casan, 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 conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal,
pero o podran 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 segun la que toda persona es capaz para contratar mientras no sea
declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros fue
favorable a esta misma tesis en su resolution 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 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.
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; ....
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

(compaias 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, L13554, 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 conflict with what it specifically provides in its Section
24: for the appellant Commissioner's stand results in equal treatment, tax wise, of a general
copartnership (compaia 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 compaias 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.; Araas, Anno. & Juris. on the N.I.R.C., As
Amended, Vol. 1, pp. 88-89).lawphi1.nt
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. 1Appellant 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.
Barredo, J., took no part.
Footnotes
1

V. Evangelists vs. Collector of Internal Revenue, 102 Phil 140; Collector vs. Batangas
Transportation Co., 102 Phil. 822.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
July 30, 1979
PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP, SALAZAR,
FELICIANO, HERNANDEZ & CASTILLO." LUCIANO E. SALAZAR, FLORENTINO P. FELICIANO,
BENILDO G. HERNANDEZ. GREGORIO R. CASTILLO. ALBERTO P. SAN JUAN, JUAN C. REYES. JR.,
ANDRES G. GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN, ETHELWOLDO E.
FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A. CATINDIG, ANCHETA K.
TAN, and ALICE V. PESIGAN,petitioners.
IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME
"OZAETA, ROMULO, DE LEON, MABANTA & REYES." RICARDO J. ROMULO, BENJAMIN M. DE
LEON, ROMAN MABANTA, JR., JOSE MA, REYES, JESUS S. J. SAYOC, EDUARDO DE LOS
ANGELES, and JOSE F. BUENAVENTURA, petitioners.
RESOLUTION
MELENCIO-HERRERA, J.:
Two separate Petitions were filed before this Court 1) by the surviving partners of Atty.
Alexander Sycip, who died on May 5, 1975, and 2) by the surviving partners of Atty. Herminio
Ozaeta, who died on February 14, 1976, praying that they be allowed to continue using, in the
names of their firms, the names of partners who had passed away. In the Court's Resolution of
September 2, 1976, both Petitions were ordered consolidated.
Petitioners base their petitions on the following arguments:
1. Under the law, a partnership is not prohibited from continuing its business under a firm name
which includes the name of a deceased partner; in fact, Article 1840 of the Civil Code explicitly
sanctions the practice when it provides in the last paragraph that: t.hqw
The use by the person or partnership continuing the business of the partnership
name, or the name of a deceased partner as part thereof, shall not of itself make
the individual property of the deceased partner liable for any debts contracted
by such person or partnership. 1
2. In regulating other professions, such as accountancy and engineering, the legislature has
authorized the adoption of firm names without any restriction as to the use, in such firm name,
of the name of a deceased partner; 2 the legislative authorization given to those engaged in the
practice of accountancy a profession requiring the same degree of trust and confidence in
respect of clients as that implicit in the relationship of attorney and client to acquire and use
a trade name, strongly indicates that there is no fundamental policy that is offended by the

continued use by a firm of professionals of a firm name which includes the name of a deceased
partner, at least where such firm name has acquired the characteristics of a "trade name." 3
3. The Canons of Professional Ethics are not transgressed by the continued use of the name of a
deceased partner in the firm name of a law partnership because Canon 33 of the Canons of
Professional Ethics adopted by the American Bar Association declares that: t.hqw
... The continued use of the name of a deceased or former partner when
permissible by local custom, is not unethical but care should be taken that no
imposition or deception is practiced through this use. ... 4
4. There is no possibility of imposition or deception because the deaths of their respective
deceased partners were well-publicized in all newspapers of general circulation for several days;
the stationeries now being used by them carry new letterheads indicating the years when their
respective deceased partners were connected with the firm; petitioners will notify all leading
national and international law directories of the fact of their respective deceased partners'
deaths. 5
5. No local custom prohibits the continued use of a deceased partner's name in a professional
firm's name; 6 there is no custom or usage in the Philippines, or at least in the Greater Manila
Area, which recognizes that the name of a law firm necessarily Identifies the individual members
of the firm. 7
6. The continued use of a deceased partner's name in the firm name of law partnerships has
been consistently allowed by U.S. Courts and is an accepted practice in the legal profession of
most countries in the world. 8
The question involved in these Petitions first came under consideration by this Court in 1953
when a law firm in Cebu (the Deen case) continued its practice of including in its firm name that
of a deceased partner, C.D. Johnston. The matter was resolved with this Court advising the firm
to desist from including in their firm designation the name of C. D. Johnston, who has long been
dead."
The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled
Register of Deeds of Manila vs. China Banking Corporation. The law firm of Perkins & Ponce
Enrile moved to intervene asamicus curiae. Before acting thereon, the Court, in a Resolution of
April 15, 1957, stated that it "would like to be informed why the name of Perkins is still being
used although Atty. E. A. Perkins is already dead." In a Manifestation dated May 21, 1957, the
law firm of Perkins and Ponce Enrile, raising substantially the same arguments as those now
being raised by petitioners, prayed that the continued use of the firm name "Perkins & Ponce
Enrile" be held proper.
On June 16, 1958, this Court resolved:
After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile
and Associates for their continued use of the name of the deceased E. G.
Perkins, the Court found no reason to depart from the policy it adopted in June

1953 when it required Attorneys Alfred P. Deen and Eddy A. Deen of Cebu City
to desist from including in their firm designation, the name of C. D. Johnston,
deceased. The Court believes that, in view of the personal and confidential
nature of the relations between attorney and client, and the high standards
demanded in the canons of professional ethics, no practice should be allowed
which even in a remote degree could give rise to the possibility of deception.
Said attorneys are accordingly advised to drop the name "PERKINS" from their
firm name.
Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.
The Court finds no sufficient reason to depart from the rulings thus laid down.
A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De
Leon, Mabanta and Reyes" are partnerships, the use in their partnership names of the names of
deceased partners will run counter to Article 1815 of the Civil Code which provides: t.hqw
Art. 1815. Every partnership shall operate under a firm name, which may or may
not include the name of one or more of the partners.
Those who, not being members of the partnership, include their names in the
firm name, shall be subject to the liability, of a partner.
It is clearly tacit in the above provision that names in a firm name of a partnership must either
be those of living partners and. in the case of non-partners, should be living persons who can be
subjected to liability. In fact, Article 1825 of the Civil Code prohibits a third person from
including his name in the firm name under pain of assuming the liability of a partner. The heirs
of a deceased partner in a law firm cannot be held liable as the old members to the creditors of
a firm particularly where they are non-lawyers. Thus, Canon 34 of the Canons of Professional
Ethics "prohibits an agreement for the payment to the widow and heirs of a deceased lawyer of
a percentage, either gross or net, of the fees received from the future business of the deceased
lawyer's clients, both because the recipients of such division are not lawyers and because such
payments will not represent service or responsibility on the part of the recipient. " Accordingly,
neither the widow nor the heirs can be held liable for transactions entered into after the death
of their lawyer-predecessor. There being no benefits accruing, there ran be no corresponding
liability.
Prescinding the law, there could be practical objections to allowing the use by law firms of the
names of deceased partners. The public relations value of the use of an old firm name can tend
to create undue advantages and disadvantages in the practice of the profession. An able lawyer
without connections will have to make a name for himself starting from scratch. Another able
lawyer, who can join an old firm, can initially ride on that old firm's reputation established by
deceased partners.
B. In regards to the last paragraph of Article 1840 of the Civil Code cited by
petitioners, supra, the first factor to consider is that it is within Chapter 3 of Title IX of the Code
entitled "Dissolution and Winding Up." The Article primarily deals with the exemption from

liability in cases of a dissolved partnership, of the individual property of the deceased partner
for debts contracted by the person or partnership which continues the business using the
partnership name or the name of the deceased partner as part thereof. What the law
contemplates therein is a hold-over situation preparatory to formal reorganization.
Secondly, Article 1840 treats more of a commercial partnership with a good will to protect
rather than of aprofessional partnership, with no saleable good will but whose reputation
depends on the personal qualifications of its individual members. Thus, it has been held that a
saleable goodwill can exist only in a commercial partnership and cannot arise in a professional
partnership consisting of lawyers. 9
As a general rule, upon the dissolution of a commercial partnership the
succeeding partners or parties have the right to carry on the business under the
old name, in the absence of a stipulation forbidding it, (s)ince the name of a
commercial partnership is a partnership asset inseparable from the good will of
the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)
On the other hand,
... a professional partnership the reputation of which depends or; the individual
skill of the members, such as partnerships of attorneys or physicians, has no
good win to be distributed as a firm asset on its dissolution, however
intrinsically valuable such skill and reputation may be, especially where there is
no provision in the partnership agreement relating to good will as an asset. ...
(ibid, s 203, p. 115) (Emphasis supplied)
C. A partnership for the practice of law cannot be likened to partnerships formed by other
professionals or for business. For one thing, the law on accountancy specifically allows the use
of a trade name in connection with the practice of accountancy. 10 t.hqw
A partnership for the practice of law is not a legal entity. It is a mere relationship
or association for a particular purpose. ... It is not a partnership formed for the
purpose of carrying on trade or business or of holding property." 11 Thus, it has
been stated that "the use of a nom de plume, assumed or trade name in law
practice is improper. 12
The usual reason given for different standards of conduct being applicable to
the practice of law from those pertaining to business is that the law is a
profession.
Dean Pound, in his recently published contribution to the Survey of the Legal
Profession, (The Lawyer from Antiquity to Modern Times, p. 5) defines a
profession as "a group of men pursuing a learned art as a common calling in the
spirit of public service, no less a public service because it may incidentally be
a means of livelihood."
xxx xxx xxx

Primary characteristics which distinguish the legal profession from business are:
1. A duty of public service, of which the emolument is a byproduct, and in which
one may attain the highest eminence without making much money.
2. A relation as an "officer of court" to the administration of justice involving
thorough sincerity, integrity, and reliability.
3. A relation to clients in the highest degree fiduciary.
4. A relation to colleagues at the bar characterized by candor, fairness, and
unwillingness to resort to current business methods of advertising and
encroachment on their practice, or dealing directly with their clients. 13
"The right to practice law is not a natural or constitutional right but is in the nature of a privilege
or franchise. 14 It is limited to persons of good moral character with special qualifications duly
ascertained and certified. 15 The right does not only presuppose in its possessor integrity, legal
standing and attainment, but also the exercise of a special privilege,highly personal and
partaking of the nature of a public trust." 16
D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar
Association" in support of their petitions.
It is true that Canon 33 does not consider as unethical the continued use of the name of a
deceased or former partner in the firm name of a law partnership when such a practice
is permissible by local custom but the Canon warns that care should be taken that no imposition
or deception is practiced through this use.
It must be conceded that in the Philippines, no local custom permits or allows the continued use
of a deceased or former partner's name in the firm names of law partnerships. Firm names,
under our custom, Identify the more active and/or more senior members or partners of the law
firm. A glimpse at the history of the firms of petitioners and of other law firms in this country
would show how their firm names have evolved and changed from time to time as the
composition of the partnership changed. t.hqw
The continued use of a firm name after the death of one or more of the partners
designated by it is proper only where sustained by local custom and not where
by custom this purports to Identify the active members. ...
There would seem to be a question, under the working of the Canon, as to the
propriety of adding the name of a new partner and at the same time retaining
that of a deceased partner who was never a partner with the new one. (H.S.
Drinker, op. cit., supra, at pp. 207208) (Emphasis supplied).
The possibility of deception upon the public, real or consequential, where the name of a
deceased partner continues to be used cannot be ruled out. A person in search of legal counsel
might be guided by the familiar ring of a distinguished name appearing in a firm title.

E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased
partner's name in the firm name of law partnerships. But that is so because it is sanctioned by
custom.
In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which
petitioners Salazar, et al. quoted in their memorandum, the New York Supreme Court sustained
the use of the firm name Alexander & Green even if none of the present ten partners of the firm
bears either name because the practice was sanctioned by custom and did not offend any
statutory provision or legislative policy and was adopted by agreement of the parties. The Court
stated therein: t.hqw
The practice sought to be proscribed has the sanction of custom and offends no
statutory provision or legislative policy. Canon 33 of the Canons of Professional
Ethics of both the American Bar Association and the New York State Bar
Association provides in part as follows: "The continued use of the name of a
deceased or former partner, when permissible by local custom is not unethical,
but care should be taken that no imposition or deception is practiced through
this use." There is no question as to local custom. Many firms in the city use the
names of deceased members with the approval of other attorneys, bar
associations and the courts. The Appellate Division of the First Department has
considered the matter and reached The conclusion that such practice should not
be prohibited. (Emphasis supplied)
xxx xxx xxx
Neither the Partnership Law nor the Penal Law prohibits the practice in
question. The use of the firm name herein is also sustainable by reason of
agreement between the partners. 18
Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has
been defined as a rule of conduct formed by repetition of acts, uniformly observed (practiced)
as a social rule, legally binding and obligatory. 19 Courts take no judicial notice of custom. A
custom must be proved as a fact, according to the rules of evidence. 20 A local custom as a
source of right cannot be considered by a court of justice unless such custom is properly
established by competent evidence like any other fact. 21 We find such proof of the existence of
a local custom, and of the elements requisite to constitute the same, wanting herein. Merely
because something is done as a matter of practice does not mean that Courts can rely on the
same for purposes of adjudication as a juridical custom. Juridical custom must be differentiated
from social custom. The former can supplement statutory law or be applied in the absence of
such statute. Not so with the latter.
Moreover, judicial decisions applying or interpreting the laws form part of the legal
system. 22 When the Supreme Court in the Deen and Perkins cases issued its Resolutions
directing lawyers to desist from including the names of deceased partners in their firm
designation, it laid down a legal rule against which no custom or practice to the contrary, even if
proven, can prevail. This is not to speak of our civil law which clearly ordains that a partnership
is dissolved by the death of any partner. 23 Custom which are contrary to law, public order or
public policy shall not be countenanced. 24

The practice of law is intimately and peculiarly related to the administration of justice and
should not be considered like an ordinary "money-making trade." t.hqw
... It is of the essence of a profession that it is practiced in a spirit of public
service. A trade ... aims primarily at personal gain; a profession at the exercise of
powers beneficial to mankind. If, as in the era of wide free opportunity, we think
of free competitive self assertion as the highest good, lawyer and grocer and
farmer may seem to be freely competing with their fellows in their calling in
order each to acquire as much of the world's good as he may within the allowed
him by law. But the member of a profession does not regard himself as in
competition with his professional brethren. He is not bartering his services as is
the artisan nor exchanging the products of his skill and learning as the farmer
sells wheat or corn. There should be no such thing as a lawyers' or physicians'
strike. The best service of the professional man is often rendered for no
equivalent or for a trifling equivalent and it is his pride to do what he does in a
way worthy of his profession even if done with no expectation of reward, This
spirit of public service in which the profession of law is and ought to be
exercised is a prerequisite of sound administration of justice according to law.
The other two elements of a profession, namely, organization and pursuit of a
learned art have their justification in that they secure and maintain that spirit. 25
In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must
bow to legal and ethical impediment.
ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names
"SYCIP" and "OZAETA" from their respective firm names. Those names may, however, be
included in the listing of individuals who have been partners in their firms indicating the years
during which they served as such.
SO ORDERED.
Teehankee, Concepcion, Jr., Santos, Fernandez, Guerrero and De Castro, JJ., concur
Fernando, C.J. and Abad Santos, J., took no part.
Separate Opinions
FERNANDO, C.J., concurring:
The petitions are denied, as there are only four votes for granting them, seven of the Justices
being of the contrary view, as explained in the plurality opinion of Justice Ameurfina MelencioHerrera. It is out of delicadeza that the undersigned did not participate in the disposition of
these petitions, as the law office of Sycip, Salazar, Feliciano, Hernandez and Castillo started with
the partnership of Quisumbing, Sycip, and Quisumbing, the senior partner, the late Ramon
Quisumbing, being the father-in-law of the undersigned, and the most junior partner then,
Norberto J. Quisumbing, being his brother- in-law. For the record, the undersigned wishes to
invite the attention of all concerned, and not only of petitioners, to the last sentence of the

opinion of Justice Ameurfina Melencio-Herrera: 'Those names [Sycip and Ozaeta] may, however,
be included in the listing of individuals wtes
AQUINO, J., dissenting:
I dissent. The fourteen members of the law firm, Sycip, Salazar, Feliciano, Hernandez & Castillo,
in their petition of June 10, 1975, prayed for authority to continue the use of that firm name,
notwithstanding the death of Attorney Alexander Sycip on May 5, 1975 (May he rest in peace).
He was the founder of the firm which was originally known as the Sycip Law Office.
On the other hand, the seven surviving partners of the law firm, Ozaeta, Romulo, De Leon,
Mabanta & Reyes, in their petition of August 13, 1976, prayed that they be allowed to continue
using the said firm name notwithstanding the death of two partners, former Justice Roman
Ozaeta and his son, Herminio, on May 1, 1972 and February 14, 1976, respectively.
They alleged that the said law firm was a continuation of the Ozaeta Law Office which was
established in 1957 by Justice Ozaeta and his son and that, as to the said law firm, the name
Ozaeta has acquired an institutional and secondary connotation.
Article 1840 of the Civil Code, which speaks of the use by the partnership of the name of a
deceased partner as part of the partnership name, is cited to justify the petitions. Also invoked
is the canon that the continued use by a law firm of the name of a deceased partner, "when
permissible by local custom, is not unethical" as long as "no imposition or deception is practised
through this use" (Canon 33 of the Canons of Legal Ethics).
I am of the opinion that the petition may be granted with the condition that it be indicated in
the letterheads of the two firms (as the case may be) that Alexander Sycip, former Justice
Ozaeta and Herminio Ozaeta are dead or the period when they served as partners should be
stated therein.
Obviously, the purpose of the two firms in continuing the use of the names of their deceased
founders is to retain the clients who had customarily sought the legal services of Attorneys Sycip
and Ozaeta and to benefit from the goodwill attached to the names of those respected and
esteemed law practitioners. That is a legitimate motivation.
The retention of their names is not illegal per se. That practice was followed before the war by
the law firm of James Ross. Notwithstanding the death of Judge Ross the founder of the law firm
of Ross, Lawrence, Selph and Carrascoso, his name was retained in the firm name with an
indication of the year when he died. No one complained that the retention of the name of Judge
Ross in the firm name was illegal or unethical.
#Footnotest.hqw
1 See Memorandum of Salazar, et al., p. 5: see also Petition of Romulo, et al., p.
3.

2 Citing Sec, 16-A, Public Act No. 3105, as amended by Commonwealth Act No.
342; Sec. 39, Commonwealth Act No. 294; Sec. 23, Republic Act No. 318; Sec.
39, Republic Act No. 184.
3 Memorandum of Salazar, et al., pp. 7-8.
4 Memorandum of Salazar, et al., pp. 8-10; Petition of Romulo, et al., pp. 3- 4.
5 Memorandum of Salazar, et al., p. 13; Petition of Romulo, et al., p. 4.
6 Petition of Romulo, et al., p. 4.
7 Memorandum of Salazar, et al., p. 11.
8 Memorandum of Salazar, et al., pp. 6-7 and pp. 16-18; Petition of Romulo. et
al., p, 5.
9 Seddal vs. Keating, 8 App. Div. 2d 44, 185 NYS 2d 630, affd 7 NY 2d 846, 196
NYS 2d 986, 164 NE 2d 860.
10 Section 16-A, Commonwealth Act No. 342.
11 In re Crawford's Estate, 184 NE 2d 779, 783.
12 H.S. Drinker, Legal Ethics (1953), p. 206; see also Canon 33, par. 2, Canons of
Professional Ethics.
13 H.S, Drinker, Legal Ethics (1953) pp. 4-5.
14 7 C.J.S. 708.
15 Am Jur 270.
16 In re Lavine, 41 P2d 161, all cited in Martin, Legal and Judicial Ethics, Fifth
Ed., p. 8.
17 Canons 1 to 32 which were adopted by the American Bar Association in 1908
were also adopted by the Philippine Bar Association in 1917. The American Bar
Association adopted Canons 33 to 45 in 1928, Canon 46 in 1933 and Canon 47 in
1937. On April 20, 1946, when Canons 33 to 47 where already in effect, the
Revised Constitution of the Philippine Bar Association was approved and it
provided that the Association "adopts and makes its own the Code of Ethics of
the American Bar Association." (Martin, Legal and Judicial Ethics, Fifth Ed. p,
341).
18 33 N.Y.S. 2d 733, 734.

19 JBL Reyes & RC Puno, Outline of Philippine Civil Law. Fourth Ed., Vol. I, p. 7
20 Article 12, Civil Code.
21 Patriarca vs. Orate, 7 Phil. 390, 395 (1907).
22 Art. 8, Civil Code
23 Art. 1830, Civil Code.
24 Art. 11, Civil Code.
25 Roscoe Pound, The Lawyer From Antiquity To Modern Times, (1953), pp. 910.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 109248 July 3, 1995
GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T. BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and JOAQUIN L.
MISA,respondents.
VITUG, J.:
The instant petition seeks a review of the decision rendered by the Court of Appeals, dated 26
February 1993, in CA-G.R. SP No. 24638 and No. 24648 affirming in toto that of the Securities
and Exchange Commission ("SEC") in SEC AC 254.
The antecedents of the controversy, summarized by respondent Commission and quoted at
length by the appellate court in its decision, are hereunder restated.
The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly registered in the
Mercantile Registry on 4 January 1937 and reconstituted with the Securities and
Exchange Commission on 4 August 1948. The SEC records show that there were several
subsequent amendments to the articles of partnership on 18 September 1958, to
change the firm [name] to ROSS, SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS,
SELPH, SALCEDO, DEL ROSARIO, BITO & MISA; on 18 April 1972 to SALCEDO, DEL
ROSARIO, BITO, MISA & LOZADA; on 4 December 1972 to SALCEDO, DEL ROSARIO, BITO,
MISA & LOZADA; on 11 March 1977 to DEL ROSARIO, BITO, MISA & LOZADA; on 7 June
1977 to BITO, MISA & LOZADA; on 19 December 1980, [Joaquin L. Misa] appellees Jesus
B. Bito and Mariano M. Lozada associated themselves together, as senior partners with
respondents-appellees Gregorio F. Ortega, Tomas O. del Castillo, Jr., and Benjamin
Bacorro, as junior partners.
On February 17, 1988, petitioner-appellant wrote the respondents-appellees a letter
stating:
I am withdrawing and retiring from the firm of Bito, Misa and Lozada,
effective at the end of this month.
"I trust that the accountants will be instructed to make the proper
liquidation of my participation in the firm."
On the same day, petitioner-appellant wrote respondents-appellees another letter
stating:

"Further to my letter to you today, I would like to have a meeting with

all of you with regard to the mechanics of liquidation, and more
particularly, my interest in the two floors of this building. I would like to
have this resolved soon because it has to do with my own plans."
On 19 February 1988, petitioner-appellant wrote respondents-appellees another letter
stating:
"The partnership has ceased to be mutually satisfactory because of the
working conditions of our employees including the assistant attorneys.
All my efforts to ameliorate the below subsistence level of the pay scale
of our employees have been thwarted by the other partners. Not only
have they refused to give meaningful increases to the employees, even
attorneys, are dressed down publicly in a loud voice in a manner that
deprived them of their self-respect. The result of such policies is the
formation of the union, including the assistant attorneys."
On 30 June 1988, petitioner filed with this Commission's Securities Investigation and
Clearing Department (SICD) a petition for dissolution and liquidation of partnership,
docketed as SEC Case No. 3384 praying that the Commission:
"1. Decree the formal dissolution and order the immediate liquidation
of (the partnership of) Bito, Misa & Lozada;
"2. Order the respondents to deliver or pay for petitioner's share in the
partnership assets plus the profits, rent or interest attributable to the
use of his right in the assets of the dissolved partnership;
"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada
in any of their correspondence, checks and pleadings and to pay
petitioners damages for the use thereof despite the dissolution of the
partnership in the amount of at least P50,000.00;
"4. Order respondents jointly and severally to pay petitioner attorney's
fees and expense of litigation in such amounts as maybe proven during
the trial and which the Commission may deem just and equitable under
the premises but in no case less than ten (10%) per cent of the value of
the shares of petitioner or P100,000.00;
"5. Order the respondents to pay petitioner moral damages with the
amount of P500,000.00 and exemplary damages in the amount of
P200,000.00.
"Petitioner likewise prayed for such other and further reliefs that the
Commission may deem just and equitable under the premises."
On 13 July 1988, respondents-appellees filed their opposition to the petition.

On 13 July 1988, petitioner filed his Reply to the Opposition.

On 31 March 1989, the hearing officer rendered a decision ruling that:
"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not
dissolve the said law partnership. Accordingly, the petitioner and
respondents are hereby enjoined to abide by the provisions of the
Agreement relative to the matter governing the liquidation of the
shares of any retiring or withdrawing partner in the partnership
interest." 1
On appeal, the SEC en banc reversed the decision of the Hearing Officer and held that the
withdrawal of Attorney Joaquin L. Misa had dissolved the partnership of "Bito, Misa & Lozada."
The Commission ruled that, being a partnership at will, the law firm could be dissolved by any
partner at anytime, such as by his withdrawal therefrom, regardless of good faith or bad faith,
since no partner can be forced to continue in the partnership against his will. In its decision,
dated 17 January 1990, the SEC held:
WHEREFORE, premises considered the appealed order of 31 March 1989 is hereby
REVERSED insofar as it concludes that the partnership of Bito, Misa & Lozada has not
been dissolved. The case is hereby REMANDED to the Hearing Officer for determination
of the respective rights and obligations of the parties. 2
The parties sought a reconsideration of the above decision. Attorney Misa, in addition, asked for
an appointment of a receiver to take over the assets of the dissolved partnership and to take
charge of the winding up of its affairs. On 4 April 1991, respondent SEC issued an order denying
reconsideration, as well as rejecting the petition for receivership, and reiterating the remand of
the case to the Hearing Officer.
The parties filed with the appellate court separate appeals (docketed CA-G.R. SP No. 24638 and
CA-G.R. SP No. 24648).
During the pendency of the case with the Court of Appeals, Attorney Jesus Bito and Attorney
Mariano Lozada both died on, respectively, 05 September 1991 and 21 December 1991. The
death of the two partners, as well as the admission of new partners, in the law firm prompted
Attorney Misa to renew his application for receivership (in CA G.R. SP No. 24648). He expressed
concern over the need to preserve and care for the partnership assets. The other partners
opposed the prayer.
The Court of Appeals, finding no reversible error on the part of respondent Commission,
AFFIRMED in toto the SEC decision and order appealed from. In fine, the appellate court held,
per its decision of 26 February 1993, (a) that Atty. Misa's withdrawal from the partnership had
changed the relation of the parties and inevitably caused the dissolution of the partnership; (b)
that such withdrawal was not in bad faith; (c) that the liquidation should be to the extent of
Attorney Misa's interest or participation in the partnership which could be computed and paid
in the manner stipulated in the partnership agreement; (d) that the case should be remanded to
the SEC Hearing Officer for the corresponding determination of the value of Attorney Misa's

share in the partnership assets; and (e) that the appointment of a receiver was unnecessary as
no sufficient proof had been shown to indicate that the partnership assets were in any such
danger of being lost, removed or materially impaired.
In this petition for review under Rule 45 of the Rules of Court, petitioners confine themselves to
the following issues:
1. Whether or not the Court of Appeals has erred in holding that the partnership of Bito,
Misa & Lozada (now Bito, Lozada, Ortega & Castillo) is a partnership at will;
2. Whether or not the Court of Appeals has erred in holding that the withdrawal of
private respondent dissolved the partnership regardless of his good or bad faith; and
3. Whether or not the Court of Appeals has erred in holding that private respondent's
demand for the dissolution of the partnership so that he can get a physical partition of
partnership was not made in bad faith;
to which matters we shall, accordingly, likewise limit ourselves.
A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa &
Lozada," and now "Bito, Lozada, Ortega and Castillo," is indeed such a partnership need not be
unduly belabored. We quote, with approval, like did the appellate court, the findings and
disquisition of respondent SEC on this matter; viz:
The partnership agreement (amended articles of 19 August 1948) does not provide for a
specified period or undertaking. The "DURATION" clause simply states:
"5. DURATION. The partnership shall continue so long as mutually
satisfactory and upon the death or legal incapacity of one of the
partners, shall be continued by the surviving partners."
The hearing officer however opined that the partnership is one for a specific
undertaking and hence not a partnership at will, citing paragraph 2 of the Amended
Articles of Partnership (19 August 1948):
"2. Purpose. The purpose for which the partnership is formed, is to act
as legal adviser and representative of any individual, firm and
corporation engaged in commercial, industrial or other lawful
businesses and occupations; to counsel and advise such persons and
entities with respect to their legal and other affairs; and to appear for
and represent their principals and client in all courts of justice and
government departments and offices in the Philippines, and elsewhere
when legally authorized to do so."
The "purpose" of the partnership is not the specific undertaking referred to in the law.
Otherwise, all partnerships, which necessarily must have a purpose, would all be
considered as partnerships for a definite undertaking. There would therefore be no

need to provide for articles on partnership at will as none would so exist. Apparently
what the law contemplates, is a specific undertaking or "project" which has a definite or
definable period of completion. 3
The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on
the constancy of that mutual resolve, along with each partner's capability to give it, and the
absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may,
at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in
good faith, not that the attendance of bad faith can prevent the dissolution of the
partnership 4 but that it can result in a liability for damages. 5
In passing, neither would the presence of a period for its specific duration or the statement of a
particular purpose for its creation prevent the dissolution of any partnership by an act or will of
a partner. 6 Among partners, 7 mutual agency arises and the doctrine of delectus personae allows
them to have the power, although not necessarily the right, to dissolve the partnership. An
unjustified dissolution by the partner can subject him to a possible action for damages.
The 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 might be distinguished from the winding
up of, the business. 8 Upon its dissolution, the partnership continues and its legal personality is
retained until the complete winding up of its business culminating in its termination. 9
The liquidation of the assets of the partnership following its dissolution is governed by various
provisions of the Civil Code; 10 however, an agreement of the partners, like any other contract, is
binding among them and normally takes precedence to the extent applicable over the Code's
general provisions. We here take note of paragraph 8 of the "Amendment to Articles of
Partnership" reading thusly:
. . . In the event of the death or retirement of any partner, his interest in the partnership
shall be liquidated and paid in accordance with the existing agreements and his
partnership participation shall revert to the Senior Partners for allocation as the Senior
Partners may determine; provided, however, that with respect to the two (2) floors of
office condominium which the partnership is now acquiring, consisting of the 5th and
the 6th floors of the Alpap Building, 140 Alfaro Street, Salcedo Village, Makati, Metro
Manila, their true value at the time of such death or retirement shall be determined by
two (2) independent appraisers, one to be appointed (by the partnership and the other
by the) retiring partner or the heirs of a deceased partner, as the case may be. In the
event of any disagreement between the said appraisers a third appraiser will be
appointed by them whose decision shall be final. The share of the retiring or deceased
partner in the aforementioned two (2) floor office condominium shall be determined
upon the basis of the valuation above mentioned which shall be paid monthly within the
first ten (10) days of every month in installments of not less than P20,000.00 for the
Senior Partners, P10,000.00 in the case of two (2) existing Junior Partners and P5,000.00
in the case of the new Junior Partner. 11

The term "retirement" must have been used in the articles, as we so hold, in a generic sense to
mean the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership
that thereby dissolves it.
On the third and final issue, we accord due respect to the appellate court and respondent
Commission on their common factual finding, i.e., that Attorney Misa did not act in bad faith.
Public respondents viewed his withdrawal to have been spurred by "interpersonal conflict"
among the partners. It would not be right, we agree, to let any of the partners remain in the
partnership under such an atmosphere of animosity; certainly, not against their will. 12Indeed,
for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and
fairness, nor for the purpose of unduly visiting harm and damage upon the partnership, bad
faith cannot be said to characterize the act. Bad faith, in the context here used, is no different
from its normal concept of a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.
WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on costs.
SO ORDERED.
Feliciano, Romero, Melo and Francisco, JJ., concur.
Footnotes
1 Rollo, pp. 53-56.
2 Rollo, p. 122.
3 Rollo, pp. 119-120.
4 Art. 1830 (1) (b), Civil Code.
5 See Art. 19, Civil Code.
6 Art. 1830 (2), Civil Code; see also Rojas vs. Maglana, 192 SCRA 110.
7 As general, as distinguished from limited partners.
8 Art. 1828, Civil Code.
9 Art. 1829, Civil Code.
10 For instance, Art. 1837 of the Civil Code provides:
"Art. 1837. When dissolution is caused in any way, except in contravention of the
partnership agreement, each partner, as against his co-partners and all persons claiming
through them in respect of their interests in the partnership, unless otherwise agreed,
may have the partnership property applied to discharge its liabilities, and the surplus
applied to pay in cash the net amount owning to the respective partners. But if
dissolution is caused by expulsion of a partner, bona fide under the partnership
agreement and if the expelled partner is discharged from all partnership liabilities,
either by payment or agreement under the second paragraph of article 1835, he shall
receive in cash only the net amount due him from the partnership."
11 Rollo, pp. 69-70.
12 Rojas v. Maglana, supra.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-49982 April 27, 1988
ELIGIO ESTANISLAO, JR., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, REMEDIOS ESTANISLAO, EMILIO and LEOCADIO
SANTIAGO,respondents.
Agustin O. Benitez for petitioner.
Benjamin C. Yatco for private respondents.
GANCAYCO, J.:
By this petition for certiorari the Court is asked to determine if a partnership exists between
members of the same family arising from their joint ownership of certain properties.
Petitioner and private respondents are brothers and sisters who are co-owners of certain lots at
the corner of Annapolis and Aurora Blvd., QuezonCity which were then being leased to the Shell
Company of the Philippines Limited (SHELL). They agreed to open and operate a gas station
thereat to be known as Estanislao Shell Service Station with an initial investment of P 15,000.00
to be taken from the advance rentals due to them from SHELL for the occupancy of the said lots
owned in common by them. A joint affidavit was executed by them on April 11, 1966 which was
prepared byAtty. Democrito Angeles 1 They agreed to help their brother, petitioner herein, by
allowing him to operate and manage the gasoline service station of the family. They negotiated
with SHELL. For practical purposes and in order not to run counter to the company's policy of
appointing only one dealer, it was agreed that petitioner would apply for the dealership.
Respondent Remedios helped in managing the bussiness with petitioner from May 3, 1966 up to
February 16, 1967.
On May 26, 1966, the parties herein entered into an Additional Cash Pledge Agreement with
SHELL wherein it was reiterated that the P 15,000.00 advance rental shall be deposited with
SHELL to cover advances of fuel to petitioner as dealer with a proviso that said agreement
"cancels and supersedes the Joint Affidavit dated 11 April 1966 executed by the co-owners." 2
For sometime, the petitioner submitted financial statements regarding the operation of the
business to private respondents, but therafter petitioner failed to render subsequent
accounting. Hence through Atty. Angeles, a demand was made on petitioner to render an
accounting of the profits.
The financial report of December 31, 1968 shows that the business was able to make a profit of
P 87,293.79 and that by the year ending 1969, a profit of P 150,000.00 was realized. 3

Thus, on August 25, 1970 private respondents filed a complaint in the Court of First Instance of
Rizal against petitioner praying among others that the latter be ordered:
1. to execute a public document embodying all the provisions of the partnership
agreement entered into between plaintiffs and defendant as provided in Article
1771 of the New Civil Code;
2. to render a formal accounting of the business operation covering the period
from May 6, 1966 up to December 21, 1968 and from January 1, 1969 up to the
time the order is issued and that the same be subject to proper audit;
3. to pay the plaintiffs their lawful shares and participation in the net profits of
the business in an amount of no less than P l50,000.00 with interest at the rate
of 1% per month from date of demand until full payment thereof for the entire
duration of the business; and
4. to pay the plaintiffs the amount of P 10,000.00 as attorney's fees and costs of
the suit (pp. 13-14 Record on Appeal.)
After trial on the merits, on October 15, 1975, Hon. Lino Anover who was then the temporary
presiding judge of Branch IV of the trial court, rendered judgment dismissing the complaint and
counterclaim and ordering private respondents to pay petitioner P 3,000.00 attorney's fee and
costs. Private respondent filed a motion for reconsideration of the decision. On December 10,
1975, Hon. Ricardo Tensuan who was the newly appointed presiding judge of the same branch,
set aside the aforesaid derision and rendered another decision in favor of said respondents.
The dispositive part thereof reads as follows:
WHEREFORE, the Decision of this Court dated October 14, 1975 is hereby
reconsidered and a new judgment is hereby rendered in favor of the plaintiffs
and as against the defendant:
(1) Ordering the defendant to execute a public instrument embodying all the
provisions of the partnership agreement entered into between plaintiffs and
defendant as provided for in Article 1771, Civil Code of the Philippines;
(2) Ordering the defendant to render a formal accounting of the business
operation from April 1969 up to the time this order is issued, the same to be
subject to examination and audit by the plaintiff,
(3) Ordering the defendant to pay plaintiffs their lawful shares and participation
in the net profits of the business in the amount of P 150,000.00, with interest
thereon at the rate of One (1%) Per Cent per month from date of demand until
full payment thereof;

(4) Ordering the defendant to pay the plaintiffs the sum of P 5,000.00 by way of
attorney's fees of plaintiffs' counsel; as well as the costs of suit. (pp. 161-162.
Record on Appeal).
Petitioner then interposed an appeal to the Court of Appeals enumerating seven (7) errors
allegedly committed by the trial court. In due course, a decision was rendered by the Court of
Appeals on November 28,1978 affirming in toto the decision of the lower court with costs
against petitioner. *
A motion for reconsideration of said decision filed by petitioner was denied on January 30, 1979.
Not satisfied therewith, the petitioner now comes to this court by way of this petition for
certiorari alleging that the respondent court erred:
1. In interpreting the legal import of the Joint Affidavit (Exh. 'A') vis-a-vis the
Additional Cash Pledge Agreement (Exhs. "B-2","6", and "L"); and
2. In declaring that a partnership was established by and among the petitioner
and the private respondents as regards the ownership and or operation of the
gasoline service station business.
Petitioner relies heavily on the provisions of the Joint Affidavit of April 11, 1966 (Exhibit A) and
the Additional Cash Pledge Agreement of May 20, 1966 (Exhibit 6) which are herein reproduced(a) The joint Affidavit of April 11, 1966, Exhibit A reads:
(1) That we are the Lessors of two parcels of land fully describe in Transfer
Certificates of Title Nos. 45071 and 71244 of the Register of Deeds of Quezon
City, in favor of the LESSEE - SHELL COMPANY OF THE PHILIPPINES LIMITED a
corporation duly licensed to do business in the Philippines;
(2) That we have requested the said SHELL COMPANY OF THE PHILIPPINE
LIMITED advanced rentals in the total amount of FIFTEEN THOUSAND PESOS (P
l5,000.00) Philippine Currency, so that we can use the said amount to augment
our capital investment in the operation of that gasoline station constructed ,by
the said company on our two lots aforesaid by virtue of an outstanding Lease
Agreement we have entered into with the said company;
(3) That the and SHELL COMPANY OF THE PHILIPPINE LIMITED out of its
benevolence and desire to help us in aumenting our capital investment in the
operation of the said gasoline station, has agreed to give us the said amount of
P 15,000.00, which amount will partake the nature of ADVANCED RENTALS;
(4) That we have freely and voluntarily agreed that upon receipt of the said
amount of FIFTEEN THOUSAND PESOS (P l6,000.00) from he SHELL COMPANY
OF THE PHILIPPINES LIMITED, the said sum as ADVANCED RENTALS to us be
applied as monthly rentals for the sai two lots under our Lease Agreement
starting on the 25th of May, 1966 until such time that the said of P 15,000.00 be

applicable, which time to our estimate and one-half months from May 25, 1966
or until the 10th of October, 1966 more or less;
(5) That we have likewise agreed among ourselves that the SHELL COMPANY OF
THE PHILIPPINES LIMITED execute an instrument for us to sign embodying our
conformity that the said amount that it will generously grant us as requested be
applied as ADVANCED RENTALS; and
(6) FURTHER AFFIANTS SAYETH NOT.,
(b) The Additional Cash Pledge Agreement of May 20,1966, Exhibit 6, is as follows:
WHEREAS, under the lease Agreement dated 13th November, 1963 (identified
as doc. Nos. 491 & 1407, Page Nos. 99 & 66, Book Nos. V & III, Series of 1963 in
the Notarial Registers of Notaries Public Rosauro Marquez, and R.D. Liwanag,
respectively) executed in favour of SHELL by the herein CO-OWNERS and
another Lease Agreement dated 19th March 1964 . . . also executed in favour of
SHELL by CO-OWNERS Remedios and MARIA ESTANISLAO for the lease of
adjoining portions of two parcels of land at Aurora Blvd./ Annapolis, Quezon
City, the CO OWNERS RECEIVE a total monthly rental of PESOS THREE
THOUSAND THREE HUNDRED EIGHTY TWO AND 29/100 (P 3,382.29), Philippine
Currency;
WHEREAS, CO-OWNER Eligio Estanislao Jr. is the Dealer of the Shell Station
constructed on the leased land, and as Dealer under the Cash Pledge Agreement
dated llth May 1966, he deposited to SHELL in cash the amount of PESOS TEN
THOUSAND (P 10,000), Philippine Currency, to secure his purchase on credit of
Shell petroleum products; . . .
WHEREAS, said DEALER, in his desire, to be granted an increased the limit up to
P 25,000, has secured the conformity of his CO-OWNERS to waive and assign to
SHELL the total monthly rentals due to all of them to accumulate the equivalent
amount of P 15,000, commencing 24th May 1966, this P 15,000 shall be treated
as additional cash deposit to SHELL under the same terms and conditions of the
aforementioned Cash Pledge Agreement dated llth May 1966.
NOW, THEREFORE, for and in consideration of the foregoing premises,and the
mutual covenants among the CO-OWNERS herein and SHELL, said parties have
agreed and hereby agree as follows:
l. The CO-OWNERS dohere by waive in favor of DEALER the monthly rentals due
to all CO-OWNERS, collectively, under the above describe two Lease
Agreements, one dated 13th November 1963 and the other dated 19th March
1964 to enable DEALER to increase his existing cash deposit to SHELL, from P
10,000 to P 25,000, for such purpose, the SHELL CO-OWNERS and DEALER
hereby irrevocably assign to SHELL the monthly rental of P 3,382.29 payable to

them respectively as they fall due, monthly, commencing 24th May 1966, until
such time that the monthly rentals accumulated, shall be equal to P l5,000.
2. The above stated monthly rentals accumulated shall be treated as additional
cash deposit by DEALER to SHELL, thereby in increasing his credit limit from P
10,000 to P 25,000. This agreement, therefore, cancels and supersedes the Joint
affidavit dated 11 April 1966 executed by the CO-OWNERS.
3. Effective upon the signing of this agreement, SHELL agrees to allow DEALER to
purchase from SHELL petroleum products, on credit, up to the amount of P
25,000.
4. This increase in the credit shall also be subject to the same terms and
conditions of the above-mentioned Cash Pledge Agreement dated llth May
1966. (Exhs. "B-2," "L," and "6"; emphasis supplied)
In the aforesaid Joint Affidavit of April 11, 1966 (Exhibit A), it is clearly stipulated by the parties
that the P 15,000.00 advance rental due to them from SHELL shall augment their "capital
investment" in the operation of the gasoline station, which advance rentals shall be credited as
rentals from May 25, 1966 up to four and one-half months or until 10 October 1966, more or
less covering said P 15,000.00.
In the subsequent document entitled "Additional Cash Pledge Agreement" above reproduced
(Exhibit 6), the private respondents and petitioners assigned to SHELL the monthly rentals due
them commencing the 24th of May 1966 until such time that the monthly rentals accumulated
equal P 15,000.00 which private respondents agree to be a cash deposit of petitioner in favor of
SHELL to increase his credit limit as dealer. As above-stated it provided therein that "This
agreement, therefore, cancels and supersedes the Joint Affidavit dated 11 April 1966 executed
by the CO-OWNERS."
Petitioner contends that because of the said stipulation cancelling and superseding that
previous Joint Affidavit, whatever partnership agreement there was in said previous agreement
had thereby been abrogated. We find no merit in this argument. Said cancelling provision was
necessary for the Joint Affidavit speaks of P 15,000.00 advance rentals starting May 25, 1966
while the latter agreement also refers to advance rentals of the same amount starting May 24,
1966. There is, therefore, a duplication of reference to the P 15,000.00 hence the need to
provide in the subsequent document that it "cancels and supersedes" the previous one. True it
is that in the latter document, it is silent as to the statement in the Joint Affidavit that the P
15,000.00 represents the "capital investment" of the parties in the gasoline station business and
it speaks of petitioner as the sole dealer, but this is as it should be for in the latter document
SHELL was a signatory and it would be against its policy if in the agreement it should be stated
that the business is a partnership with private respondents and not a sole proprietorship of
petitioner.
Moreover other evidence in the record shows that there was in fact such partnership agreement
between the parties. This is attested by the testimonies of private respondent Remedies
Estanislao and Atty. Angeles. Petitioner submitted to private respondents periodic accounting of

the business. 4 Petitioner gave a written authority to private respondent Remedies Estanislao,
his sister, to examine and audit the books of their "common business' aming
negosyo). 5 Respondent Remedios assisted in the running of the business. There is no doubt that
the parties hereto formed a partnership when they bound themselves to contribute money to a
common fund with the intention of dividing the profits among themselves. 6 The sole dealership
by the petitioner and the issuance of all government permits and licenses in the name of
petitioner was in compliance with the afore-stated policy of SHELL and the understanding of the
parties of having only one dealer of the SHELL products.
Further, the findings of facts of the respondent court are conclusive in this proceeding, and its
conclusion based on the said facts are in accordancewith the applicable law.
WHEREFORE, the judgment appealed from is AFFIRMED in toto with costs against petitioner.
This decision is immediately executory and no motion for extension of time to file a motion for
reconsideration shag beentertained.
SO ORDERED.
Narvasa, Cruz and Grio-Aquino, JJ., concur.
Footnotes
1 Exhibit A.
2 Exhibits 6 and 6-A.
3 Exhibit D.
* Penned by then Justice Ramon G. Gaviola, Jr., and concurred in by Justices B.S.
de la Fuente and Edgardo Paras, Fourth Division, Court of Appeals.
4 Exhibits D, D-1, D-2, D-3 and D-4.
5 Exhibit E.
6 Article 1767, New Civil Code.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18703

August 28, 1922

INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en C., appellee,

vs.
PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO., and INTERNATIONAL BANKING
CORPORATION,petitioners-appellants.
Jose Yulo, Ross and Lawrence and J. A. Wolfson for appellants.
Antonio Sanz for appellee.
ROMUALDEZ, J.:
The record of this proceeding having been transmitted to this court by virtue of an appeal taken
herein, a motion was presented by the appellants praying this court that this case be considered
purely a moot question now, for the reason that subsequent to the decision appealed from, the
partnership Campos Rueda & Co., voluntarily filed an application for a judicial decree adjudging
itself insolvent, which is just what the herein petitioners and appellants tried to obtain from the
lower court in this proceeding.
The motion now before us must be, and is hereby, denied even under the facts stated by the
appellants in their motion aforesaid. The question raised in this case is not purely moot one; the
fact that a man was insolvent on a certain day does not justify an inference that he was some
time prior thereto.
Proof that a man was insolvent on a certain day does not justify an inference that he
was on a day some time prior thereto. Many contingencies, such as unwise investments,
losing contracts, misfortune, or accident, might happen to reduce a person from a state
of solvency within a short space of time. (Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep.,
767.)
A decree of insolvency begins to operate on the date it is issued. It is one thing to adjudge
Campos Rueda & Co. insolvent in December, 1921, as prayed for in this case, and another to
declare it insolvent in July, 1922, as stated in the motion.
Turning to the merits of this appeal, we find that this limited partnership was, and is, indebted
to the appellants in various sums amounting to not less than P1,000, payable in the Philippines,
which were not paid more than thirty days prior to the date of the filing by the petitioners of the
application for involuntary insolvency now before us. These facts were sufficient established by
the evidence.

The trial court denied the petition on the ground that it was not proven, nor alleged, that the
members of the aforesaid firm were insolvent at the time the application was filed; and that was
said partners are personally and solidarily liable for the consequence of the transactions of the
partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven
to be insolvent. From this judgment the petitioners appeal to this court, on the ground that this
finding of the lower court is erroneous.
The fundamental question that presents itself for decision is whether or not a limited
partnership, such as the appellee, which has failed to pay its obligation with three creditors for
more than thirty days, may be held to have committed an act of insolvency, and thereby be
adjudged insolvent against its will.
Unlike the common law, the Philippine statutes consider a limited partnership as a juridical
entity for all intents and purposes, which personality is recognized in all its acts and contracts
(art. 116, Code of Commerce). This being so and the juridical personality of a limited partnership
being different from that of its members, it must, on general principle, answer for, and suffer,
the consequence of its acts as such an entity capable of being the subject of rights and
obligations. If, as in the instant case, the limited partnership of Campos Rueda & Co. Failed to
pay its obligations with three creditors for a period of more than thirty days, which failure
constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication
of involuntary insolvency can be predicated, this partnership must suffer the consequences of
such a failure, and must be adjudged insolvent. We are not unmindful of the fact that some
courts of the United States have held that a partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its members are insolvent, while others have
maintained a contrary view. But it must be borne in mind that under the American common law,
partnerships have no juridical personality independent from that of its members; and if now
they have such personality for the purpose of the insolvency law, it is only by virtue of general
law enacted by the Congress of the United States on July 1, 1898, section 5, paragraph (h), of
which reads thus:
In the event of one or more but not all of the members of a partnership being adjudged
bankrupt, the partnership property shall not be administered in bankruptcy, unless by
consent of the partner or partners not adjudged bankrupt; but such partner or partners
not adjudged bankrupt shall settle the partnership business as expeditiously as its
nature will permit, and account for the interest of the partner or partners adjudged
bankrupt.
The general consideration that these partnership had no juridical personality and the limitations
prescribed in subsection (h) above set forth gave rise to the conflict noted in American
decisions, as stated in the case of In reSamuels (215 Fed., 845), which mentions the two
apparently conflicting doctrines, citing one from In reBertenshaw (157 Fed., 363), and the other
from Francis vs. McNeal (186 Fed., 481).
But there being in our insolvency law no such provision as that contained in section 5 of said Act
of Congress of July 1, 1898, nor any rule similar thereto, and the juridical personality of limited
partnership being recognized by our statutes from their formation in all their acts and contracts
the decision of American courts on this point can have no application in this jurisdiction, nor we
see any reason why these partnerships cannot be adjudged bankrupt irrespective of the

solvency or insolvency of their members, provided the partnership has, as such, committed
some of the acts of insolvency provided in our law. Under this view it is unnecessary to discuss
the other points raised by the parties, although in the particular case under consideration it can
be added that the liability of the limited partners for the obligations and losses of the
partnership is limited to the amounts paid or promised to be paid into the common fund except
when a limited partner should have included his name or consented to its inclusion in the firm
name (arts. 147 and 148, Code of Commerce).
Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than
thirty days to pay its obligations to the petitioners the Pacific Commercial Co. the Asiatic
Petroleum Co. and the International Banking Corporation, the case comes under paragraph 11
of section 20 of Act No. 1956, and consequently the petitioners have the right to a judicial
decree declaring the involuntary insolvency of said partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged that the limited
partnership Campos Rueda & Co. is and was on December 28, 1921, insolvent and liable for
having failed for more than thirty days to meet its obligations with the three petitioners herein,
and it is ordered that this proceeding be remanded to the Court of First Instance of Manila with
instruction to said court to issue the proper decrees under section 24 of Act No. 1956, and
proceed therewith until its final disposition.
It is so ordered without special finding as to costs.
Araullo, C. J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand, and Johns, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-8576

February 11, 1915

VARGAS and COMPANY, plaintiff-appellee,

vs.
CHAN HANG CHIU, ET AL., defendants-appellants.
Rohde and Wright for appellants.
Escaler and Salas for appellee.
MORELAND, J.:
This is an action brought to set aside a judgment of the justice's court of Manila on the ground
that the plaintiff here, the defendant in the action in which the judgment was secured, was not
served with summons and that, therefore, the justice's court acquired no jurisdiction to render
the judgment was that the same is null and void. Judgment was entered in favor of plaintiff
declaring the judgment in controversy void and setting it aside. This appeal is from that
judgment.
It appears from the record that the plaintiff is a merchantile association duly organized under
the laws of the Philippine Islands and presumably registered as required by law. On the 19th day
of August, 1911, an action was begun by Chan Hang Chiu against the plaintiff in this case to
recover a sum of money. The summons and complaint were placed in the hands of the sheriff,
who certified that on the 19th day of August, 1911, he served the same on Vargas & Co. by
delivering to and leaving with one Jose Macapinlac personally true copies thereof, he being the
managing agent of said Vargas & Co. at the time of such service. On July 2. 1912, the justice's
court rendered judgment against Vargas & Co. for the sum of 372.28. Thereafter execution was
duly issued and the property of Vargas & Co. levied on for the payment thereof. Thereupon
Vargas & Co. paid the amount of the judgment and costs under protest, with notice that it
would sue to recover the amount paid. The execution was returned satisfied and there the
matter rested until the present action was brought.
The contention of plaintiff is, and that contention is supported by the decision of the court
below, that Vargas & Co. being a partnership, it is necessary, in bringing an action against it, to
serve the summons on all of the partners, delivering to each one of them personally a copy
thereof; and that the summons in this case having been served on the managing agent of the
company only, the service was of no effect as against the company and the members thereof
and the judgment entered by virtue of such a service was void.
Plaintiff also contends, and this contention is likewise supported by the court below, that, even
admitting that service on the managing agent of the plaintiff is sufficient service, as a matter of
fact no service was really made on the managing agent of the company but, rather, on an

employee or salesman of the company, who had no powers of management or supervision and
who was not competent to receive service on behalf of the company within the provisions of
section 396 of the Code of Civil Procedure.
We are of the opinion that neither of these contentions can be sustained. As to the first, we may
say that it has been the universal practice in the Philippine Islands since American occupation,
and was the practice prior to that time, to treat companies of the class to which the plaintiff
belongs as legal or juridicial entities and to permit them to sue and be sued in the name of the
company, the summons being served solely on the managing agent or other official of the
company specified by the section of the Code of Civil Procedure referred to. This very action is
an illustration of the practice in vogue in the Philippine Islands. The plaintiff brings this action in
the company name and not in the name of the members of the firm. Actions against companies
of the class to which plaintiff belongs are brought, according to the uninterrupted practice,
against such companies in their company names and not against the individual partners
constituting the firm. In the States, in which the individual members of the firm must be
separately served with process, the rule also prevails that they must be parties to the action,
either plaintiffs or defendant, and that the action cannot be brought in the name of or against
the company itself. This follows naturally for the reason that, if it is necessary to serve the
partners individually, they are entitled to be heard individually in the action and they must,
therefore, be made parties thereto so that they can be heard. It would be idle to serve process
on individual members of a partnership if the litigation were to be conducted in the name of the
partnership itself and by the duly constituted officials of the partnership exclusively.
From what has been said it is apparent that the plaintiff in this action is acting contrary to its
own contention by bringing the action in the name of the company be served with process, then
the action should be brought in the individual names of the partners and not in the name of the
company itself.
Article 35 of the Civil Code provides:
The following are judicial persons:
1. The corporation, associations, and institutions of public interest recognized by law.
2. The associations of private interest, be they civil, commercial, or industrial, to which
the law grants proper personality, independent of that of each member thereof.
Article 38 provides: "Judicial persons may acquire and possess property of all kinds, as well as
contract obligations and institute civil or criminal actions in accordance with the laws and rules
of their establishment."
Article 116 of the Code of Commerce provides in part: "After a commercial association has been
established, it shall have legal representation in all its acts and contracts."
These provisions have been the foundation of the practice followed without interruption for
many years that association of the class to which plaintiff belongs have an independent and
separate legal entity sufficient to permit them to sue and be sued in the company name and to

be served with process through the chief officer or managing agent thereof or any other official
of the company specified by law.
As to the second contention, we may say that the presumption is that a judgment rendered by a
justice's court is a valid and enforceable judgment where the record discloses that all of the
steps necessary to confer jurisdiction on the court have been taken. In the case before us it
affirmatively appears that the service of process was made on the person the sheriff certified
was the managing agent of the defendant company. The sheriff's certificate serves as prima
facie evidence of the existence of the facts stated therein. The record, therefore, discloses, so
far as the fact of service is concerned, that it was duly made on the managing agent of the
company as required by section 396, paragraph 1, of the Code of Civil Procedure. In attacking
the judgement on the ground that service was not made on the managing agent of the
company, it is incumbent on the plaintiff to overcome the presumption arising from the sheriff's
certificate before the attack will succeed. Endeavoring to overcome the presumption referred
to, plaintiff offered as a witness one Tomas O. Segovia, an employee of the plaintiff company.
He testified that he was a bookkeeper and that as such he was well acquainted with the
business of the company and that the person Macapinlac referred to in the sheriff's certificate
as managing agent of the plaintiff company was an agent for the sale of plows, of which the
plaintiff company was a manufacturer; and that he had no other relations with the company
than that stated. During the course of the examination this question was put to and answer
elicited from this witness:
How do you know that they were not summoned, or that they did not know of this case
brought before the justice of the peace of the city of Manila?
I being the bookkeeper and the general attorney-in-fact to Vargas & Co., in Iloilo, ought
to know whether they have been notified or summoned, but I only knew about it when
the sheriff appeared in our office to make the levy.
This is the only witness who testified in the case. It does not appear when he became the
bookkeeper of the company, or that he was in such a position that he could know or did know
personally the acts of the company and its relations to Macapinlac. He does not testify of his
own knowledge to the essential facts necessary to controvert the statements contained it the
sheriff's certificate of service. His testimony is rather negative than positive, it being at all times
possible, in spite of his evidence, indeed, in strict accord therewith, that Vargas & Co., of which
the witness was neither official nor manager, could have appointed a managing agent for the
company or could have removed him without the personal knowledge of the witness. The
witness had no personal knowledge of the relation between the company and Macapinlac. He
never saw the contract existing between them. He did not hear the agreement between them
nor did he know of his own knowledge what the relations between the company and
Macapinlac were. His testimony besides being negative in character has in it many of the
elements of hearsay and is not at all satisfactory. It would have been very easy to present one of
the members of the company, or all of them, who engaged Macapinlac, who know the relations
between him and the company, to testify as to what those relations were and to deny, if that
were the fact, that Macapinlac was such an agent or official of the company as is within the
purview of section 396 above referred to. The facts stated in the certificate of the sheriff will not
be considered as overcome and rebutted except on clear evidence showing the contrary. The
evidence of the bookkeeper, who is the only witness for the company, is not satisfactory in any

sense and is quite insufficient to overcome the presumption established by the sheriff's
certificate.
In view of these considerations it is not necessary to consider the question presented by the
payment by the plaintiff company of the judgment.
The judgment appealed from is reversed and the complaint dismissed on the merits, without
costs in this instance. So ordered.
Arellano, C.J., Torres, Johnson and Araullo, JJ., concur.
Carson, J., dissents.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-48113

April 7, 1947

NGO TIAN TEK and NGO HAY, petitioner,

vs.
PHILIPPINE EDUCATION CO., INC., respondent.
Tansinsin and Yatco for petitioner.
Marcial Esposo for respondent.
PARAS, J.:
The plaintiff, Philippine Education Co., Inc., instituted in the Court of First Instance of Manila an
action against the defendants, Vicente Tan alias Chan Sy and the partnership of Ngo Tian Tek
and Ngo Hay, for the recovery of some P16,070.14, unpaid cost of merchandise purchased by
Lee Guan Box Factory from the plaintiff and five other corporate entities which, though not
parties to the action, had previously assigned their credits to the plaintiff, together with
attorney's fees, interest and costs. /by agreement of the parties, the case was heard before a
referee, Attorney Francisco Dalupan, who in due time submitted his report holding the
defendants jointly and severally liable to the plaintiff for the sum of P16,070.14 plus attorney's
fees and interest at the rates specified in the report. On March 6, 1939, the Court of First
Instance of Manila rendered judgment was affirmed by the Court of Appeals in its decision of
January 31, 1941, now the subject of our review at the instance of the partnership Ngo Tian Tek
and Ngo Hay, petitioner herein.
"It appears that," quoting from the decision of the Court of Appeals whose findings of fact are
conclusive, "as far back as the year 1925, the Modern Box Factory was established at 603
Magdalena Street, Manila. It was at first owned by Ngo Hay, who three years later was joined by
Ngo Tian Tek as a junior partner. The modern Box Factory dealt in pare and similar merchandise
and purchased goods from the plaintiff and its assignors in the names of the Modern Box
Factory, Ngo Hay and Co., Go Hay Box Factory, or Go Hay. Then about the year 1930, the Lee
Guan Box Factory was established a few meters from the Modern Box Factory, under the
management of Vicente Tan. When that concern, through Vicente Tan, sought credit with the
plaintiff and its assignors, Ngo Hay, in conversations and interviews with their officers and
employees, represented that he was the principal owner of such factory, that the Lee Guan Box
Factory and the Modern Box Factory belonged to the same owner, and that the Lee Guan Box
Factory was a subsidiary of the Modern Box Factory. There is evidence that many goods
purchased in the name of the Lee Guan Box Factory were delivered to the Modern Box Factory
by the employees of the plaintiff and its assignors upon the express direction of Vicente Tan.
There is also evidence that the collectors of the sellers were requested by Vicente Tan to collect
and did collect from the Modern Box Factory the bills against the Lee Guan Box Factory. In
the fact the record shows many checks signed by Ngo Hay or Ngo Tian Tek in payment of

accounts of the Lee Guan Box Factory. Furthermore, and this seems to be conclusive-Ngo
Hay, testifying for the defense, admitted that 'he' was the owner of the Lee Guan Box Factory in
and before the year 1934, but that in January, 1935, 'he' sold it, by the contract of sale Exhibit 7,
to Vicente Tan, who had been his manager of the business. Tan declared also that before
January, 1935, the Lee Guan Box Factory pertained to Ngo Hay and Ngo Tian Tek. The contract
Exhibit 7 was found by the referee, to be untrue and simulated, for various convincing reasons
that need no repetition here. And the quoted statements serve effectively to confirm the
evidence for the plaintiff that it was Ngo Hay's representations of ownership of, and
responsibility for, Lee Guan Box Factory that induced them to open credit for that concern. It
must be stated that in this connection to answer appellant's fitting observation that the
plaintiff and the assignors have considered Ngo Hay, the Modern Box Factory and Ngo Hay and
Co. as one and the same, through the acts of the partners themselves, and that the proof as to
Ngo Hay's statements regarding the ownership of Lee Guan Box Factory must be taken in that
view. Ngo Hay was wont to say 'he' owned the Modern Box Factory, meaning that he was the
principal owner, his other partner being Ngo Tian Tek. Now, it needs no demonstration for
appellant does not deny it that the obligations of the Lee Guan Box Factory must rest upon its
known owner. And that owner in Ngo Tian Tek and Ngo Hay."
We must overrule petitioner's contention that the Court of Appeals erred in holding that Lee
Guan Box Factory was a subsidiary of the Modern Box Factory and in disregarding the fact that
the contracts evidencing the debts in question were signed by Vicente Tan alias Chan Sy,
without any indication that tended to involve the Modern Box Factory or the petitioner. In the
first place, we are concluded by the finding of the Court of Appeals regarding the ownership by
the petitioner of Lee Guan Box Factory. Secondly, the circumstances that Vicente Tan alias Chan
Sy acted in his own name cannot save the petitioner, in view of said ownership, and because
contracts entered into by a factor of a commercial establishment known to belong to a well
known enterprise or association, shall be understood as made for the account of the owner of
such enterprise or association, even when the factor has not so stated at the time of executing
the same, provided that such contracts involve objects comprised in the line and business of the
establishment. (Article 286, Code of Commerce.) The fact that Vicente Tan did not have any
recorded power of attorney executed by the petitioner will not operate to prejudice third
persons, like the respondent Philippine Education Co., Inc., and its assignors. (3 Echavarri, 133.)
Another defense set up by the petitioner is that prior to the transactions which gave rise to this
suit, Vicente Tan had purchased Lee Guan Box Factory from Ngo Hay under the contract, Exhibit
7; and the petitioner assails, under the second assignment of error, the conclusion of the Court
of Appeals that said contract is simulated. This contention is purely factual and must also be
overruled.
The petitioner questions the right of the respondent Philippine Education Co., Inc., to sue for the
credits assigned by the five entities with which Lee Guan Box Factory originally contracted, it
being argued that the assignment, intended only for purposes of collection, did not make said
respondent the real party in interest. The petitioner has cited 5 Corpus Juris, section 144, page
958, which points out that "under statutes authorizing only a bona fideassignee of choses in
action to sue thereon in his own name, an assignee for collection merely is not entitled to sue in
his own name."

The finding of the Court of Appeals that there is nothing "simulated in the assignment,"
precludes us from ruling that respondent company is not a bona fide assignee. Even assuming,
however, that said assignment was only for collection, we are not prepared to say that, under
section 114 of the Code of Civil Procedure, in force at the time this action was instituted, ours is
not one of those jurisdictions following the rule that "when a choose, capable of legal
assignment, is assigned absolutely to one, but the assignment is made for purpose of collection,
the legal title thereto vests in the assignee, and it is no concern of the debtor that the equitable
title is in another, and payment to the assignee discharges the debtor." (5 C. J., section 144, p.
958.) No substantial right of the petitioner could indeed be prejudiced by such assignment,
because section 114 of the Code of Civil Procedure reserves to it "'any set-off or other defense
existing at the time of or before notice of the assignment.'"
Petitioner's allegation that "fraud in the inception of the debt is personal to the contracting
parties and does not follow assignment," and that the contracts assigned to the respondent
company "are immoral and against public policy and therefore void," constitute defenses on the
merits, but do not affect the efficacy of the assignment. It is obvious that, apart from the fact
that the petitioner can not invoke fraud of its authorship to evade liability, the appealed
decision is founded on an obligation arising, not from fraud, but from the very contracts under
which merchandise had been purchased by Lee Guan Box Factory.
The fourth and fifth assignments of error relate to the refusal of the Court of Appeals to hold
that the writ of attachment is issued at the commencement of this action by the Court of First
Instance is illegal, and to award in favor of the petitioner damages for such wrongful
attachment. For us to sustain petitioner's contention will amount to an unauthorized reversal of
the following conclusion of fact of the Court of Appeals: "The stereotyped manner in which
defendants obtained goods on credit from the six companies, Vicente Tan's sudden
disappearance, the execution of the fake sale Exhibit 7 to throw the whole responsibility upon
the absent or otherwise insolvent Tan, defendant's mercurial and unbelievable theories as to
the ownership of the Modern Box Factory and Lee Guan Box Factory obviously adopted in a
vain effort to meet or explain away the evidentiary force of plaintiff's documentary evidence
are much too significant to permit a declaration that the attachment was not justified."
Regarding the suggestion in petitioner's memorandum that this case should be dismissed
because of the death of Ngo Hay, it is sufficient to state that the petitioner Ngo Tian Tek and
Ngo Hay is sued as a partnership possessing a personality distinct from any of the partners.
The appealed decision is affirmed, with costs against the petitioner. So ordered.
Moran, C.J., Pablo, Perfecto, Hilado, Briones, Hontiveros, and Tuason, JJ., concur.
Separate Opinions
FERIA, J., concurring and dissenting:
I concur in the majority except that portion thereof which deals with the question whether an
assignee for collection merely is entitled to sue in his own name, which need not be discussed,
in view of the finding of the Court of Appeals that there is nothing "simulated in the assignment"

which according to the very opinion of the majority "precludes us from ruling that the
respondent company is not a bona fide assignee;" because such being the conclusion of fact of
the Court of Appeals, this Supreme Court can not modify or reverse that conclusion and find
that respondent Philippine Education Co. was not a bona fide assignee, and the assignment was
not absolute, but made merely for collection in order that said respondent may sue in its own
name.
But I dissent from the majority opinion when it further says:
Even assuming, however, that said assignment was only for collection, we are not
prepared to say that, under section 114 of the Code of Civil Procedure, in force at the
time this action was instituted, ours is not one of those jurisdictions following the rule
that "when a choose, capable of legal assignment, is assigned absolutely to one, but the
assignment is made for purpose of collection, the legal title thereto vests in the
assignee, and it is no concern of the debtor that the equitable title is in another, and
payment to the assignee discharges the debtor." (5 C. J., section 114, p. 958.) No
substantial right of the petitioner could indeed be prejudiced by such assignment,
because section 114 of the Code of Civil Procedure reserves to it "any set-off or other
defense exiting at the time of or before notice of the assignment."
The reason for my dissenting is that, after quoting the finding of the Court of Appeals and
stating that said conclusion precludes this Court "from ruling that the respondent company is
not a bona fide assignee," the majority should have stopped then and there. But having
preferred to adduce an additional ratio decidendi, and assume that the assignment was for
collection only and not an absolute and bona fide one, in order to meet the latter's argument,
because the Court of Appeals' conclusion is that the assignment was not simulated, that is,
absolute and bona fide, the majority should have quoted and discussed the second and third
sentences of paragraph 144, page 958, of the Corpus Juris, quoted and relied on by the
petitioner, which refers to an assignment that is not absolutely and bona fide made. However
the majority opinion did not do so, and quotes and bases its conclusion to the contrary on the
first sentence of said paragraph, not relied on by the petitioner, and which deals with absolute
and bona fide assignment, and to the provision of section 114 of the Code of Civil Procedure on
set-off and defenses which defendant may set up to an action instituted by a bona fide assignee.
To clearly show the error, we transcribe below section 144, page 958, of Corpus Juris quoted
and underlined by the petitioner in his brief:
144. G. Assignments for Collection. When a chose, capable of legal assignment, is
assigned absolutely to one, but the assignment is made for purpose of collection, the
legal title thereto vests in the assignee, and it is no concern of the debtor that the
equitable title is in another, and payment to the assignee discharges the debtor. Under
the statutes of most jurisdictions, the assignee may prosecute an action thereon in his
own name as the real party in interest or as a trustee of an express trust; but, under
statutes authorizing only a bona fide assignee of choses in action to sue thereon in his
own name, an assignee for collection merely is not entitled to sue in his own name. An
assignment merely for collection does not transfer the beneficial ownership to the
assignee.

It is not only convenient but necessary to point this error in the present concurring and
dissenting opinion, for the conclusion set forth in the above quoted portion of the majority
decision is misleading; because it apparently lays down the ruling that an assignee not bona
fide to whom a credit was assigned, not absolutely, but for collection merely may sue in his own
name (a debatable question which has not yet been passed upon squarely by this Court [
Annotation; 64 L. R. A., 585]), but the premise on which the majority's conclusion or ruling is
predicated in said portion of the Corpus Juris quoted in the opinion, which is a wrong premise
laid down, not by the petitioner, but by the writer himself of the majority opinion.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17295

July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company,
Ang Pue and Tan Siong against the Secretary of Commerce and Industry to secure judgment
"declaring that plaintiffs could extend for five years the term of the partnership pursuant to the
provisions of plaintiffs' Amendment to the Article of Co-partnership."
The answer filed by the defendant alleged, in substance, that the extension for another five
years of the term of the plaintiffs' partnership would be in violation of the provisions of Republic
Act No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the
partnership Ang Pue & Company for a term of five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership was "to maintain the business of general
merchandising, buying and selling at wholesale and retail, particularly of lumber, hardware and
other construction materials for commerce, either native or foreign." The corresponding articles
of partnership (Exhibit B) were registered in the Office of the Securities & Exchange Commission
on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided,
among other things, that, after its enactment, a partnership not wholly formed by Filipinos could
continue to engage in the retail business until the expiration of its term.
On April 15, 1958 prior to the expiration of the five-year term of the partnership Ang Pue &
Company, but after the enactment of the Republic Act 1180, the partners already mentioned
amended the original articles of part ownership (Exhibit B) so as to extend the term of life of the
partnership to another five years. When the amended articles were presented for registration in
the Office of the Securities & Exchange Commission on April 16, 1958, registration was refused
upon the ground that the extension was in violation of the aforesaid Act.
From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed
this appeal.

The question before us is too clear to require an extended discussion. To organize a corporation
or a partnership that could claim a juridical personality of its own and transact business as such,
is not a matter of absolute right but a privilege which may be enjoyed only under such terms as
the State may deem necessary to impose. That the State, through Congress, and in the manner
provided by law, had the right to enact Republic Act No. 1180 and to provide therein that only
Filipinos and concerns wholly owned by Filipinos may engage in the retail business can not be
seriously disputed. That this provision was clearly intended to apply to partnership already
existing at the time of the enactment of the law is clearly showing by its provision giving them
the right to continue engaging in their retail business until the expiration of their term or life.
To argue that because the original articles of partnership provided that the partners could
extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely
affect appellants herein, is to erroneously assume that the aforesaid provision constitute a
property right of which the partners can not be deprived without due process or without their
consent. The agreement contain therein must be deemed subject to the law existing at the time
when the partners came to agree regarding the extension. In the present case, as already
stated, when the partners amended the articles of partnership, the provisions of Republic Act
1180 were already in force, and there can be not the slightest doubt that the right claimed by
appellants to extend the original term of their partnership to another five years would be in
violation of the clear intent and purpose of the law aforesaid.
WHEREFORE, the judgment appealed from is affirmed, with costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ.,
concur.
Bautista Angelo and Reyes, J.B.L., JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al.
and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while
the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March
19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National Internal Revenue
Code 1 that the unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were required to pay the deficiency
income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA
Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership
was in fact formed by petitioners which like a corporation was subject to corporate income tax
distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of
the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON
THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE
AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with
their own personal funds they used in buying several real properties. They appointed their
brother to manage their properties with full power to lease, collect, rent, issue receipts, etc.
They had the real properties rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded
the payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms
corporation and partnership as used in sections 24 and 84 of said Code, the
pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed,
collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized
but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include duly
registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely:
(a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are
fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was
not a property inherited by them pro indiviso. They created it purposely. What is
more they jointly borrowed a substantial portion thereof in order to establish
said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April
23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days

later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots
(24) acquired and transcations undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and
preservation of the aforementioned common fund or even of the property
acquired by petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business transactions engaged in
for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over
twelve (12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary
to constitute a partnership, the collective effect of these circumstances is such as
to leave no room for doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were present in the cases
cited by petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the
profits among themselves. Respondent commissioner and/ or his representative just assumed
these conditions to be present on the basis of the fact that petitioners purchased certain parcels
of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land
from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did
not make any additional or new purchase. The remaining three (3) parcels were sold by them in
1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15)
years. None of the circumstances are present in the case at bar. The co-ownership started only
in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil
Code lays down the rule for determining when a transaction should be deemed
a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made
by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a coownership share or do not share any profits made by the use of the property
held in common does not convert their venture into a partnership. Or the sharing
of the gross returns does not of itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in the property.
This only means that, aside from the circumstance of profit, the presence of
other elements constituting partnership is necessary, such as the clear intent to
form a partnership, the existence of a juridical personality different from that of
the individual partners, and the freedom to transfer or assign any interest in the
property by one with the consent of the others (Padilla, Civil Code of the
Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree
to share the gross returns of that enterprise in proportion to their contribution,
but who severally retain the title to their respective contribution, are not
thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the

proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd

Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of
land create a partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single
tract of realty, holding as tenants in common, and to divide the profits of
disposing of it, the brother and the other not being entitled to share in plaintiffs
commission, no partnership existed as between the three parties, whatever
their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673,
233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and such
a community of interest, as far as third persons are concerned as enables each
party to make contract, manage the business, and dispose of the whole
property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership
between the owners, though they may use it for the purpose of making gains;
and they may, without becoming partners, agree among themselves as to the
management, and use of such property and the application of the proceeds
therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the individual
partners, and the freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the
same a few years thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual

taxpayers in these transactions, they are thereby relieved of any further tax liability arising
therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.
Footnotes
1 Annex C of the Petition, citing Evangelista v. Collector, G.R. No. 9996, Oct.
15,1957,102 Phil. 140.
2 Penned by Presiding Judge Amante Filler, concurred in by Associate Judge Alex
Z. Reyes, Associate Judge Roaquin dissented in a separate opinion.
3 Supra.
4 Supra.
5 Supra, pp. 144-146; italics supplied.
6 Supra, pp. 150-151; italics supplied.
7 Article 1816. All partners, including industrial ones, shall be liable pro rata with
all their property and after all the partnership assets have been exhausted, for
the contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the
partnership. However, any partner may enter into a separate obligation to
perform a partnership contract. (Civil Code of the Philippines)
See also Articles 1817 and 1818, Supra.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B. OA,
LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete,
and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have constituted an unregistered partnership and
are, therefore, subject to the payment of the deficiency corporate income taxes assessed
against them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in
the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15,
1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended
by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said
court denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oa and her five children. In 1948, Civil Case No. 4519 was instituted
in the Court of First Instance of Manila for the settlement of her estate. Later,
Lorenzo T. Oa the surviving spouse was appointed administrator of the estate
of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was approved by the
Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz,
Virginia and Lorenzo, Jr., all surnamed Oa, were still minors when the project
of partition was approved, Lorenzo T. Oa, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of
Manila for appointment as guardian of said minors. On November 14, 1949, the
Court appointed him guardian of the persons and property of the aforenamed
minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the
heirs have undivided one-half (1/2) interest in ten parcels of land with a total
assessed value of P87,860.00, six houses with a total assessed value of

P17,590.00 and an undetermined amount to be collected from the War Damage

Commission. Later, they received from said Commission the amount of
P50,000.00, more or less. This amount was not divided among them but was
used in the rehabilitation of properties owned by them in common (t.s.n., p.
46). Of the ten parcels of land aforementioned, two were acquired after the
death of the decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR
rec.).
The project of partition also shows that the estate shares equally with Lorenzo
T. Oa, the administrator thereof, in the obligation of P94,973.00, consisting of
loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit
K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949,
no attempt was made to divide the properties therein listed. Instead, the
properties remained under the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real properties
and securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned
from the following year-end balances:
Year

Investment

Land

Building

Account

Account

Account

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as
profits from installment sales of subdivided lots, profits from sales of stocks,
dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp.
37-38). The said incomes are recorded in the books of account kept by Lorenzo

T. Oa where the corresponding shares of the petitioners in the net income for
the year are also known. Every year, petitioners returned for income tax
purposes their shares in the net income derived from said properties and
securities and/or from transactions involving them (Exhibit 3,supra; t.s.n., pp.
25-26). However, petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands
of Lorenzo T. Oa who, as heretofore pointed out, invested them in real
properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal
Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the
petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes
for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50
and 86, BIR rec.). Petitioners protested against the assessment and asked for
reconsideration of the ruling of respondent that they have formed an
unregistered partnership. Finding no merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in
line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and 1956

and the "Compromise for non-filing," the latter item obviously referring to the
compromise in lieu of the criminal liability for failure of petitioners to file the
corporate income tax returns for said years. (See Exh. 17, page 86, BIR records).
(Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP;
II.THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V .ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts
found by the Court of Tax Appeals, should petitioners be considered as co-owners of the
properties inherited by them from the deceased Julia Buales and the profits derived from
transactions involving the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code?
(2) Assuming they have formed an unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by the properties owned by them in
common and the loans granted to them upon the security of the said properties, with the result
that as far as their respective shares in the inheritance are concerned, the total income thereof
should be considered as that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on
their respective shares of the profits accruing from the properties they owned in common be
deducted from the deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as May 16, 1949, and presumably
petitioners have been holding their respective shares in their inheritance since those dates
admittedly under the administration or management of the head of the family, the widower and
father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We
believe this point to be important because, apparently, at the start, or in the years 1944 to 1954,
the respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable
to corporate tax, and it was only from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason how it could be
otherwise, it is easily understandable why petitioners' position that they are co-owners and not
unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed
earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said properties and investments
steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building
account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from Lorenzo T. Oa and
instead, they allowed him to continue using said shares as part of the common fund for their
ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance.
In these circumstances, it is Our considered view that from the moment petitioners allowed not
only the incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the
above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily follow that such

status as co-owners continues until the inheritance is actually and physically distributed among
the heirs, for it is easily conceivable that after knowing their respective shares in the partition,
they might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for
holding the appellants therein to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the
co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom are
used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed in
an extrajudicial settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith.
If after such partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his share,
there can be no doubt that, even if no document or instrument were executed for the purpose,
for tax purposes, at least, an unregistered partnership is formed. This is exactly what happened
to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a joint or common right or interest in any property from
which the returns are derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of
partnerships under the Civil Code from that of unregistered partnerships which are considered
as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr.
Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to the
tax on "corporations", said Code must allude, therefore, to organizations which
are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely one of the most
typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how
created or organized." This qualifying expression clearly indicates that a joint

venture need not be undertaken in any of the standard forms, or in confirmity

with the usual requirements of the law on partnerships, in order that one could
be deemed constituted for purposes of the tax on corporation. Again, pursuant
to said section 84(b),the term "corporation" includes, among others, "joint
accounts,(cuentas en participacion)" and "associations", none of which has a
legal personality of its own, independent of that of its members. Accordingly,
the lawmaker could not have regarded that personality as a condition essential
to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" which are possessed of the
aforementioned personality have been expressly excluded by law (sections
24 and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term
"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries on
any business, financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal Income Taxation,
p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships with the exception only of duly registered general
copartnerships within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a
theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of
the corporate taxes in question, of their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of the Tax Court in denying
their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an

unregistered partnership, the holding should be limited to the business engaged
in apart from the properties inherited by petitioners. In other words, the taxable
income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the
inherited properties and the income derived therefrom were used in the
business of buying and selling other real properties and corporate securities.
Accordingly, the partnership income must include not only the income derived
from the purchase and sale of other properties but also the income of the
inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate
is not distributed or, at least, partitioned, but the moment their respective known shares are
used as part of the common assets of the heirs to be used in making profits, it is but proper that
the income of such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court
that the herein petitioners have formed an unregistered
partnership and, therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual income tax
returns reported their shares of the profits of the unregistered
partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on
their respective shares of the unregistered partnership should
be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7,
Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income tax
assessed against the partnership. Consequently, each of the petitioners in his
individual capacity overpaid his income tax for the years in question, but the
income tax due from the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in issue in this proceeding,
it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might
have paid as individual income tax cannot be credited as part payment of the taxes herein in
question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate.
Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the
law is very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case of
herein petitioners has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because the taxpayers failed
to make the proper return and payment of the corporate taxes legally due from them. In
principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are
not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.
Footnotes
1 In other words, the assessment was affirmed except for the sum of P100.00
which was the total of two P50-items purportedly for "Compromise for nonfiling" which the Tax Court held to be unjustified, since there was no
compromise agreement to speak of.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the
sum of P1,863.44, with legal interest thereon, which they paid under protest by way of income
tax. They appealed from the decision rendered in the case on October 23, 1936 by the Court of
First Instance of the City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable Court
the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts
as follows:
1. Jose Gatchalian .................................................................................................... P0.18
2. Gregoria Cristobal ...............................................................................................

.18

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

.08

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

.13

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

.15

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

.07

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

.08

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

.13

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

.13

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

.16

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

.13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

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

.13

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

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in
the ordinary course of business, from one of the duly authorized agents of the National
Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2)
and that the said ticket was registered in the name of Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the abovementioned ticket bearing No. 178637 won one of the third prizes in the amount of
P50,000 and that the corresponding check covering the above-mentioned prize of
P50,000 was drawn by the National Charity Sweepstakes Office in favor of Jose
Gatchalian & Company against the Philippine National Bank, which check was cashed
during the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by Jose
Gatchalian & Company and that on December 29, 1934, the said return was signed by
Jose Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian
& Company requesting the payment of the sum of P1,499.94 to the deputy provincial
treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20,
1935 within which to pay the said amount of P1,499.94, a copy of which letter marked
Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is attached and made a part hereof, requesting
exemption from payment of the income tax to which reply there were enclosed fifteen
(15) separate individual income tax returns filed separately by each one of the plaintiffs,
copies of which returns are attached and marked Exhibit D-1 to D-15, respectively, in
order of their names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amount put up by each of the

plaintiffs to cover up the attached and marked as Exhibit E and made a part hereof; and
a copy of the affidavit signed by Jose Gatchalian dated December 29, 1934 is attached
and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from
the payment of tax and reiterated his demand for the payment of the sum of P1,499.94
as income tax and gave plaintiffs until February 10, 1935 within which to pay the said
tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed,
defendant on May 13, 1935 issued a warrant of distraint and levy against the property
of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part
hereof;
10. That to avoid embarrassment arising from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C.
Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and
penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt
No. 7454879 which is attached and marked Exhibit J and made a part hereof, and
requested defendant that plaintiffs be allowed to pay under protest the balance of the
tax and penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two
solvent persons to guarantee prompt payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to guarantee the payment of the balance of the
alleged tax liability by monthly installments at the rate of P118.70 a month, the first
payment under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of
the sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935 overruled the protest and denied the
request for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of bond filed by them, the defendant in his
letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered the
municipal treasurer of Pulilan, Bulacan to execute within five days the warrant of
distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia,

Maria Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of
Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance of the income
tax and penalties demanded by defendant as evidenced by income tax receipt No.
35811 which is attached and marked Exhibit N and made a part hereof; and that on
September 3, 1936, the plaintiffs formally protested to the defendant against the
payment of said amount and requested the refund thereof, copy of which is attached
and marked Exhibit O and made part hereof; but that on September 4, 1936, the
defendant overruled the protest and denied the refund thereof; copy of which is
attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one
thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid
under protest by them but that defendant refused and still refuses to refund the said
amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if
necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on
the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the
persons and for the amount indicated below and the part of may share remaining is also
shown to wit:
Purchaser
1. Mariano Santos ...........................................

Amount

Address

P0.14 Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

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

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Name

Exhibit
No.

Purchase
Price

Price
Won

Expenses

Net
prize

1. Jose Gatchalian
..........................................

D-1

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

D-2

.18

4,575

2,000 2,575

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

D-3

.08

1,875

360 1,515

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

D-4

.13

3,325

360 2,965

5. Jesus Legaspi by Maria Cristobal

.........

D-5

.15

3,825

720 3,105

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

D-6

.08

1,875

360 1,515

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

D-7

.07

1,875

360 1,515

8. Julio Gatchalian by Beatriz Guzman

.......

D-8

.13

3,150

240 2,910

P0.18 P4,425

P 480 3,945

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

D-9

.13

3,325

360 2,965

10. Maria C. Legaspi

......................................

D-10

.16

4,100

960 3,140

11. Francisco Cabral

......................................

D-11

.13

3,325

360 2,965

12. Gonzalo Javier

..........................................

D-12

.14

3,325

360 2,965

13. Maria Santiago

..........................................

D-13

.17

4,350

360 3,990

14. Buenaventura Guzman

...........................

D-14

.13

3,325

360 2,965

15. Mariano Santos

........................................

D-15

.14

3,325

360 2,965

2.00 50,000
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced
to the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of
property without a personality of its own; in the first case it is admitted that the partnership
thus formed is liable for the payment of income tax, whereas if there was merely a community
of property, they are exempt from such payment; and (2) whether they should pay the tax
collectively or whether the latter should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total
net income received in the preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association or insurance company, organized in the Philippine Islands, no matter how
created or organized, but not including duly registered general copartnership
(compaias colectivas), a tax of three per centum upon such income; and a like tax shall
be levied, assessed, collected, and paid annually upon the total net income received in
the preceding calendar year from all sources within the Philippine Islands by every
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association, or insurance company organized, authorized, or existing under the laws of
any foreign country, including interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise: Provided, however, That nothing in this
section shall be construed as permitting the taxation of the income derived from
dividends or net profits on which the normal tax has been paid.

The gain derived or loss sustained from the sale or other disposition by a corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
insurance company, or property, real, personal, or mixed, shall be ascertained in
accordance with subsections (c) and (d) of section two of Act Numbered Two thousand
eight hundred and thirty-three, as amended by Act Numbered Twenty-nine hundred
and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
association, or insurance company in the calendar year nineteen hundred and twenty
and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulation facts
the plaintiffs organized a partnership of a civil nature because each of them put up money to
buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win,
as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not
only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as copartner, as such collection the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner, in the same capacity, collected the said check. All
these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound
to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act
No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention
that the tax should be prorated among them and paid individually, resulting in their exemption
from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiffs appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47045 November 22, 1988
NOBIO SARDANE, petitioner,
vs.
THE COURT OF APPEALS and ROMEO J. ACOJEDO, respondents.
Y.G. Villaruz & Associates for petitioner.
Pelagio R. Lachica for private respondent.
REGALADO, J.:
The extensive discussion and exhaustive disquisition in the decision 1 of the respondent
Court 2 should have written finis to this case without further recourse to Us. The assignment of
errors and arguments raised in the respondent Court by herein private respondent, as the
petitioner therein, having been correctly and justifiedly sustained by said court without any
reversible error in its conclusions, the present petition must fail.
The assailed decision details the facts and proceedings which spawned the present controversy
as follows:
Petitioner brought an action in the City Court of Dipolog for collection of a sum
of P5,217.25 based on promissory notes executed by the herein private
respondent Nobio Sardane in favor of the herein petitioner. Petitioner bases his
right to collect on Exhibits B, C, D, E, F, and G executed on different dates and
signed by private respondent Nobio Sardane. Exhibit B is a printed promissory
note involving Pl,117.25 and dated May 13, 1972. Exhibit C is likewise a printed
promissory note and denotes on its face that the sum loaned was Pl,400.00.
Exhibit D is also a printed promissory note dated May 31, 1977 involving an
amount of P100.00. Exhibit E is what is commonly known to the layman as 'vale'
which reads: 'Good for: two hundred pesos (Sgd) Nobio Sardane'. Exhibit F is
stated in the following tenor: 'Received from Mr. Romeo Acojedo the sum
Pesos: Two Thousand Two Hundred (P2,200.00) ONLY, to be paid on or before
December 25, 1975. (Sgd) Nobio Sardane.' Exhibit G and H are both vales'
involving the same amount of one hundred pesos, and dated August 25, 1972
and September 12, 1972 respectively.
It has been established in the trial court that on many occasions, the petitioner
demanded the payment of the total amount of P5,217.25. The failure of the
private respondent to pay the said amount prompted the petitioner to seek the
services of lawyer who made a letter (Exhibit 1) formally demanding the return
of the sum loaned. Because of the failure of the private respondent to heed the

demands extrajudicially made by the petitioner, the latter was constrained to

bring an action for collection of sum of money.
During the scheduled day for trial, private respondent failed to appear and to
file an answer. On motion by the petitioner, the City Court of Dipolog issued an
order dated May 18, 1976 declaring the private respondent in default and
allowed the petitioner to present his evidence ex-parte. Based on petitioner's
evidence, the City Court of Dipolog rendered judgment by default in favor of the
petitioner.
Private respondent filed a motion to lift the order of default which was granted
by the City Court in an order dated May 24, 1976, taking into consideration that
the answer was filed within two hours after the hearing of the evidence
presented ex-parte by the petitioner.
After the trial on the merits, the City Court of Dipolog rendered its decision on
September 14, 1976, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
plaintiff and against the defendant as follows:
(a) Ordering the defendant to pay unto the plaintiff the sum of Five Thousand
Two Hundred Seventeen Pesos and Twenty-five centavos (P5,217.25) plus legal
interest to commence from April 23, 1976 when this case was filed in court; and
(b) Ordering the defendant to pay the plaintiff the sum of P200.00 as attorney's
fee and to pay the cost of this proceeding. 3
Therein defendant Sardane appealed to the Court of First Instance of Zamboanga del Norte
which reversed the decision of the lower court by dismissing the complaint and ordered the
plaintiff-appellee Acojedo to pay said defendant-appellant P500.00 each for actual damages,
moral damages, exemplary damages and attorney's fees, as well as the costs of suit. Plaintiffappellee then sought the review of said decision by petition to the respondent Court.
The assignment of errors in said petition for review can be capsulized into two decisive issues,
firstly, whether the oral testimony for the therein private respondent Sardane that a partnership
existed between him and therein petitioner Acojedo are admissible to vary the meaning of the
abovementioned promissory notes; and, secondly, whether because of the failure of therein
petitioner to cross-examine therein private respondent on his sur-rebuttal testimony, there was
a waiver of the presumption accorded in favor of said petitioner by Section 8, Rule 8 of the Rules
of Court.
On the first issue, the then Court of First Instance held that "the pleadings of the parties herein
put in issue the imperfection or ambiguity of the documents in question", hence "the appellant
can avail of the parol evidence rule to prove his side of the case, that is, the said amount taken
by him from appellee is or was not his personal debt to appellee, but expenses of the
partnership between him and appellee."

Consequently, said trial court concluded that the promissory notes involved were merely
receipts for the contributions to said partnership and, therefore, upheld the claim that there
was ambiguity in the promissory notes, hence parol evidence was allowable to vary or
contradict the terms of the represented loan contract.
The parol evidence rule in Rule 130 provides:
Sec. 7. Evidence of written agreements.When the terms of an agreement have
been reduced to writing, it is to be considered as containing all such terms, and,
therefore, there can be, between the parties and their successors in interest, no
evidence of the terms of the agreement other than the contents of the writing
except in the following cases:
(a) Where a mistake or imperfection of the writing or its failure to express the
the true intent and agreement of the parties, or the validity of the agreement is
put in issue by the pleadings;
(b) When there is an intrinsic ambiguity in the writing.
As correctly pointed out by the respondent Court the exceptions to the rule do not apply in this
case as there is no ambiguity in the writings in question, thus:
In the case at bar, Exhibits B, C, and D are printed promissory notes containing a
promise to pay a sum certain in money, payable on demand and the promise to
bear the costs of litigation in the event of the private respondent's failure to pay
the amount loaned when demanded extrajudicially. Likewise, the vales denote
that the private respondent is obliged to return the sum loaned to him by the
petitioner. On their face, nothing appears to be vague or ambigous, for the
terms of the promissory notes clearly show that it was incumbent upon the
private respondent to pay the amount involved in the promissory notes if and
when the petitioner demands the same. It was clearly the intent of the parties
to enter into a contract of loan for how could an educated man like the private
respondent be deceived to sign a promissory note yet intending to make such a
writing to be mere receipts of the petitioner's supposed contribution to the
alleged partnership existing between the parties?
It has been established in the trial court that, the private respondent has been
engaged in business for quite a long period of time--as owner of the Sardane
Trucking Service, entering into contracts with the government for the
construction of wharfs and seawall; and a member of the City Council of Dapitan
(TSN, July 20, 1976, pp. 57-58).<re||an1w> It indeed puzzles us how the
private respondent could have been misled into signing a document containing
terms which he did not mean them to be. ...
xxx xxx xxx

The private respondent admitted during the cross-examination made by

petitioner's counsel that he was the one who was responsible for the printing of
Exhibits B, C, and D (TSN, July 28, 1976, p. 64). How could he purportedly rely on
such a flimsy pretext that the promissory notes were receipts of the petitioner's
contribution? 4
The Court of Appeals held, and We agree, that even if evidence aliunde other than the
promissory notes may be admitted to alter the meaning conveyed thereby, still the evidence is
insufficient to prove that a partnership existed between the private parties hereto.
As manager of the basnig Sarcado naturally some degree of control over the operations and
maintenance thereof had to be exercised by herein petitioner. The fact that he had received
50% of the net profits does not conclusively establish that he was a partner of the private
respondent herein. Article 1769(4) of the Civil Code is explicit that while the receipt by a person
of a share of the profits of a business is prima facie evidence that he is a partner in the business,
no such inference shall be drawn if such profits were received in payment as wages of an
employee. Furthermore, herein petitioner had no voice in the management of the affairs of
the basnig. Under similar facts, this Court in the early case of Fortis vs. Gutierrez Hermanos, 5 in
denying the claim of the plaintiff therein that he was a partner in the business of the defendant,
declared:
This contention cannot be sustained. It was a mere contract of employment.
The plaintiff had no voice nor vote in the management of the affairs of the
company. The fact that the compensation received by him was to be
determined with reference to the profits made by the defendant in their
business did not in any sense make him a partner therein. ...
The same rule was reiterated in Bastida vs. Menzi & Co., Inc., et al. 6 which involved the same
factual and legal milieu.
There are other considerations noted by respondent Court which negate herein petitioner's
pretension that he was a partner and not a mere employee indebted to the present private
respondent. Thus, in an action for damages filed by herein private respondent against the North
Zamboanga Timber Co., Inc. arising from the operations of the business, herein petitioner did
not ask to be joined as a party plaintiff. Also, although he contends that herein private
respondent is the treasurer of the alleged partnership, yet it is the latter who is demanding an
accounting. The advertence of the Court of First Instance to the fact that the casco bears the
name of herein petitioner disregards the finding of the respondent Court that it was just a
concession since it was he who obtained the engine used in the Sardaco from the Department of
Local Government and Community Development. Further, the use by the parties of the pronoun
"our" in referring to "our basnig, our catch", "our deposit", or "our boseros" was merely
indicative of the camaraderie and not evidentiary of a partnership, between them.
The foregoing factual findings, which belie the further claim that the aforesaid promissory notes
do not express the true intent and agreement of the parties, are binding on Us since there is no
showing that they fall within the exceptions to the rule limiting the scope of appellate review
herein to questions of law.

On the second issue, the pertinent rule on actionable documents in Rule 8, for ready reference,
reads:
Sec. 8. How to contest genuineness of such documents.When an action or
defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness
and due execution of the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies them, and sets forth what he
claims to be the facts; but this provision does not apply when the adverse party
does not appear to be a party to the instrument or when compliance with an
order for the inspection of the original instrument is refused.
The record shows that herein petitioner did not deny under oath in his answer the authenticity
and due execution of the promissory notes which had been duly pleaded and attached to the
complaint, thereby admitting their genuineness and due execution. Even in the trial court, he
did not at all question the fact that he signed said promissory notes and that the same were
genuine. Instead, he presented parol evidence to vary the import of the promissory notes by
alleging that they were mere receipts of his contribution to the alleged partnership.
His arguments on this score reflect a misapprehension of the rule on parol evidence as
distinguished from the rule on actionable documents. As the respondent Court correctly
explained to herein petitioner, what he presented in the trial Court was testimonial evidence
that the promissory notes were receipts of his supposed contributions to the alleged
partnership which testimony, in the light of Section 7, Rule 130, could not be admitted to vary or
alter the explicit meaning conveyed by said promissory notes. On the other hand, the presumed
genuineness and due execution of said promissory notes were not affected, pursuant to the
provisions of Section 8, Rule 8, since such aspects were not at all questioned but, on the
contrary, were admitted by herein petitioner.
Petitioner's invocation of the doctrines in Yu Chuck, et al. vs. Kong Li Po, 7 which was reiterated
in Central Surety & Insurance Co. vs. C. N. Hodges, et al. 8 does not sustain his thesis that the
herein private respondent had "waived the mantle of protection given him by Rule 8, Sec. 8". It
is true that such implied admission of genuineness and due execution may be waived by a party
but only if he acts in a manner indicative of either an express or tacit waiver thereof. Petitioner,
however, either overlooked or ignored the fact that, as held in Yu Chuck, and the same is true in
other cases of Identical factual settings, such a finding of waiver is proper where a case has been
tried in complete disregard of the rule and the plaintiff having pleaded a document by copy,
presents oral evidence to prove the due execution of the document and no objections are made
to the defendant's evidence in refutation. This situation does not obtain in the present case
hence said doctrine is obviously inapplicable.
Neither did the failure of herein private respondent to cross-examine herein petitioner on the
latter's sur-rebuttal testimony constitute a waiver of the aforesaid implied admission. As found
by the respondent Court, said sur-rebuttal testimony consisted solely of the denial of the
testimony of herein private respondent and no new or additional matter was introduced in that
sur-rebuttal testimony to exonerate herein petitioner from his obligations under the aforesaid
promissory notes.

On the foregoing premises and considerations, the respondent Court correctly reversed and set
aside the appealed decision of the Court of First Instance of Zamboanga del Norte and affirmed
in full the decision of the City Court of Dipolog City in Civil Case No. A-1838, dated September
14, 1976.
Belatedly, in his motion for reconsideration of said decision of the respondent Court, herein
petitioner, as the private respondent therein, raised a third unresolved issue that the petition
for review therein should have been dismissed for lack of jurisdiction since the lower Court's
decision did not affirm in full the judgment of the City Court of Dipolog, and which he claimed
was a sine qua non for such a petition under the law then in force. He raises the same point in
his present appeal and We will waive the procedural technicalities in order to put this issue at
rest.
Parenthetically, in that same motion for reconsideration he had sought affirmative relief from
the respondent Court praying that it sustain the decision of the trial Court, thereby invoking and
submitting to its jurisdiction which he would now assail. Furthermore, the objection that he
raises is actually not one of jurisdiction but of procedure. 9
At any rate, it will be noted that petitioner anchors his said objection on the provisions of
Section 29, Republic Act 296 as amended by Republic Act 5433 effective September 9, 1968.
Subsequently, the procedure for appeal to the Court of Appeals from decisions of the then
courts of first instance in the exercise of their appellate jurisdiction over cases originating from
the municipal courts was provided for by Republic Act 6031, amending Section 45 of the
Judiciary Act effective August 4, 1969. The requirement for affirmance in full of the inferior
court's decision was not adopted or reproduced in Republic Act 6031. Also, since Republic Act
6031 failed to provide for the procedure or mode of appeal in the cases therein contemplated,
the Court of Appeals en banc provided thereof in its Resolution of August 12, 1971, by requiring
a petition for review but which also did not require for its availability that the judgment of the
court of first instance had affirmed in full that of the lower court. Said mode of appeal and the
procedural requirements thereof governed the appeal taken in this case from the aforesaid
Court of First Instance to the Court of Appeals in 1977. 10 Herein petitioner's plaint on this issue
is, therefore, devoid of merit.
WHEREFORE, the judgment of the respondent Court of Appeals is AFFIRMED, with costs against
herein petitioner.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1 Penned by Gutierrez, H. E., J., with the concurrence of Serrano, M. and
Batacan, D. Fl., JJ.

2 Special Fifth Division, CA-G.R. No. SP-06464-R, Romeo J. Acojedo, Petitioner,

vs. Nobio Sardane and Hon. Dimalanes B. Buissan, in his capacity as Judge of the
Court of First Instance of Zamboanga del Norte, Respondents.
3 Rollo, 62-65.
4 Rollo, 71-74.
5 6 Phil. 100 (1906).
6 58 Phil. 188 (1933).
7 46 Phil. 608 (1924).
8 38 SCRA 159 (1971).
9 See Manila Railroad Co. vs. Attorney-General, 20 Phil. 523 (1911).
10 For the present procedure, see Sec. 22 B.P. 129; Pars. 20, 21, and 22 (b) of
the Interim or Transitional Rules and Guidelines.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21906

December 24, 1968

INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,

vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.
Aportadera and Palabrica and Pelaez, Jalandoni and Jamir plaintiffs-appellees.
Ruiz Law Offices for defendant-appellant.
CASTRO, J.:
This is an appeal from the order of May 2, 1956, the decision of May 4, 1956 and the order of
May 21, 1956, all of the Court of First Instance of Davao, in civil case 629. The basic action is for
specific performance, and damages resulting from an alleged breach of contract.
In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the then
Sitio of Malalag (now the Municipality of Malalag), Municipality of Padada, Davao. No action
was taken thereon by the authorities concerned. During the Japanese occupation, he filed
another fishpond application for the same area, but because of the conditions then prevailing, it
was not acted upon either. On December 12, 1945 he filed a third fishpond application for the
same area, which, after a survey, was found to contain 178.76 hectares. Upon investigation
conducted by a representative of the Bureau of Forestry, it was discovered that the area applied
for was still needed for firewood production. Hence on May 13, 1946 this third application was
disapproved.
Despite the said rejection, Casteel did not lose interest. He filed a motion for reconsideration.
While this motion was pending resolution, he was advised by the district forester of Davao City
that no further action would be taken on his motion, unless he filed a new application for the
area concerned. So he filed on May 27, 1947 his fishpond application 1717.
Meanwhile, several applications were submitted by other persons for portions of the area
covered by Casteel's application.
On May 20, 1946 Leoncio Aradillos filed his fishpond application 1202 covering 10 hectares of
land found inside the area applied for by Casteel; he was later granted fishpond permit F-289-C
covering 9.3 hectares certified as available for fishpond purposes by the Bureau of Forestry.
Victor D. Carpio filed on August 8, 1946 his fishpond application 762 over a portion of the land
applied for by Casteel. Alejandro Cacam's fishpond application 1276, filed on December 26,
1946, was given due course on December 9, 1947 with the issuance to him of fishpond permit F-

539-C to develop 30 hectares of land comprising a portion of the area applied for by Casteel,
upon certification of the Bureau of Forestry that the area was likewise available for fishpond
purposes. On November 17, 1948 Felipe Deluao filed his own fishpond application for the area
covered by Casteel's application.
Because of the threat poised upon his position by the above applicants who entered upon and
spread themselves within the area, Casteel realized the urgent necessity of expanding his
occupation thereof by constructing dikes and cultivating marketable fishes, in order to prevent
old and new squatters from usurping the land. But lacking financial resources at that time, he
sought financial aid from his uncle Felipe Deluao who then extended loans totalling more or less
P27,000 with which to finance the needed improvements on the fishpond. Hence, a wide
productive fishpond was built.
Moreover, upon learning that portions of the area applied for by him were already occupied by
rival applicants, Casteel immediately filed the corresponding protests. Consequently, two
administrative cases ensued involving the area in question, to wit: DANR Case 353, entitled "Fp.
Ap. No. 661 (now Fp. A. No. 1717), Nicanor Casteel, applicant-appellant versus Fp. A. No. 763,
Victorio D. Carpio, applicant-appellant"; and DANR Case 353-B, entitled "Fp. A. No. 661 (now Fp.
A. No. 1717), Nicanor Casteel, applicant-protestant versus Fp. Permit No. 289-C, Leoncio
Aradillos, Fp. Permit No. 539-C, Alejandro Cacam, Permittees-Respondents."
However, despite the finding made in the investigation of the above administrative cases that
Casteel had already introduced improvements on portions of the area applied for by him in the
form of dikes, fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected
Casteel's application on October 25, 1949, required him to remove all the improvements which
he had introduced on the land, and ordered that the land be leased through public auction.
Failing to secure a favorable resolution of his motion for reconsideration of the Director's order,
Casteel appealed to the Secretary of Agriculture and Natural Resources.
In the interregnum, some more incidents occurred. To avoid repetition, they will be taken up in
our discussion of the appellant's third assignment of error.
On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and
Nicanor Casteel as party of the second part, executed a contract denominated a "contract of
service" the salient provisions of which are as follows:
That the Party of the First Part in consideration of the mutual covenants and
agreements made herein to the Party of the Second Part, hereby enter into a contract of
service, whereby the Party of the First Part hires and employs the Party of the Second
Part on the following terms and conditions, to wit:
That the Party of the First Part will finance as she has hereby financed the sum of
TWENTY SEVEN THOUSAND PESOS (P27,000.00), Philippine Currency, to the Party of the
Second Part who renders only his services for the construction and improvements of a
fishpond at Barrio Malalag, Municipality of Padada, Province of Davao, Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce
of the fish that will be produced from said fishpond;
That the Party of the First Part will be the administrator of the same she having financed
the construction and improvement of said fishpond;
That this contract was the result of a verbal agreement entered into between the
Parties sometime in the month of November, 1947, with all the above-mentioned
conditions enumerated; ...
On the same date the above contract was entered into, Inocencia Deluao executed a special
power of attorney in favor of Jesus Donesa, extending to the latter the authority "To represent
me in the administration of the fishpond at Malalag, Municipality of Padada, Province of Davao,
Philippines, which has been applied for fishpond permit by Nicanor Casteel, but rejected by the
Bureau of Fisheries, and to supervise, demand, receive, and collect the value of the fish that is
being periodically realized from it...."
On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao
on November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same
area in the two administrative cases (DANR Cases 353 and 353-B) and asked for reinvestigation
of the application of Nicanor Casteel over the subject fishpond. However, by letter dated March
15, 1950 sent to the Secretary of Commerce and Agriculture and Natural Resources (now
Secretary of Agriculture and Natural Resources), Deluao withdrew his petition for
reinvestigation.
On September 15, 1950 the Secretary of Agriculture and Natural Resources issued a decision in
DANR Case 353, the dispositive portion of which reads as follows:
In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of
Nicanor Casteel should be, as hereby it is, reinstated and given due course for the area
indicated in the sketch drawn at the back of the last page hereof; and Fp. A. No. 762 of
Victorio D. Carpio shall remain rejected.
On the same date, the same official issued a decision in DANR Case 353-B, the dispositive
portion stating as follows:
WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No.
F-539-C of Alejandro Cacam, should be, as they are hereby cancelled and revoked;
Nicanor Casteel is required to pay the improvements introduced thereon by said
permittees in accordance with the terms and dispositions contained elsewhere in this
decision....
Sometime in January 1951 Nicanor Casteel forbade Inocencia Deluao from further administering
the fishpond, and ejected the latter's representative (encargado), Jesus Donesa, from the
premises.

Alleging violation of the contract of service (exhibit A) entered into between Inocencia Deluao
and Nicanor Casteel, Felipe Deluao and Inocencia Deluao on April 3, 1951 filed an action in the
Court of First Instance of Davao for specific performance and damages against Nicanor Casteel
and Juan Depra (who, they alleged, instigated Casteel to violate his contract), praying inter alia,
(a) that Casteel be ordered to respect and abide by the terms and conditions of said contract
and that Inocencia Deluao be allowed to continue administering the said fishpond and collecting
the proceeds from the sale of the fishes caught from time to time; and (b) that the defendants
be ordered to pay jointly and severally to plaintiffs the sum of P20,000 in damages.
On April 18, 1951 the plaintiffs filed an ex parte motion for the issuance of a preliminary
injunction, praying among other things, that during the pendency of the case and upon their
filling the requisite bond as may be fixed by the court, a preliminary injunction be issued to
restrain Casteel from doing the acts complained of, and that after trial the said injunction be
made permanent. The lower court on April 26, 1951 granted the motion, and, two days later, it
issued a preliminary mandatory injunction addressed to Casteel, the dispositive portion of which
reads as follows:
POR EL PRESENTE, queda usted ordenado que, hasta nueva orden, usted, el demandado
y todos usu abogados, agentes, mandatarios y demas personas que obren en su ayuda,
desista de impedir a la demandante Inocencia R. Deluao que continue administrando
personalmente la pesqueria objeto de esta causa y que la misma continue recibiendo los
productos de la venta de los pescados provenientes de dicha pesqueria, y que,
asimismo, se prohibe a dicho demandado Nicanor Casteel a desahuciar mediante fuerza
al encargado de los demandantes llamado Jesus Donesa de la pesqueria objeto de la
demanda de autos.
On May 10, 1951 Casteel filed a motion to dissolve the injunction, alleging among others, that
he was the owner, lawful applicant and occupant of the fishpond in question. This motion,
opposed by the plaintiffs on June 15, 1951, was denied by the lower court in its order of June
26, 1961.
The defendants on May 14, 1951 filed their answer with counterclaim, amended on January 8,
1952, denying the material averments of the plaintiffs' complaint. A reply to the defendants'
amended answer was filed by the plaintiffs on January 31, 1952.
The defendant Juan Depra moved on May 22, 1951 to dismiss the complaint as to him. On June
4, 1951 the plaintiffs opposed his motion.
The defendants filed on October 3, 1951 a joint motion to dismiss on the ground that the
plaintiffs' complaint failed to state a claim upon which relief may be granted. The motion,
opposed by the plaintiffs on October 12, 1951, was denied for lack of merit by the lower court in
its order of October 22, 1951. The defendants' motion for reconsideration filed on October 31,
1951 suffered the same fate when it was likewise denied by the lower court in its order of
November 12, 1951.

After the issues were joined, the case was set for trial. Then came a series of postponements.
The lower court (Branch I, presided by Judge Enrique A. Fernandez) finally issued on March 21,
1956 an order in open court, reading as follows: .
Upon petition of plaintiffs, without any objection on the part of defendants, the hearing
of this case is hereby transferred to May 2 and 3, 1956 at 8:30 o'clock in the morning.
This case was filed on April 3, 1951 and under any circumstance this Court will not
entertain any other transfer of hearing of this case and if the parties will not be ready on
that day set for hearing, the court will take the necessary steps for the final
determination of this case. (emphasis supplied)
On April 25, 1956 the defendants' counsel received a notice of hearing dated April 21, 1956,
issued by the office of the Clerk of Court (thru the special deputy Clerk of Court) of the Court of
First Instance of Davao, setting the hearing of the case for May 2 and 3, 1956 before Judge
Amador Gomez of Branch II. The defendants, thru counsel, on April 26, 1956 filed a motion for
postponement. Acting on this motion, the lower court (Branch II, presided by Judge Gomez)
issued an order dated April 27, 1956, quoted as follows:
This is a motion for postponement of the hearing of this case set for May 2 and 3, 1956.
The motion is filed by the counsel for the defendants and has the conformity of the
counsel for the plaintiffs.
An examination of the records of this case shows that this case was initiated as early as
April 1951 and that the same has been under advisement of the Honorable Enrique A.
Fernandez, Presiding Judge of Branch No. I, since September 24, 1953, and that various
incidents have already been considered and resolved by Judge Fernandez on various
occasions. The last order issued by Judge Fernandez on this case was issued on March
21, 1956, wherein he definitely states that the Court will not entertain any further
postponement of the hearing of this case.
CONSIDERING ALL THE FOREGOING, the Court believes that the consideration and
termination of any incident referring to this case should be referred back to Branch I, so
that the same may be disposed of therein. (emphasis supplied)
A copy of the abovequoted order was served on the defendants' counsel on May 4, 1956.
On the scheduled date of hearing, that is, on May 2, 1956, the lower court (Branch I, with Judge
Fernandez presiding), when informed about the defendants' motion for postponement filed on
April 26, 1956, issued an order reiterating its previous order handed down in open court on
March 21, 1956 and directing the plaintiffs to introduce their evidence ex parte, there being no
appearance on the part of the defendants or their counsel. On the basis of the plaintiffs'
evidence, a decision was rendered on May 4, 1956 the dispositive portion of which reads as
follows:
EN SU VIRTUD, el Juzgado dicta de decision a favor de los demandantes y en contra del
demandado Nicanor Casteel:

(a) Declara permanente el interdicto prohibitorio expedido contra el demandado;

(b) Ordena al demandado entregue la demandante la posesion y administracion de la
mitad () del "fishpond" en cuestion con todas las mejoras existentes dentro de la
misma;
(c) Condena al demandado a pagar a la demandante la suma de P200.00 mensualmente
en concepto de danos a contar de la fecha de la expiracion de los 30 dias de la
promulgacion de esta decision hasta que entregue la posesion y administracion de la
porcion del "fishpond" en conflicto;
(d) Condena al demandado a pagar a la demandante la suma de P2,000.00 valor de los
pescado beneficiados, mas los intereses legales de la fecha de la incoacion de la
demanda de autos hasta el completo pago de la obligacion principal;
(e) Condena al demandado a pagar a la demandante la suma de P2,000.00, por gastos
incurridos por aquella durante la pendencia de esta causa;
(f) Condena al demandado a pagar a la demandante, en concepto de honorarios, la
suma de P2,000.00;
(g) Ordena el sobreseimiento de esta demanda, por insuficiencia de pruebas, en tanto
en cuanto se refiere al demandado Juan Depra;
(h) Ordena el sobreseimiento de la reconvencion de los demandados por falta de
pruebas;
(i) Con las costas contra del demandado, Casteel.
The defendant Casteel filed a petition for relief from the foregoing decision, alleging, inter alia,
lack of knowledge of the order of the court a quo setting the case for trial. The petition,
however, was denied by the lower court in its order of May 21, 1956, the pertinent portion of
which reads as follows:
The duty of Atty. Ruiz, was not to inquire from the Clerk of Court whether the trial of
this case has been transferred or not, but to inquire from the presiding Judge,
particularly because his motion asking the transfer of this case was not set for hearing
and was not also acted upon.
Atty. Ruiz knows the nature of the order of this Court dated March 21, 1956, which
reads as follows:
Upon petition of the plaintiff without any objection on the part of the
defendants, the hearing of this case is hereby transferred to May 2 and 3, 1956,
at 8:30 o'clock in the morning.

This case was filed on April 3, 1951, and under any circumstance this Court will
not entertain any other transfer of the hearing of this case, and if the parties will
not be ready on the day set for hearing, the Court will take necessary steps for
the final disposition of this case.
In view of the order above-quoted, the Court will not accede to any transfer of this case
and the duty of Atty. Ruiz is no other than to be present in the Sala of this Court and to
call the attention of the same to the existence of his motion for transfer.
Petition for relief from judgment filed by Atty. Ruiz in behalf of the defendant, not well
taken, the same is hereby denied.
Dissatisfied with the said ruling, Casteel appealed to the Court of Appeals which certified the
case to us for final determination on the ground that it involves only questions of law.
Casteel raises the following issues:
(1) Whether the lower court committed gross abuse of discretion when it ordered
reception of the appellees' evidence in the absence of the appellant at the trial on May
2, 1956, thus depriving the appellant of his day in court and of his property without due
process of law;
(2) Whether the lower court committed grave abuse of discretion when it denied the
verified petition for relief from judgment filed by the appellant on May 11, 1956 in
accordance with Rule 38, Rules of Court; and
(3) Whether the lower court erred in ordering the issuance ex parte of a writ of
preliminary injunction against defendant-appellant, and in not dismissing appellees'
complaint.
1. The first and second issues must be resolved against the appellant.
The record indisputably shows that in the order given in open court on March 21, 1956, the
lower court set the case for hearing on May 2 and 3, 1956 at 8:30 o'clock in the morning and
empathically stated that, since the case had been pending since April 3, 1951, it would not
entertain any further motion for transfer of the scheduled hearing.
An order given in open court is presumed received by the parties on the very date and time of
promulgation,1 and amounts to a legal notification for all legal purposes.2 The order of March
21, 1956, given in open court, was a valid notice to the parties, and the notice of hearing dated
April 21, 1956 or one month thereafter, was a superfluity. Moreover, as between the order of
March 21, 1956, duly promulgated by the lower court, thru Judge Fernandez, and the notice of
hearing signed by a "special deputy clerk of court" setting the hearing in another branch of the
same court, the former's order was the one legally binding. This is because the incidents of
postponements and adjournments are controlled by the court and not by the clerk of court,
pursuant to section 4, Rule 31 (now sec. 3, Rule 22) of the Rules of Court.

Much less had the clerk of court the authority to interfere with the order of the court or to
transfer the cage from one sala to another without authority or order from the court where the
case originated and was being tried. He had neither the duty nor prerogative to re-assign the
trial of the case to a different branch of the same court. His duty as such clerk of court, in so far
as the incident in question was concerned, was simply to prepare the trial calendar. And this
duty devolved upon the clerk of court and not upon the "special deputy clerk of court" who
purportedly signed the notice of hearing.
It is of no moment that the motion for postponement had the conformity of the appellees'
counsel. The postponement of hearings does not depend upon agreement of the parties, but
upon the court's discretion.3
The record further discloses that Casteel was represented by a total of 12 lawyers, none of
whom had ever withdrawn as counsel. Notice to Atty. Ruiz of the order dated March 21, 1956
intransferably setting the case for hearing for May 2 and 3, 1956, was sufficient notice to all the
appellant's eleven other counsel of record. This is a well-settled rule in our jurisdiction.4
It was the duty of Atty. Ruiz, or of the other lawyers of record, not excluding the appellant
himself, to appear before Judge Fernandez on the scheduled dates of hearing Parties and their
lawyers have no right to presume that their motions for postponement will be granted.5 For
indeed, the appellant and his 12 lawyers cannot pretend ignorance of the recorded fact that
since September 24, 1953 until the trial held on May 2, 1956, the case was under the
advisement of Judge Fernandez who presided over Branch I. There was, therefore, no necessity
to "re-assign" the same to Branch II because Judge Fernandez had exclusive control of said case,
unless he was legally inhibited to try the case and he was not.
There is truth in the appellant's contention that it is the duty of the clerk of court not of the
Court to prepare the trial calendar. But the assignment or reassignment of cases already
pending in one sala to another sala, and the setting of the date of trial after the trial calendar
has been prepared, fall within the exclusive control of the presiding judge.
The appellant does not deny the appellees' claim that on May 2 and 3, 1956, the office of the
clerk of court of the Court of First Instance of Davao was located directly below Branch I. If the
appellant and his counsel had exercised due diligence, there was no impediment to their going
upstairs to the second storey of the Court of First Instance building in Davao on May 2, 1956 and
checking if the case was scheduled for hearing in the said sala. The appellant after all admits
that on May 2, 1956 his counsel went to the office of the clerk of court.
The appellant's statement that parties as a matter of right are entitled to notice of trial, is
correct. But he was properly accorded this right. He was notified in open court on March 21,
1956 that the case was definitely and intransferably set for hearing on May 2 and 3, 1956 before
Branch I. He cannot argue that, pursuant to the doctrine in Siochi vs. Tirona,6 his counsel was
entitled to a timely notice of the denial of his motion for postponement. In the cited case the
motion for postponement was the first one filed by the defendant; in the case at bar, there had
already been a series of postponements. Unlike the case at bar, the Siochi case was not
intransferably set for hearing. Finally, whereas the cited case did not spend for a long time, the
case at bar was only finally and intransferably set for hearing on March 21, 1956 after almost
five years had elapsed from the filing of the complaint on April 3, 1951.

The pretension of the appellant and his 12 counsel of record that they lacked ample time to
prepare for trial is unacceptable because between March 21, 1956 and May 2, 1956, they had
one month and ten days to do so. In effect, the appellant had waived his right to appear at the
trial and therefore he cannot be heard to complain that he has been deprived of his property
without due process of law.7 Verily, the constitutional requirements of due process have been
fulfilled in this case: the lower court is a competent court; it lawfully acquired jurisdiction over
the person of the defendant (appellant) and the subject matter of the action; the defendant
(appellant) was given an opportunity to be heard; and judgment was rendered upon lawful
hearing.8
2. Finally, the appellant contends that the lower court incurred an error in ordering the
issuance ex parte of a writ of preliminary injunction against him, and in not dismissing the
appellee's complaint. We find this contention meritorious.
Apparently, the court a quo relied on exhibit A the so-called "contract of service" and the
appellees' contention that it created a contract of co-ownership and partnership between
Inocencia Deluao and the appellant over the fishpond in question.
Too well-settled to require any citation of authority is the rule that everyone is conclusively
presumed to know the law. It must be assumed, conformably to such rule, that the parties
entered into the so-called "contract of service" cognizant of the mandatory and prohibitory laws
governing the filing of applications for fishpond permits. And since they were aware of the said
laws, it must likewise be assumed in fairness to the parties that they did not intend to
violate them. This view must perforce negate the appellees' allegation that exhibit A created a
contract of co-ownership between the parties over the disputed fishpond. Were we to admit the
establishment of a co-ownership violative of the prohibitory laws which will hereafter be
discussed, we shall be compelled to declare altogether the nullity of the contract. This would
certainly not serve the cause of equity and justice, considering that rights and obligations have
already arisen between the parties. We shall therefore construe the contract as one of
partnership, divided into two parts namely, a contract of partnership to exploit the fishpond
pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to
divide the fishpond between them after such award. The first is valid, the second illegal.
It is well to note that when the appellee Inocencia Deluao and the appellant entered into the socalled "contract of service" on November 25, 1949, there were two pending applications over
the fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and
Natural Resources after it was disallowed by the Director of Fisheries on October 25, 1949. The
other was Felipe Deluao's application over the same area which was likewise rejected by the
Director of Fisheries on November 29, 1949, refiled by Deluao and later on withdrawn by him by
letter dated March 15, 1950 to the Secretary of Agriculture and Natural Resources. Clearly,
although the fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was
the holder of a fishpond permit over the area. But be that as it may, they were not however
precluded from exploiting the fishpond pending resolution of Casteel's appeal or the approval of
Deluao's application over the same area whichever event happened first. No law, rule or
regulation prohibited them from doing so. Thus, rather than let the fishpond remain idle they
cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not
to form a co-ownership but to establish a partnership Inocencia Deluao as capitalist partner
and Casteel as industrial partner the ultimate undertaking of which was to divide into two
equal parts such portion of the fishpond as might have been developed by the amount extended
by the plaintiffs-appellees, with the further provision that Casteel should reimburse the
expenses incurred by the appellees over one-half of the fishpond that would pertain to him. This
can be gleaned, among others, from the letter of Casteel to Felipe Deluao on November 15,
1949, which states, inter alia:
... [W]ith respect to your allowing me to use your money, same will redound to your
benefit because you are the ones interested in half of the work we have done so far,
besides I did not insist on our being partners in my fishpond permit, but it was you
"Tatay" Eping the one who wanted that we be partners and it so happened that we
became partners because I am poor, but in the midst of my poverty it never occurred to
me to be unfair to you. Therefore so that each of us may be secured, let us have a
document prepared to the effect that we are partners in the fishpond that we caused to
be made here in Balasinon, but it does not mean that you will treat me as one of your
"Bantay" (caretaker) on wage basis but not earning wages at all, while the truth is that
we are partners. In the event that you are not amenable to my proposition and consider
me as "Bantay" (caretaker) instead, do not blame me if I withdraw all my cases and be
left without even a little and you likewise.
(emphasis supplied)9
Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing
their partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which,
although denominated a "contract of service," was actually the memorandum of their
partnership agreement. That it was not a contract of the services of the appellant, was admitted
by the appellees themselves in their letter10 to Casteel dated December 19, 1949 wherein they
stated that they did not employ him in his (Casteel's) claim but because he used their money in
developing and improving the fishpond, his right must be divided between them. Of course,
although exhibit A did not specify any wage or share appertaining to the appellant as industrial
partner, he was so entitled this being one of the conditions he specified for the execution of
the document of partnership.11
Further exchanges of letters between the parties reveal the continuing intent to divide the
fishpond. In a letter,12dated March 24, 1950, the appellant suggested that they divide the
fishpond and the remaining capital, and offered to pay the Deluaos a yearly installment of
P3,000 presumably as reimbursement for the expenses of the appellees for the development
and improvement of the one-half that would pertain to the appellant. Two days later, the
appellee Felipe Deluao replied,13expressing his concurrence in the appellant's suggestion and
advising the latter to ask for a reconsideration of the order of the Director of Fisheries
disapproving his (appellant's) application, so that if a favorable decision was secured, then they
would divide the area.
Apparently relying on the partnership agreement, the appellee Felipe Deluao saw no further
need to maintain his petition for the reinvestigation of Casteel's application. Thus by
letter14 dated March 15, 1950 addressed to the Secretary of Agriculture and Natural Resources,
he withdrew his petition on the alleged ground that he was no longer interested in the area, but

stated however that he wanted his interest to be protected and his capital to be reimbursed by
the highest bidder.
The arrangement under the so-called "contract of service" continued until the decisions both
dated September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in
DANR Cases 353 and 353-B. This development, by itself, brought about the dissolution of the
partnership. Moreover, subsequent events likewise reveal the intent of both parties to
terminate the partnership because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a
partnership, "... any event which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership." The approval of the appellant's
fishpond application by the decisions in DANR Cases 353 and 353-B brought to the fore several
provisions of law which made the continuation of the partnership unlawful and therefore
caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee)
from transferring or subletting the fishpond granted to him, without the previous consent or
approval of the Secretary of Agriculture and Natural Resources.15 To the same effect is Condition
No. 3 of the fishpond permit which states that "The permittee shall not transfer or sublet all or
any area herein granted or any rights acquired therein without the previous consent and
approval of this Office." Parenthetically, we must observe that in DANR Case 353-B, the permit
granted to one of the parties therein, Leoncio Aradillos, was cancelled not solely for the reason
that his permit covered a portion of the area included in the appellant's prior fishpond
application, but also because, upon investigation, it was ascertained thru the admission of
Aradillos himself that due to lack of capital, he allowed one Lino Estepa to develop with the
latter's capital the area covered by his fishpond permit F-289-C with the understanding that he
(Aradillos) would be given a share in the produce thereof.16
Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides
that
The lessee shall not assign, encumber, or sublet his rights without the consent of the
Secretary of Agriculture and Commerce, and the violation of this condition shall avoid
the contract; Provided, That assignment, encumbrance, or subletting for purposes of
speculation shall not be permitted in any case:Provided, further, That nothing contained
in this section shall be understood or construed to permit the assignment,
encumbrance, or subletting of lands leased under this Act, or under any previous Act, to
persons, corporations, or associations which under this Act, are not authorized to lease
public lands.
Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural
Resources issued in August 1937, prohibits a transfer or sublease unless first approved by the
Director of Lands and under such terms and conditions as he may prescribe. Thus, it states:
When a transfer or sub-lease of area and improvement may be allowed. If the
permittee or lessee had, unless otherwise specifically provided, held the permit or lease

and actually operated and made improvements on the area for at least one year, he/she
may request permission to sub-lease or transfer the area and improvements under
certain conditions.
(a) Transfer subject to approval. A sub-lease or transfer shall only be valid when first
approved by the Director under such terms and conditions as may be prescribed,
otherwise it shall be null and void. A transfer not previously approved or reported shall
be considered sufficient cause for the cancellation of the permit or lease and forfeiture
of the bond and for granting the area to a qualified applicant or bidder, as provided in
subsection (r) of Sec. 33 of this Order.
Since the partnership had for its object the division into two equal parts of the fishpond
between the appellees and the appellant after it shall have been awarded to the latter, and
therefore it envisaged the unauthorized transfer of one-half thereof to parties other than the
applicant Casteel, it was dissolved by the approval of his application and the award to him of the
fishpond. The approval was an event which made it unlawful for the business of the partnership
to be carried on or for the members to carry it on in partnership.
The appellees, however, argue that in approving the appellant's application, the Secretary of
Agriculture and Natural Resources likewise recognized and/or confirmed their property right to
one-half of the fishpond by virtue of the contract of service, exhibit A. But the untenability of
this argument would readily surface if one were to consider that the Secretary of Agriculture
and Natural Resources did not do so for the simple reason that he does not possess the
authority to violate the aforementioned prohibitory laws nor to exempt anyone from their
operation.
However, assuming in gratia argumenti that the approval of Casteel's application, coupled with
the foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their
partnership, succeeding events reveal the intent of both parties to terminate the partnership by
refusing to share the fishpond with the other.
On December 27, 1950 Casteel wrote17 the appellee Inocencia Deluao, expressing his desire to
divide the fishpond so that he could administer his own share, such division to be subject to the
approval of the Secretary of Agriculture and Natural Resources. By letter dated December 29,
1950,18 the appellee Felipe Deluao demurred to Casteel's proposition because there were
allegedly no appropriate grounds to support the same and, moreover, the conflict over the
fishpond had not been finally resolved.
The appellant wrote on January 4, 1951 a last letter19 to the appellee Felipe Deluao wherein the
former expressed his determination to administer the fishpond himself because the decision of
the Government was in his favor and the only reason why administration had been granted to
the Deluaos was because he was indebted to them. In the same letter, the appellant forbade
Felipe Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply
thereto, Felipe Deluao wrote a letter20 dated January 5, 1951 in which he reiterated his refusal
to grant the administration of the fishpond to the appellant, stating as a ground his belief "that
only the competent agencies of the government are in a better position to render any equitable
arrangement relative to the present case; hence, any action we may privately take may not
meet the procedure of legal order."

Inasmuch as the erstwhile partners articulated in the aforecited letters their respective
resolutions not to share the fishpond with each other in direct violation of the undertaking
for which they have established their partnership each must be deemed to have expressly
withdrawn from the partnership, thereby causing its dissolution pursuant to art. 1830(2) of the
Civil Code which provides, inter alia, that dissolution is caused "by the express will of any
partner at any time."
In this jurisdiction, the Secretary of Agriculture and Natural Resources possesses executive and
administrative powers with regard to the survey, classification, lease, sale or any other form of
concession or disposition and management of the lands of the public domain, and, more
specifically, with regard to the grant or withholding of licenses, permits, leases and contracts
over portions of the public domain to be utilized as fishponds.21, Thus, we held in Pajo, et al. vs.
Ago, et al. (L-15414, June 30, 1960), and reiterated in Ganitano vs. Secretary of Agriculture and
Natural Resources, et al.
(L-21167, March 31, 1966), that
... [T]he powers granted to the Secretary of Agriculture and Commerce (Natural
Resources) by law regarding the disposition of public lands such as granting of licenses,
permits, leases, and contracts, or approving, rejecting, reinstating, or cancelling
applications, or deciding conflicting applications, are all executive and administrative in
nature. It is a well-recognized principle that purely administrative and discretionary
functions may not be interfered with by the courts (Coloso v. Board of Accountancy, G.R.
No. L-5750, April 20, 1953). In general, courts have no supervising power over the
proceedings and action of the administrative departments of the government. This is
generally true with respect to acts involving the exercise of judgment or discretion, and
findings of fact. (54 Am. Jur. 558-559) Findings of fact by an administrative board or
official, following a hearing, are binding upon the courts and will not be disturbed
except where the board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his duty or
with grave abuse of discretion... (emphasis supplied)
In the case at bar, the Secretary of Agriculture and Natural Resources gave due course to the
appellant's fishpond application 1717 and awarded to him the possession of the area in
question. In view of the finality of the Secretary's decision in DANR Cases 353 and 353-B, and
considering the absence of any proof that the said official exceeded his statutory authority,
exercised unconstitutional powers, or acted with arbitrariness and in disregard of his duty, or
with grave abuse of discretion, we can do no less than respect and maintain unfettered his
official acts in the premises. It is a salutary rule that the judicial department should not dictate
to the executive department what to do with regard to the administration and disposition of the
public domain which the law has entrusted to its care and administration. Indeed, courts cannot
superimpose their discretion on that of the land department and compel the latter to do an act
which involves the exercise of judgment and discretion.22
Therefore, with the view that we take of this case, and even assuming that the injunction was
properly issued because present all the requisite grounds for its issuance, its continuation, and,
worse, its declaration as permanent, was improper in the face of the knowledge later acquired
by the lower court that it was the appellant's application over the fishpond which was given due
course. After the Secretary of Agriculture and Natural Resources approved the appellant's

application, he became to all intents and purposes the legal permittee of the area with the
corresponding right to possess, occupy and enjoy the same. Consequently, the lower court erred
in issuing the preliminary mandatory injunction. We cannot overemphasize that an injunction
should not be granted to take property out of the possession and control of one party and place
it in the hands of another whose title has not been clearly established by law.23
However, pursuant to our holding that there was a partnership between the parties for the
exploitation of the fishpond before it was awarded to Casteel, this case should be remanded to
the lower court for the reception of evidence relative to an accounting from November 25, 1949
to September 15, 1950, in order for the court to determine (a) the profits realized by the
partnership, (b) the share (in the profits) of Casteel as industrial partner, (e) the share (in the
profits) of Deluao as capitalist partner, and (d) whether the amounts totalling about P27,000
advanced by Deluao to Casteel for the development and improvement of the fishpond have
already been liquidated. Besides, since the appellee Inocencia Deluao continued in possession
and enjoyment of the fishpond even after it was awarded to Casteel, she did so no longer in the
concept of a capitalist partner but merely as creditor of the appellant, and therefore, she must
likewise submit in the lower court an accounting of the proceeds of the sales of all the fishes
harvested from the fishpond from September 16, 1950 until Casteel shall have been finally given
the possession and enjoyment of the same. In the event that the appellee Deluao has received
more than her lawful credit of P27,000 (or whatever amounts have been advanced to Casteel),
plus 6% interest thereon per annum, then she should reimburse the excess to the appellant.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby
rendered: (1) dissolving the injunction issued against the appellant, (2) placing the latter back in
possession of the fishpond in litigation, and (3) remanding this case to the court of origin for the
reception of evidence relative to the accounting that the parties must perforce render in the
premises, at the termination of which the court shall render judgment accordingly. The
appellant's counterclaim is dismissed. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Capistrano,
JJ., concur.
Footnotes
1

Landicho vs. Tan, 87 Phil. 601.

Venturina vs. Court of First Instance of Nueva Ecija, et al., 75 Phil. 804.

Philippine Air Lines, Inc. vs. Ceniza, et al., 93 Phil. 1011.

Ortega, et al. vs. Pacho, 98 Phil. 618.

Bautista vs. Municipal Council of Mandaluyong, et al., 98 Phil. 409; Fenis, et al. vs.
Cordero, et al., 98 Phil. 335; Parina vs. Cobangcobang, et al., L-8398, March 21, 1956.
6

99 Phil. 462.

Siojo vs. Tecson, 88 Phil. 531; Sandejas vs. Robles, 81 Phil. 421; Pajarillo vs. Manahan,
99 Phil. 1000.
8

Banco Espaol vs. Palanca, 37 Phil. 921..

Quoted in full in the Record on Appeal, pp. 444-445.

10

Quoted in full in the Record on Appeal, pp. 168-169.

11

See Casteel's letter to the Deluaos dated November 15, 1949, supra.

12

Quoted in full in the Record on Appeal, pp. 445-446.

13

Quoted in full in the Record on Appeal, pp. 169-170.

14

Quoted in full in the Record on Appeal, pp. 170-171.

15

Memorandum Order No. 4, January 24, 1933, Department of Agriculture and

Commerce.
16

See the full text of the decision in the Record on Appeal, pp. 27-34..

17

Quoted in full in the Record on Appeal, pp. 457-458.

18

Quoted in full in the Record on Appeal, pp. 458-459.

19

Quoted in full in the Record on Appeal, pp. 459-460.

20

Quoted in full in the Record on Appeal, pp. 460-461.

21

See Secs. 3 and 4 of C.A. 141, the Public Land Act, and Secs. 3 and 4 of Public Act 4003,
the Fisheries Act.
22

23

Gonzales vs. Director of Lands, 43 Phil. 227.

Devea vs. Arbes, 13 Phil. 273; Palafox vs. Madamba, 19 Phil. 444; Evangelista vs.
Pedrenos, 27 Phil. 648; Gilchrist vs. Cuddy, 29 Phil. 542; Asombra vs. Dorado &
Gesmundo, 36 Phil. 883; Golding vs. Balatbat, 36 Phil. 942; Lacassagne vs. Chapuis, 144
U.S. 119, 12 Sup. Ct. 659, 36
L. Ed. 368; Roy vs. Moore, 85 Conn. 159, 82 At. 233.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 21639

September 25, 1924

ALBERT F. KIEL, plaintiff-appellee,

vs.
ESTATE OF P. S. SABERT, defendant-appellant.
J. F. Yeager for appellant.
J. S. Alano for appellee.
MALCOLM, J.:
This action relates to the legal right of Albert F. Kiel to secure from the estate of P. S. Sabert the
sum of P20,000, on a claim first presented to the commissioners and disallowed, then on appeal
to the Court of First Instance allowed, and ultimately the subject-matter of the appeal taken to
this court.
A skeletonized statement of the case and the facts based on the complaint, the findings of the
trial judge, and the record, may be made in the following manner:
In 1907, Albert F. Kiel along with William Milfeil commenced to work on certain public lands
situated in the municipality of Parang, Province of Cotabato, known as Parang Plantation
Company. Kiel subsequently took over the interest of Milfeil. In 1910, Kiel and P. S. Sabert
entered into an agreement to develop the Parang Plantation Company. Sabert was to furnish
the capital to run the plantation and Kiel was to manage it. They were to share and share alike in
the property. It seems that this partnership was formed so that the land could be acquired in
the name of Sabert, Kiel being a German citizen and not deemed eligible to acquire public lands
in the Philippines.
By virtue of the agreement, from 1910 to 1917, Kiel worked upon and developed the plantation.
During the World War, he was deported from the Philippines.
On August 16, 1919, five persons, including P. S. Sabert, organized the Nituan Plantation
Company, with a subscribed capital of P40,000. On April 10, 1922, P. S. Sabert transferred all of
his rights in two parcels of land situated in the municipality of Parang, Province of Cotabato,
embraced within his homestead application No. 21045 and his purchase application No. 1048, in
consideration of the sum of P1, to the Nituan Plantation Company.
In this same period, Kiel appears to have tried to secure a settlement from Sabert. At least in a
letter dated June 6, 1918, Sabert wrote Kiel that he had offered "to sell all property that I have
for P40,000 or take in a partner who is willing to develop the plantation, to take up the K. & S.
debt no matter which way I will straiten out with you." But Sabert's death came before any

amicable arrangement could be reached and before an action by Kiel against Sabert could be
decided. So these proceedings against the estate of Sabert.
In this court, the defendant-appellant assigns the following errors:
The lower court erred
(1) In finding this was an action to establish a resulting trust in land.
(2) In finding a resulting trust in land could have been established in public lands in favor
of plaintiff herein who was an alien subject at the same time said alleged resulting trust
was created.
(3) In finding a resulting trust in land had been established by the evidence in the case.
(4) In admitting the testimony of the plaintiff herein.
(5) In admitting the testimony of William Milfeil, John C. Beyersdorfer, Frank R. Lasage,
Oscar C. Butler and Stephen Jurika with reference to alleged statements and
declarations of the deceased P. S. Sabert.
(6) In finding any copartnership existed between plaintiff and the deceased Sabert.
(7) In rendering judgment for the plaintiff herein.
Errors 1, 2, and 3, relating to resulting trusts. These three errors discussing the same subject
may be resolved together. In effect, as will soon appear, we reach the conclusion that both
parties were in error in devoting so much time to the elaboration of these questions, and that a
ruling on the same is not needed.
It is conceivable, that the facts in this case could have been so presented to the court by means
of allegations in the complaint, as to disclose characteristics of a resulting trust. But the
complaint as framed asks for a straight money judgment against an estate. In no part of the
complaint did plaintiff allege any interest in land, claim any interest in land, or pretend to
establish a resulting trust in land. That the plaintiff did not care to press such an action is
demonstrated by the relation of the fact of alienage with the rule, that a trust will not be
created when, for the purpose of evading the law prohibiting one from taking or holding real
property, he takes a conveyance thereof in the name of a third person. (26 R. C. L., 1214-1222;
Leggett vs. Dubois [1835], 5 Paige, N. Y., 114; 28 Am. Dec., 413.)
The parties are wrong in assuming that the trial judge found that this was an action to establish
a resulting trust in land. In reality, all that the trial judge did was to ground one point of his
decision on an authority coming from the Supreme Court of California, which discussed the
subject of resulting trusts.
Error 4, relating to the admission of testimony of the plaintiff herein. Well taken.

The Code of Civil Procedure in section 383, No. 7, names as incompetent witnesses, parties to an
action or proceeding against an executor or administrator of a deceased person upon a claim or
demand against the estate of such deceased person, who "cannot testify as to any matter of fact
occuring before the death of such deceased person." But the trial judge, misled somewhat by
the decision of the Supreme Court of California in the city ofMyers vs. Reinstein ([1885], 67 Cal.,
89), permitted this testimony to go in, whereas if the decision had been read more carefully, it
would have been noted that "the action was not on a claim or demand against the estate of
Reinstein." Here this is exactly the situation which confronts us.
The case of Maxilom vs. Tabotabo ([1907], 9 Phil., 390), is squarely on all fours with the case at
bar. It was there held that "A party to an action against an executor or administrator of a
deceased person, upon a claim against the estate of the latter, is absolutely prohibited by law
from giving testimony concerning such claim or demand as to anything that occurred before the
death of the person against whose estate the action is prosecuted."
Error 5, relating to the testimony of five witnesses with reference to alleged statements and
declarations of the deceased P. S. Sabert. Not well taken.
By section 282 of the Code of Civil Procedure, the declaration, act, or omission of a deceased
person having sufficient knowledge of the subject, against his pecuniary interest, is admissible
as evidence to that extent against his successor in interest. By section 298, No. 4, of the same
Code, evidence may be given up a trial of the following facts: ". . . the act or declaration of a
deceased person, done or made against his interest in respect to his real property."
(See Leonardo vs. Santiago [1907], 7 Phil., 401.) The testimony of these witnesses with reference
to the acts or declarations of Sabert was, therefore, properly received for whatever they might
be worth.
Error 6, relating to the existence of a copartnership between Kiel and Sabert. Not well taken.
No partnership agreement in writing was entered into by Kiel and Sabert. The question
consequently is whether or not the alleged verbal copartnership formed by Kiel and Sabert has
been proved, if we eliminate the testimony of Kiel and only consider the relevant testimony of
other witnesses. In performing this task, we are not unaware of the rule of partnership that the
declarations of one partner, not made in the presence of his copartner, are not competent to
prove the existence of a partnership between them as against such other partner, and that the
existence of a partnership cannot be established by general reputation, rumor, or hearsay.
(Mechem on Partnership, sec. 65; 20 R. C. L., sec. 53; Owensboro Wagon Company vs. Bliss
[1901], 132 Ala., 253.)
The testimony of the plaintiff's witnesses, together with the documentary evidence, leaves the
firm impression with us that Kiel and Sabert did enter into a partnership, and that they were to
share equally. Applying the tests as to the existence of partnership, we feel that competent
evidence exists establishing the partnership. Even more primary than any of the rules of
partnership above announced, is the injunction to seek out the intention of the parties, as
gathered from the facts and as ascertained from their language and conduct, and then to give
this intention effect. (Giles vs. Vette [1924], 263 U. S., 553.)

Error 7, relating to the judgment rendered for the plaintiff. Well taken in part.
The judgment handed down, it will be remembered, permitted the plaintiff to recover from the
estate the full amount claimed, presumably on the assumption that Sabert having sold by
property to the Nituan Plantation Company for P40,000, Kiel should have one-half of the same,
or P20,000. There is, however, extant in the record absolutely no evidence as to the precise
amount received by Sabert from the sale of this particular land. If it is true that Sabert sold all
his land to the Nituan Plantation Company for P40,000, although this fact was not proven, what
part of the P40,000 would correspond to the property which belonged to Kiel and Sabert under
their partnership agreement? It impresses us further that Kiel under the facts had no standing in
court to ask for any part of the land and in fact he does not do so; his only legal right is to ask for
what is in effect an accounting with reference to its improvements and income as of 1917 when
Sabert became the trustee of the estate on behalf of Kiel.
As we have already intimated, we do not think that Kiel is entitled to any share in the land itself,
but we are of the opinion that he has clearly shown his right to one-half of the value of the
improvements and personal property on the land as to the date upon which he left the
plantation. Such improvements and personal property include buildings, coconut palms, and
other plantings, cattle and other animals, implements, fences, and other constructions, as well
as outstanding collectible credits, if any, belonging to the partnership. The value of these
improvements and of the personal property cannot be ascertained from the record and the case
must therefore be remanded for further proceedings.
In resume, we disregard errors 1, 2, and 3, we find well taken, errors 4 and 7, and we find not
well taken, errors 5 and 6.
The judgment appealed from is set aside and the record is returned to the lower court where
the plaintiff, if he so desires, may proceed further to prove his claim against the estate of P. S.
Sabert. Without costs. So ordered.
Johnson, Street, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 19892

September 6, 1923

TECK SEING AND CO., LTD., petitioner-appellee.

SANTIAGO JO CHUNG, ET AL., partners,
vs.
PACIFIC COMMERCIAL COMPANY, ET AL., creditors-appellants.
Del Rosario & Del Rosario and Block, Johnston and Greenbaum for appellants.
F. V. Arias for appellants Jo Ibec and Go Tayco.
No appearance for petitioner and appellee.
Jose A. Espiritu and Felipe Ysmael as amici curiae.
MALCOLM, J.:
Following the presentation of an application to be adjudged an insolvent by the "Sociedad
Mercantil, Teck Seing & Co., Ltd.," the creditors, the Pacific Commercial Company, Piol &
Company, Riu Hermanos, and W. H. Anderson & Company, filed a motion in which the Court
was prayed to enter an order: "(A) Declaring the individual partners as described in paragraph 5
parties to this proceeding; (B) to require each of said partners to file an inventory of his property
in the manner required by section 51 of Act No. 1956; and (C) that each of said partners be
adjudicated insolvent debtors in this proceeding." The trial judge first granted the motion, but,
subsequently, on opposition being renewed, denied it. It is from this last order that an appeal
was taken in accordance with section 82 of the Insolvency Law.
There has been laid before us for consideration and decision a question of some importance and
of some intricacy. The issue in the case relates to a determination of the nature of the
mercantile establishment which operated under the name of Teck Seing & co., Ltd., and this
issue requires us to look into, and analyze, the document constituting Teck Seing & Co., Ltd. It
reads:
ESCRITURA DE SOCIEDAD MERCANTIL LIMITADA
Sepan todos por la presente:
Que nosotros, Santiago Jo Chung Cang, mayor de edad comerciante, vecino y residente
del municipio de Tabogon Provincia de Cebu, Islas Filipinas, Go Tayco, mayor de edad,
comerciante, vecino y residente del municipio de Cebu Provincia de Cebu, Islas Filipinas,
Yap Gueco, mayor de edad, comerciante, vecino y residente del municipio y Provincia de
Cebu, Islas Filipinas, Lim Yogsing, mayor de edad comerciante, vecino y residente del
municipio de Cebu, Provincia de Cebu, Islas Filipinas, y Jo Ybec, mayor de edad,
comerciante, vecino y residente del municipio de Jagna, Provincia de Bohol, Islas

Filipinas, hacemos constar por la presente, que constituimos y formamos una sociedad
mercantil limitada, bajo las leyes vigentes en las Islas Filipinas y para ser registrada de
acuerdo con los reglamentos vigentes del Codigo de Comercio en Filipinas.
Que la razon social se denominara "Teck Seing & Co., Ltd." y tendra su domicilio
principal en la Calle Magallanes No. 94, de la Ciudad de Cebu, Provincia de Cebu, Islas
Filipinas.
Que el capital social sera de treinta mil pesos (P30,000) moneda legal de las Islas
Filipinas, dividido en cinco acciones de a P6,000 como sigue:
Santiago Jo Chung Cang . . . . . . . . . . . . .

P6,000.00

Go Tayco . . . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Yap Gueco . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Jo Ybec . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Lim Yogsing . . . . . . . . . . . . . . . . . . . . . . .

6,000.00

Total . . . . . . . . . . . . . . . . . . . . . .

30,000.00

Que la duracion de la sociedad sera la de seis aos, a contar de la fecha de esta

escritura, pudiendo prorrogarse este tiempo a discrecion unanime de todos los
accionistas.
El objeto de la sociedad sera la compra y venta de mercaderias en general.
El administrador o administradores de la sociedad podran, previa conformidad de los
accionistas, establecer cuantas sucursales o establecimientos considere necesarios para
facilitar sus negocios y el mayor desarrollo del comercio a que se dedica la sociedad,
verificando todas las operaciones que crean convenientes para el fomento de su capital.
Las ganancias o perdidas que resultaren durante cada ao comercial, se distribuiran
proporcionalmente entre los accionistas, de acuerdo con el capital aportado por cada
uno de los mismos.
Las ganancias que resultaren en cada ao comercial, si resultaren algunas ganancias, no
podran ser retiradas pors los accionistas hasta dentro del termino de tres aos a contar
de la fecha del primer balance anual del negocio, quedadno por tanto estas ganancias
en reserva, para ampliar el capital aportado opor los accionistas y ampliar por tanto la
esfera de accion emprendida por la misma sociedad. Al pasar o expirar el termino de
tres aos, cada accionista podra retirar o depositar en poder de la sociedad, las
ganancias que le debiera corresponder durante dicho termino de tres aos.
Que los accionistas no podran extraer ni disponer en ningun tiempo cualesquiera
cantidad o cantidades de la sociedad, que haya sido aportado por los mismos, para

atender sus gastos particulares ni aun pagando redito alguno sobre la cantidad que
intenen disponer o extraer de dicha sociedad.
El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr. Vicente Jocson Jo, la
administracion de la Compaia, quienes podran usar indistintamente la firma social,
quedando por consiguiente autorizados amobs para hacer en nombre de ella toda calse
de operaciones, negocios y especulaciones mercantiles, practicando judicial y extrajudicialment cuantos actos se requieran para el bien de la sociedad, nombrar
procuradores o abogados para reclamaciones y cobro de creditos y proponer ante los
tribunales las demandas, convenios, transacciones y excepciones procdentes. En caso de
ausencia, enfermedad o cualquier otro impedimento del accionista administrador Sr.
Lim Yogsing, este podra conferir poder general o especial al accionista que crea
conveniente para que en union del administrador auxiliar Sr. Vicente Jocson Jo,
pudieran ambos administrar convenientemente los negocios de la sociedad. Que los
administradores podran tener los empleados necesarios para el mejor que debieran
percibir dichos empleados por servicios rendidos a la sociedad.
Que ambos administradores podran disponer de mil discientos pesos (P1,200) moneda
filipina, anualmente, para sus gastos particulares, siendo dicha cantidad de P1,200 la
que corresponde a cada uno de dichos administradores, como emolumentos o salarios
que se les asigna a cas uno, por sus trabajos en la administracion de la
sociedad. Entendiendose, que, los accionistas podran disponer cada fin de aola
gratificacion quese concedera a cada administrador, si los negocios del ao fueran
boyantes y justifiquen la concesion de una gratificacion especial, aparte del salario aqui
dispuesto y especificado.
Que pasado el termino de seis aos, y es de la conveniencia de los accionistas la
continuacion del negocio de esta sociedad, dicho termino sera prorrogado por igual
numero de aos, sin necesidas del otorgamiento de ulteriores escrituras, quedando la
presente en vigor hasta el termino dispuesto por todos los accionistas.
Que las diferencias que pudieran suscitarse entre los accionistas, bien sea por razon de
lo estipulado en esta en ella comprendidos, se procurara arreglar entre los mismos
amistosa y extrajudicialmente, y si no se consiguiere un arreglo de este modo, dichos
accionistas nombraran un arbitro, cuya resolucion estan todos obligados y por la
presente se comprometen y se obligan a acatarla en todas sus partes, renunciando
ulteriores recursos.
En cuyos terminos dejamos formalizada esta escritura de sociedad mercantillimitada, y
prometemos cumplirla fiel y estrictamente segun los pactos que hemos establecido.
En testimonio de todo lo cual, firmamos en la Ciudad de Cebu, Provincia de Cebu, Islas
Filipinas, hoy 31 de octubre de mil novecientos diez y nueve.
(Fdos.) "LIM YOGSING
"Jo YBec por Ho Seng Sian
"SANTIAGO JO CHUNG CANG

"GO TAYCO
"YAP GUECO
Firnando en presencia de:
(Fdos.) "ATILANO LEYSON
"JULIO DIAZ
"ESTADOS UNIDOS DE AMERCA
"ISLAS FILIPINAS
"PROVINCIA DE CEBU
En el Municipio de Cebu, de la Provincia antes mencionada, I.F., hoy 31 de octubre de
1919, A.D., ante mi, Notario Publico que subscribe, comprecieron personalmente
Santiago Jo Chung Cang, Go Tayco, Yap Gueco, Lim Yogsing y Jo Ybec, representado este
ultimo por Ho Seng Sian, segun autorizacion hecha en telegrama de fecha 27 de
septiembre de 1919 que se me ha presentado en este mismo acto, de quienes doy fe de
que les conozco por ser las mismas personas que otorgaron el preinserto documento,
ratificando ant emi su contenido y manifestando ser el mismo un acto de su libre y
voluntario otorgamiento. El Sr. Santiago Jo Chung Cang me exhibio su cedula personal
expedida en Cebu, Cebu, I.F. el dia 19 de septiembre de 1919 bajo el No. H77742, Go
Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I.F., el dia 9 de octubre de
1919 bajo el No. G2042490, Yap Gueco tambien me exhibio la suya expedida en Cebu,
Cebu, I.F. el dia 20 de enero de 1919 bajo el No. F1452296, Lim Yogsing tambien me
exhibio la suya expedida en Cebu, Cebu, I.F., el dia 26 de febrero de 1919 bajo el No.
F1455662, y Ho Seng Sian representante de Jo Ybec, me exhibio su cedula personal
expedida en Cebu, Cebu, I.f. el dia 4 de febrero de 1919 bajo el No. F1453733.
Ante mi,
(Fdo.) "F.V.ARIAS
"Notario Publico
"Hasta el 1. de enero de 1920
"Asiento No. 157
Pagina No. 95 de mi
Registro Notarial
Serie 1919
Libro 2.
Presentado a las diez y cuarenta y tres minutos de la maana de hoy, segun el asiento
No. 125, pagina 9 del Tomo 1. del Libro Diario. Cebu, 11 de febrero de 1920.
(Fdo.) "QUIRICO ABETO
[SELLO] "Registrador Mercantil Ex-Officio"

Inscrito el documento que preced al folio 84 hoja No. 188, inscripcion 1.a del Tomo 3.
del Libro Registro de Sociedades Mercantiles. Cebu, 11 de febrero de 1920. Honorarios
treinta pesos con cincuenta centavos. Art. 197, Ley No. 2711, Codigo Administrativo.
(Fdo.) "QUIRICO ABETO
[SELLO] "Registrador Mercantil Ex-Officio"
Proceeding by process of elimination, it is self-evident that Teck Seing & Co., Ltd., is not a
corporation. Neither is it contended by any one that Teck Seing & Co., Ltd., is accidental
partnership denominated cuenta en participacion (joint account association).
Counsel for the petitioner and appellee described his client in once place in his opposition to the
motion of the creditors as "una verdadera sociedad anonima" (a true sociedad anonima). The
provisions of the Code of Commerce relating to sociedades anonimas were, however, repealed
by section 191 of the Corporation Law (Act No. 1459), with the exceptions the sociedades
anonimas lawfully organized at the time of the passage of the Corporation Law were recognized,
which is not our case.
The document providing for the partnership contract purported to form "una sociedad mercantil
limitada," and counsel for the petitioner's first contention was that Teck Seing & Co., Ltd., was
not "una sociedad regular colectiva, ni siquiera comanditaria, sino una sociedad mercantil
limitada." Let us see if the partnership contract created a "sociedad en comandita," or, as it is
known in English, and will hereafter be spoken of, "a limited partnership."
To establish a limited partnership there must be, at least, one general partner and the name of
the least one of the general partners must appear in the firm name. (Code of Commerce, arts.
122 [2], 146, 148.) But neither of these requirements have been fulfilled. The general rule is,
that those who seek to avail themselves of the protection of laws permitting the creation of
limited partnerships must show a substantially full compliance with such laws. A limited
partnership that has not complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the members are liable. (Mechem,
Elements of Partnership, p. 412; Gilmore, Partnership, pp. 499, 595; 20 R C. L. 1064.)
The contention of the creditors and appellants is that the partnership contract established a
general partnership.
Article 125 of the Code of Commerce provides that the articles of general copartnership must
estate the names, surnames, and domiciles of the partners; the firm name; the names, and
surnames of the partners to whom the management of the firm and the use of its signature is
instrusted; the capital which each partner contributes in cash, credits, or property, stating the
value given the latter or the basis on which their appraisement is to be made; the duration of
the copartnership; and the amounts which, in a proper case, are to be given to each managing
partner annually for his private expenses, while the succeeding article of the Code provides that
the general copartnership must transact business under the name of all its members, of several
of them, or of one only. Turning to the document before us, it will be noted that all of the
requirements of the Code have been met, with the sole exception of that relating to the

composition of the firm name. We leave consideration of this phase of the case for later
discussion.
The remaining possibility is the revised contention of counsel for the petitioners to the effect
that Teck Seing & Co., Ltd., is "una sociedad mercantil "de facto" solamente" (only a de
facto commercial association), and that the decision of the Supreme court in the case of HungMan-Yoc vs. Kieng-Chiong-Seng [1906], 6 Phil., 498), is controlling. It was this argument which
convinced the trial judge, who gave effect to his understanding of the case last cited and which
here must be given serious attention.
The decision in Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, discloses that the firm KiengChiong-Seng was not organized by means of any public document; that the partnership had not
been recorded in the mercantile registry; and that Kieng-Chiong-Seng was not proven to be the
firm name, but rather the designation of the partnership. The conclusion then was, that the
partnership in question was merely de facto and that, therefore, giving effect to the provisions
of article 120 of the Code of Commerce, the right of action was against the persons in charge of
the management of the association.
Laying the facts of the case of Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, side by side with the
facts before us, a marked difference is at once disclosed. In the cited case, the organization of
the partnership was not evidenced by any public document; here, it is by a public document. In
the cited case, the partnership naturally could not present a public instrument for record in the
mercantile registry; here, the contract of partnership has been duly registered. But the two
cases are similar in that the firm name failed to include the name of any of the partners.
We come then to the ultimate question, which is, whether we should follow the decision in
Hung-Man-Yoc vs. Kieng-Chiong-Seng, supra, or whether we should differentiate the two cases,
holding Teck Seing & Co., Ltd., a general copartnership, notwithstanding the failure of the firm
name to include the name of one of the partners. Let us now notice this decisive point in the
case.
Article 119 of the Code of Commerce requires every commercial association before beginning its
business to state its article, agreements, and conditions in a public instrument, which shall be
presented for record in the mercantile registry. Article 120, next following, provides that the
persons in charge of the management of the association who violate the provisions of the
foregoing article shall be responsible in solidum to the persons not members of the association
with whom they may have transacted business in the name of the association. Applied to the
facts before us, it would seem that Teck Seing & Co., Ltd. has fulfilled the provisions of article
119. Moreover, to permit the creditors only to look to the person in charge of the management
of the association, the partner Lim Yogsing, would not prove very helpful to them.
What is said in article 126 of the Code of Commerce relating to the general copartnership
transacting business under the name of all its members or of several of them or of one only, is
wisely included in our commercial law. It would appear, however, that this provision was
inserted more for the protection of the creditors than of the partners themselves. A distinction
could well be drawn between the right of the alleged partnership to institute action when failing
to live up to the provisions of the law, or even the rights of the partners as among themselves,

and the right of a third person to hold responsible a general copartnership which merely lacks a
legal firm name in order to make it a partnership de jure.
The civil law and the common law alike seem to point to a difference between the rights of the
partners who have failed to comply with the law and the rights of third persons who have dealt
with the partnership.
The supreme court of Spain has repeatedly held that notwithstanding the obligation of the
members to register the articles of association in the commercial registry, agreements
containing all the essential requisites are valid as between the contracting parties, whatever the
form adopted, and that, while the failure to register in the commercial registry necessarily
precludes the members from enforcing rights acquired by them against third persons, such
failure cannot prejudice the rights of third persons. (See decisions of December 6, 1887, January
25, 1888, November 10, 1890, and January 26, 1900.) The same reasoning would be applicable
to the less formal requisite pertaining to the firm name.
The common law is to the same effect. The State of Michigan had a statute prohibiting the
transaction of business under an assumed name or any other than the real name of the
individual conducting the same, unless such person shall file with the county clerk a certificate
setting forth the name under which the business is to be conducted and the real name of each
of the partners, with their residences and post-office addresses, and making a violation thereof
a misdemeanor. The supreme Court of Michigan said:
The one object of the act is manifestly to protect the public against imposition and
fraud, prohibiting persons from concealing their identity by doing business under an
assumed name, making it unlawful to use other than their real names in transacting
business without a public record of who they are, available for use in courts, and to
punish those who violate the prohibition. The object of this act is not limited to
facilitating the collection of debts, or the protection of those giving credit to persons
doing business under an assumed name. It is not unilateral in its application. It applies
to debtor and creditor, contractor and contractee, alike. Parties doing business with
those acting under an assumed name, whether they buy or sell, have a right, under the
law, to know who they are, and who to hold responsible, in case the question of
damages for failure to perform or breach of warranty should arise.
The general rule is well settled that, where statutes enacted to protect the public
against fraud or imposition, or to safeguard the public health or morals, contain a
prohibition and impose a penalty, all contracts in violation thereof are void. . . .
As this act involves purely business transactions, and affects only money interests, we
think it should be construed as rendering contracts made in violation of it unlawful and
unforceable at the instance of the offending party only, but not as designed to take away
the rights of innocent parties who may have dealt with the offenders in ignorance of
their having violated the statute. (Cashin vs. Pliter [1912], 168 Mich., 386; Ann. Cas.
[1913-C, 697.)

The early decision of our Supreme Court in the case of Prautch Scholes & Co. vs. Hernandez
[1903], 1 Phil., 705), contains the following pertinent observations:
Another case may be supposed. A partnership is organized for commercial purposes. It
fails to comply with the requirements of article 119. A creditor sues the partnership for
a debt contracted by it, claiming to hold the partners severally. They answer that their
failure to comply with the Code of Commerce makes them a civil partnership and that
they are in accordance with article 1698 of the Civil Code only liable jointly. To allow
such liberty of action would be to permit the parties by a violation of the Code to escape
a liability which the law has seen fit to impose upon persons who organized commercial
partnership; "Because it would be contrary to all legal principles that the
nonperformance of a duty should redound to the benefit of the person in default either
intentional or unintentional." (Mercantile Law, Eixala, fourth ed., p. 145.)" (See
also Lichauco vs. Lichauco [1916], 33 Phil., 350, 360.)
Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the following comment after
articles 121 and 126 of the Code:
From the decisions cited in this and in the previous comments, the following is deduced:
1st. Defects in the organization cannot affect relations with third persons. 2d. Members
who contract with other persons before the association is lawfully organized are liable
to these persons. 3d. The intention to form an association is necessary, so that if the
intention of mutual participation in the profits and losses in a particular business is
proved, and there are no articles of association, there is no association. 4th. An
association, the articles of which have not been registered, is valid in favor of third
persons. 5th. The private pact or agreement to form a commercial association is
governed not by the commercial law but by the civil law. 6th. Secret
stipulationsexpressed in a public instrument, but not inserted in the articles of
association, do not affect third persons, but are binding on the parties themselves. 7th.
An agreement made in a public instrument, other than the articles of association, by
means of which one of the partners guarantees to another certain profits or secures him
from losses, is valid between them, without affecting the association. 8th. Contracts
entered into by commercial associations defectively organized are valid when they are
voluntarily executed by the parties, if the only controversy relates to whether or not they
complied with the agreement.
xxx

xxx

xxx

The name of the collective merchant is called firm name. By this name, the new being is
distinguished from others, its sphere of action fixed, and the juridical personality better
determined, without constituting an exclusive character of the general partnership to
such an extent as to serve the purpose of giving a definition of said kind of a mercantile
partnership, as is the case in our Code.
Having in mind that these partnerships are prevailingly of a personal character, article
126 says that they must transact business under the name of all its members, of some of
them, or of one only, the words "and company" to be added in the latter two cases.

It is rendered impossible for the general partnership to adopt a firm name appropriate
to its commercial object; the law wants to link, and does link, the solidary and unlimited
responsibility of the members of this partnership with the formation of its name, and
imposes a limitation upon personal liberty in its selection, not only by prescribing the
requisites, but also by prohibiting persons not members of the company from including
their names in its firm name under penalty of civil solidary responsibility.
Of course, the form required by the Code for the adoption of the firm name does not
prevent the addition thereto of any other title connected with the commercial purpose
of the association. The reader may see our commentaries on the mercantile registry
about the business names and firm names of associations, but it is proper to establish
here that, while the business name may be alienated by any of the means admitted by
the law, it seems impossible to separate the firm names of general partnerships from
the juridical entity for the creation of which it was formed. (Vol. 2, pp. 197, 213.)
On the question of whether the fact that the firm name "Teck Seing & Co., Ltd." does not
contain the name of all or any of the partners as prescribed by the Code of Commerce prevents
the creation of a general partnership, Professor Jose A. Espiritu, as amicus curi, states:
My opinion is that such a fact alone cannot and will not be a sufficient cause of
preventing the formation of a general partnership, especially if the other requisites are
present and the requisite regarding registration of the articles of association in the
Commercial Registry has been complied with, as in the present case. I do not believe
that the adoption of a wrong name is a material fact to be taken into consideration in
this case; first, because the mere fact that a person uses a name not his own does not
prevent him from being bound in a contract or an obligation he voluntarily entered into;
second, because such a requirement of the law is merely a formal and not necessarily an
essential one to the existence of the partnership, and as long as the name adopted
sufficiently identity the firm or partnership intended to use it, the acts and contracts
done and entered into under such a name bind the firm to third persons; and third,
because the failure of the partners herein to adopt the correct name prescribed by law
cannot shield them from their personal liabilities, as neither law nor equity will permit
them to utilize their own mistake in order to put the blame on third persons, and much
less, on the firm creditors in order to avoid their personal possibility.
The legal intention deducible from the acts of the parties controls in determining the existence
of a partnership. If they intend to do a thing which in law constitutes a partnership, they are
partners, although their purpose was to avoid the creation of such relation. Here, the intention
of the persons making up Teck Seing & co., Ltd. was to establish a partnership which they
erroneously denominated a limited partnership. If this was their purpose, all subterfuges
resorted to in order to evade liability for possible losses, while assuming their enjoyment of the
advantages to be derived from the relation, must be disregarded. The partners who have
disguised their identity under a designation distinct from that of any of the members of the firm
should be penalized, and not the creditors who presumably have dealt with the partnership in
good faith.
Articles 127 and 237 of the Code of Commerce make all the members of the general
copartnership liable personally and in solidum with all their property for the results of the

transactions made in the name and for the account of the partnership. Section 51 of the
Insolvency Law, likewise, makes all the property of the partnership and also all the separate
property of each of the partners liable. In other words, if a firm be insolvent, but one or more
partners thereof are solvent, the creditors may proceed both against the firm and against the
solvent partner or partners, first exhausting the assets of the firm before seizing the property of
the partners. (Brandenburg of Bankcruptcy, sec. 108; De los Reyes vs. Lukban and Borja [1916],
35 Phil., 757; Involuntary Insolvency of Campos Rueda & Co. vs. Pacific Commercial Co. [1922],
44 Phil., 916).
We reach the conclusion that the contract of partnership found in the document hereinbefore
quoted established a general partnership or, to be more exact, a partnership as this word is
used in the Insolvency Law.
Wherefore, the order appealed from is reversed, and the record shall be returned to the court
of origin for further proceedings pursuant to the motion presented by the creditors, in
conformity with the provisions of the Insolvency Law. Without special findings as to the costs in
this instance, it is ordered.
Araullo, C.J., Johnson, Street, Avancea, Villamor, Johns and Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24193

June 28, 1968

MAURICIO AGAD, plaintiff-appellant,

vs.
SEVERINO MABATO and MABATO and AGAD COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
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.
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 ab initio; and that Agad be sentenced to pay actual,
moral and exemplary damages, as well as attorney's fees.
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 fishpond or a real right to any fishpond.
Their contributions were 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.
xxx

xxx

xxx

The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership.
Neither said fishpond 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.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23497

April 26, 1968

J.M. TUASON and CO., INC., petitioner,

vs.
ESTRELLA VDA. DE LUMANLAN and the COURT OF APPEALS (FIFTH DIVISION), respondents.
Tuason and Sison for petitioner.
Jose Chuico and Wilfredo E. Dizon for respondents.
REYES, J.B.L., Actg. C.J.:
J. M. Tuason & Co., Inc. petitioned for a review by certiorari of the decision issued by the Court
of Appeals (Fifth Division) in its case CA-G.R. No. 27259-R, reversing the judgment rendered by
the Court of First Instance of Rizal (Civil Case No. Q-4243) that ordered defendant (now
respondent) Estrella Vda. de Lumanlan to vacate the lot occupied by her in Sta. Mesa Heights
Subdivision, barrio Tatalon, Quezon City, and to remove therefrom the house and other
structures constructed thereon, paying P240.00 a month until restoration of the premises to
plaintiff.
The facts are stated in the decision of the Court of Appeals (accepted by both parties) in this
wise:1wph1.t
. . . That in the complaint filed in this case by plaintiff, J. M. Tuason & Co., Inc.,
hereinafter called Tuason, on 30 April, 1969, the basis is that it being the registered
owner of the property known as Santa Mesa Heights Subdivision, situated at Barrio
North Tatalon, Quezon City, herein defendant sometime in April, 1949 unlawfully
entered into possession of 800 square meters, and therein constructed his house so that
plaintiff prayed for ejectment and damages for the occupancy; and defendant in her
answer set forthaffirmative defense that on 12 March, 1949, she had bought the
property she was occupying from one Pedro Deudor, and that in a compromise
agreement between Pedro and Tuason on 16 March 1953, approved by the Court of
First Instance of Quezon City, she was one of the buyers therein recognized, so that she
asked that her rights be recognized and the complaint dismissed; but on the basis of the
evidence presented by both parties in the trial, Lower Court sustained plaintiff, holding
that Tuason being the registered owner, and the question being purely one of
possession, therefore, defendant's said evidence was "completely immaterial". . . . (Page
2 of Decision, Annex "A" of Petition.)
Upon the facts thus stated, the Fifth Division of the Court of Appeals held that, pursuant to this
Supreme Court's ruling in Evangelista vs. Deudor, L-12826, September 10, 1959, the
Compromise Agreement (Exh. 2) between the petitioner Tuason & Co. and the Deudors

constituted a valid defense against the possessory action filed by Tuason & Co.; that under
paragraph 7 of said Compromise Agreement, petitioner bound and committed itself to sell to
respondent Lumanlan the lot occupied by her at a reasonable price; that said respondent had a
right to compel petitioner to accept payment for the lot in question; and that the compromise
agreement legalized the possession of respondent.
These pronouncements are assailed by the petitioner in this appeal as legally incorrect and
contrary to the decisions of this Court.
The terms of the compromise agreement between the heirs of Telesforo Deudor and J. M.
Tuason & Co. have been taken cognizance of in many decisions of this Court (Evangelista vs.
Deudor, jam. cit; Deudor vs. J. M. Tuason & Co., L-18768, May 30, 1961, and L-20105, Oct. 31,
1963; J. M. Tuason vs. Jaramillo, et al., L-18932-34, Sept. 30, 1963; J. M. Tuason vs. Macalindong,
L-15398, Dec. 29, 1962 and others). The Deudors had therein recognized the registered title of
Tuason & Co. over the lands claimed by them, and received payment of certain sums of money;
but as the Deudors had, prior to the compromise, sold their possessory rights to various
persons, paragraph seventh of the compromise agreement (case Q-135 of the court of origin)
provided:
That the sales of the possessory rights claimed by the DEUDORS, are described in the
lists submitted by them to the OWNERS which are attached hereto marked Annexes "B"
and "C" and made part hereof. Whatever amounts may have been collected by the
DEUDORS on account thereof, shall be deducted from the total sum of P1,201,063.00 to
be paid to them. It shall be the joint and solidary obligation of the DEUDORS to make
the buyer of the lots purportedly sold by them to recognize the title of the OWNERS
over the property purportedly bought by them, and to make them sign, whenever
possible, new contracts of purchase for said property at the current paces and terms
specified by the OWNERS in their sales of lots in their subdivision known at "Sta. Mesa
Heights Subdivision." The DEUDORS HEREBY advised the OWNERS that the buyer listed
in Annex "B" herein with the annotation "continue" shall buy the lots respectively
occupied by them and shall sign contracts, but the sums already paid by them to the
DEUDORS amounting to P134,922.84 (subject to verification by the Court) shall be
credited to the buyers and shall be deducted from the sums to be paid to the DEUDORS
by the OWNERS. The DEUDORS also advise the OWNERS that, the buyers listed in Annex
"C" herein with the annotation "Refund" have decided not to continue with their former
contracts or purchases with the DEUDORS and the sums already paid by them to the
DEUDORS TOTALLING P101,182.42 (subject to verification by the Court) shall be
refunded to them by the OWNERS and deducted from the sums that may be due to the
DEUDORS from the OWNERS (J.M. Tuason & Co., Inc. vs. Jaramillo, L-18932, Sept. 30,
1963);
Careful analysis of this paragraph of the compromise agreement will show that while the same
created "a sort of contractual relation" between the J. M. Tuason & Co., Inc., and the Deudor
vendees (as ruled by this Court in Evangelista vs. Deudor, ante), the same in no way obligated
Tuason & Co. to sell to those buyers the lots occupied by them at the price stipulated with the
Deudors, but at "the current prices and terms specified by the OWNERS (Tuason) in their sales
of lots in their subdivision known as 'Sta. Mesa Heights Subdivision'". This is what is expressly
provided. Further, the paragraph plainly imports that these buyers of the Deudors must

"recognize the title of the OWNERS (Tuason) over the property purportedly bought by them"
from the Deudors, and "sign, whenever possible, new contracts of purchase for said property";
and, if and when they do so, "the sums paid by them to the Deudors . . . shall be credited to the
buyers." All that Tuason & Co. agreed to, therefore, was to grant the Deudor buyers preferential
right to purchase "at current prices and terms" the lots occupied by them, upon their
recognizing the title of Tuason & Co., Inc., and signing new contracts therefor; and to credit
them for the amounts they had paid to the Deudors.
Nowhere in her answer did the respondent Estrella Vda. de Lumanlan claim that she had signed
a new contract with J. M. Tuason & Co., Inc. for the purchase of the lot occupied. What is worse,
instead of recognizing the title of the owners (Tuason & Co.) as required by the aforementioned
compromise agreement, she charged in paragraph 6 of her special defense (Rec. on Appeal, p.
10) that "Pedro Deudor and his co-owners and the plaintiff herein . . . conspired together and
helped each other . . . by entering into a supposed Compromise" whereby "Pedro Deudor and his
co-owners renounced, ceded, waived and quitclaimed all their rights, title and interest in the
property including the land sold to herein defendant, in favor of the plaintiff J. M. Tuason & Co.,
Inc., in consideration of the sum of P1,201,063.00, without the knowledge and consent,
and much less the intervention of the herein defendant." In other words, the respondent
Lumanlan in her answer repudiated and assailed the compromise between the Deudors and J.
M. Tuason & Co. How then can she now claim to take advantage and derive rights from that
compromise?
Without the compromise agreement, Lumanlan must justify her possession on the basis of a
pretended superiority of the Deudors' old Spanish informacion posesoria over Tuason's
Certificate of Title No. 1267, traceable back to the original Certificate of Title No. 735 of Rizal,
issued under the Registration Act No. 496. But, as ruled by this Court in previous cases,
Lumanlan is by now barred from assailing the decree of registration in favor of Tuason & Co.,
Inc.'s predecessors twenty years after its issuance (Tiburcio vs. PHHC, L-13429, Oct. 31, 1959;
Tuason & Co. vs. Bolaos, 95 Phil. 107; Tuason & Co. vs. Santiago, 99 Phil. 622-623; Tuason & Co.
vs. Macalindong, supra; Tuason & Co. vs. Jaramillo, L-16827, Jan. 31, 1963).
It is thus apparent that no legal basis exists for the pronouncement in the appealed decision that
Tuason & Co. had committed itself to sell to Lumanlan the lot occupied by her at a reasonable
price, or that the compromise agreement legalized the possession of the respondent, since the
latter does not rely on the compromise but, on the contrary, she assails it.
The Court of Appeals ruled that the price to be paid by Lumanlan to Tuason & Co., Inc., is
governed by Article 1474 of the new Civil Code of the Philippines, which provides that:
Where the price cannot be determined in accordance with the preceding articles, or in
any other manner, the contract is inefficacious. However, if the thing or any part thereof
has been delivered to and appropriated by the buyer, he must pay a reasonable price
therefor. What is a reasonable price is a question of fact dependent on the
circumstances of each particular case.
Since there has been no contract between petitioner Tuason & Co. and respondent Lumanlan
for the sale of the lot occupied by the latter, and by paragraph 7 of the Compromise Agreement
(assuming that respondent-appellee still has the right to invoke the same, and seek refuge

thereunder), Tuason & Co. did not consider itself bound by the sales made by the Deudors, but
demanded that the Deudor buyers should sign new contracts with it at current prices specified
for the sales of lots in "Sta. Mesa Heights Subdivision" (ante) the aforequoted Article 1474 can
have no bearing on the case, Lumanlan not being a buyer from Tuason & Co.
As to Lumanlan's allegation in her counterclaim that she should be deemed a builder in good
faith, a similar contention has been rejected in Tuason & Co. vs. Macalindong, L-15398,
December 29, 1962, where we ruled that there being a presumptive knowledge of the Torrens
titles issued to Tuason & Co. and its predecessors-in-interest since 1914, the buyer from the
Deudors (or from their transferees) can not, in good conscience, say now that she believed her
vendor had rights of ownership over the lot purchased. The reason given by the Court is that
Had he investigated before buying and before building his house on the questioned lot,
he would have been informed that the land is registered under the Torrens system in
the name of J. M. Tuason & Co., Inc., If he failed to make the necessary inquiry,
appellant is now bound conclusively by appellee's Torrens title (Sec. 51, Act 496; Emas
vs. Zuzuarregui, 35 Phil. 144) (Tuason & Co., Inc. vs. Macalindong, ante).
Lumanlan had chosen to ignore the Torrens title of Tuason & Co., Inc. and relied instead upon
the Deudors' claim of ownership, perhaps because such course appeared to her as more
advantageous; hence, she has only herself to blame for the consequences now that the
Deudors' claim has been abandoned by the Deudors themselves, and can not pretend good
faith. The Court of First Instance, therefore, did not err in holding that she was not a rightful
possessor and sentencing her to vacate.
Respondent could have asked that she recover or be credited with the amounts paid by her to
the Deudors, but as no claim to such credit was ever advanced by her in the trial Court, no
pronouncement can be made thereon in this appeal. Equity demands, however, that her right to
claim such return, or to have the amount offset against the sums she was sentenced to pay,
should be, as it is, reserved.
WHEREFORE, the decision of the Court of Appeals is reversed and that of the Court of First
Instance reinstated. Costs against respondent, Estrella Vda. de Lumanlan.
Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Fernando, JJ., concur.
Angeles, J., took no part.
Concepcion, C.J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM,
CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the
then Intermediate Appellate Court and directed that in all subsequent elections for directors of
Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's
choice of its three (3) nominees; that, on the other hand, the Filipino stockholders can nominate
only six (6) candidates and in the event they cannot agree on the six (6) nominees, they shall
vote only among themselves to determine who the six (6) nominees will be, with cumulative
voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went
abroad to look for foreign partners, European or American who could help in its expansion
plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States
entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the
Filipino investors agreed to participate in the ownership of an enterprise which would engage
primarily in the business of manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares. The parties agreed that the business operations in the
Philippines shall be carried on by an incorporated enterprise and that the name of the
corporation shall initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the
nomination and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the
form annexed hereto as Exhibit A and, insofar as permitted under Philippine
law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors,
which shall consist of nine individuals. As long as American-Standard shall own
at least 30% of the outstanding stock of the Corporation, three of the nine
directors shall be designated by American-Standard, and the other six shall be
designated by the other stockholders of the Corporation. (pp. 51 & 53, Rollo of
75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority
group, including the grant of veto powers over a number of corporate acts and the right to
designate certain officers, such as a member of the Executive Committee whose vote was
required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered
with the Board of Investments for availment of incentives with the condition that at least 60% of
the capital stock of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the
initially harmonious relations between the two groups. According to the Filipino group, a basic

disagreement was due to their desire to expand the export operations of the company to which
ASI objected as it apparently had other subsidiaries of joint joint venture groups in the countries
where Philippine exports were contemplated. On March 8, 1983, the annual stockholders'
meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by the
Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders
then proceeded to the election of the members of the board of directors. The ASI group
nominated three persons namely; Wolfgang Aurbach, John Griffin and David P. Whittingham.
The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto
R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr.
Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young
ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past annual stockholders' meetings to nominate
only nine persons as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the body
of stockholders present that a vote be taken on the ruling of the Chairman. The
Chairman, Baldwin Young, declared the appeal out of order and no vote on the
ruling was taken. The Chairman then instructed the Corporate Secretary to cast
all the votes present and represented by proxy equally for the 6 nominees of
the Philippine Investors and the 3 nominees of ASI, thus effectively excluding
the 2 additional persons nominated, namely, Luciano E. Salazar and Charles
Chamsay. The ASI representative, Mr. Jaqua protested the decision of the
Chairman and announced that all votes accruing to ASI shares, a total of
1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted
for the three ASI nominees and Charles Chamsay, and instructed the Secretary
to so vote. Luciano E. Salazar and other proxy holders announced that all the
votes owned by and or represented by them 467,197 shares (p. 27, Rollo, ACG.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar.
The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all
votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach,
John Griffin and David Whittingham and the six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then
certified for the election of the following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then
moved to recess the meeting which was duly seconded. There was also a
motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn
was accepted by the Chairman, Baldwin Young, who announced that the motion
was carried and declared the meeting adjourned. Protests against the
adjournment were registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned but only recessed
and that the meeting would be reconvened in the next room. The Chairman
then threatened to have the stockholders who did not agree to the decision of
the Chairman on the casting of votes bodily thrown out. The ASI Group, Luciano
E. Salazar and other stockholders, allegedly representing 53 or 54% of the

shares of Saniwares, decided to continue the meeting at the elevator lobby of

the American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of
the cumulative votes cast earlier in the meeting, the ASI Group nominated its
four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Chamsay. Luciano E. Salazar voted for himself, thus the said five directors were
certified as elected directors by the Acting Secretary, Andres Gatmaitan, with
the explanation that there was a tie among the other six (6) nominees for the
four (4) remaining positions of directors and that the body decided not to break
the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities
and Exchange Commission (SEC). The first petition filed was for preliminary injunction by
Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The case
was denominated as SEC Case No. 2417. The second petition was for quo warranto and
application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E.
Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case
No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties
except for Avelino Cruz claimed to be the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo Group and dismissing the quo warranto
petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the SEC en
banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court
by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as ACG.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions
were consolidated and the appellate court in its decision ordered the remand of the case to the
Securities and Exchange Commission with the directive that a new stockholders' meeting of
Saniwares be ordered convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach,
John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following
errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF
PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS

INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the
following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding
contractual agreements entered into by stockholders and the replacement of
the conditions of such agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the
property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-7597576)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I.

II.

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE

RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED
INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT
PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS
DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF
SANTWARES. (P. 24, Rollo-75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983
during its annual stockholders' meeting held on March 8, 1983. To answer this question the
following factors should be determined: (1) the nature of the business established by the parties
whether it was a joint venture or a corporation and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of
contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal
Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of
the parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is
clearly stated that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement
was to establish a joint venture presented by the Lagdameo and Young Group on the ground
that it contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of
Court. According to them, the Lagdameo and Young Group never pleaded in their pleading that
the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and
therefore, there can be, between the parties and their successors in interest, no
evidence of the terms of the agreement other than the contents of the writing,
except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the
true intent and agreement of the parties or the validity of the agreement is put
in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and
Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true
intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the
parties thereto disclaim being partners or joint venturers such disclaimer is
directed at third parties and is not inconsistent with, and does not preclude, the
existence of two distinct groups of stockholders in Saniwares one of which (the
Philippine Investors) shall constitute the majority, and the other ASI shall
constitute the minority stockholder. In any event, the evident intention of the
Philippine Investors and ASI in entering into the Agreement is to enter into
ajoint venture enterprise, and if some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall prevail over the
former (Art. 1370, New Civil Code). The various stipulations of a contract shall
be interpreted together attributing to the doubtful ones that sense which may
result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in
order to judge the intention of the contracting parties, their contemporaneous

and subsequent acts shall be principally considered. (Art. 1371, New Civil Code).
(Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties
joined their efforts in furtherance of an enterprise for their joint profit, the
question whether they intended by their agreement to create a joint adventure,
or to assume some other relation is a question of fact for the jury. (Binder v.
Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238
SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows that the parties
agreed to establish a joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making body are all consistent
with a joint venture and not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI
agreed to accept the role of minority vis-a-vis the Philippine National group of
investors, on the condition that the Agreement should contain provisions to
protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included
to protect the interests of ASI as the minority. For example, the vote of 7 out of
9 directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of
the Agreement]. ASI is contractually entitled to designate a member of the
Executive Committee and the vote of this member is required for certain
transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of
the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given
the right to designate the president and plant manager [Sec. 5 (6)]. The
Agreement further provides that the sales policy of Saniwares shall be that
which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should not
export "Standard" products otherwise than through ASI's Export Marketing
Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology
and know-how to Saniwares and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9
votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements for amendments of the

articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the balance of 60%, and that
2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to three ratio. Each group is assured of a fixed
number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young
also testified that Section 16(c) of the Agreement that "Nothing herein contained shall be
construed to constitute any of the parties hereto partners or joint venturers in respect of any
transaction hereunder" was merely to obviate the possibility of the enterprise being treated as
partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world. Arrangements are formalized where a
foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise,
use of its brand names, and other such assistance. However, there is always a danger from such
arrangements. The foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture arrangement to gain a foothold or
test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group undermines the local
majority ownership and actively tries to completely or predominantly take over the entire
company. This undermining of joint ventures is not consistent with fair dealing to say the least.
To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting
rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx

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

the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation
Code's chapter on close corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly, although Saniwares had 95
stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for
another 13 stockholders, the Chamsay family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7 stockholders, etc. If the members
of one family and/or business or interest group are considered as one (which, it
is respectfully submitted, they should be for purposes of determining how
closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is
a close-held corporation. Surely, appellants cannot honestly claim that
Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint
venture corporations and have not rigidly applied principles of corporation law
designed primarily for public issue corporations. These courts have indicated
that express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the
agreement between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union
Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240
N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway
v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v.
Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11
Vand Law Rev. p. 680,1958). These American cases dealt with legal questions as
to the extent to which the requirements arising from the corporate form of joint
venture corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied on the joint venture agreement rather
than the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders'

agreements in joint venture corporations often contain provisions which do one

or more of the following: (1) require greater than majority vote for shareholder
and director action; (2) give certain shareholders or groups of shareholders
power to select a specified number of directors; (3) give to the shareholders
control over the selection and retention of employees; and (4) set up a
procedure for the settlement of disputes by arbitration (See I O' Neal, Close
Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing
Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily
imply that agreements regarding the exercise of voting rights are allowed only in
close corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close corporation under
section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not
voting or pooling agreements to protect their interests, as long as they do not
intend to commit any wrong, or fraud on the other stockholders not parties to
the agreement. Of course, voting or pooling agreements are perhaps more
useful and more often resorted to in close corporations. But they may also be
found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with the
requisites laid down by section 96, it is entirely possible that a corporation
which is in fact a close corporation will not come within the definition. In such
case, its stockholders should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op
cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the
designation or nomination of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual provision, as correctly held by
the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity
during elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a)
hereof says that three of the nine directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the Filipino stockholders. This
allocation of board seats is obviously in consonance with the minority position
of ASI.

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

the parties should honor and adhere to their respective rights and obligations
thereunder. Appellants seem to contend that any allocation of board seats,
even in joint venture corporations, are null and void to the extent that such may
interfere with the stockholder's rights to cumulative voting as provided in
Section 24 of the Corporation Code. This Court should not be prepared to hold
that any agreement which curtails in any way cumulative voting should be
struck down, even if such agreement has been freely entered into by
experienced businessmen and do not prejudice those who are not parties
thereto. It may well be that it would be more cogent to hold, as the Securities
and Exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders who enter
into special relationships with each other to pursue and implement specific
purposes, as in joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general
rule on this question. Rather, all that needs to be done is to give life and effect
to the particular contractual rights and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats Cannot be disregarded. On the other hand,
the rights of the stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over
the first. Upon further reflection, we feel that the proper and just solution to
give due consideration to both factors suggests itself quite clearly. This Court
should recognize and uphold the division of the stockholders into two groups,
and at the same time uphold the right of the stockholders within each group to
cumulative voting in the process of determining who the group's nominees
would be. In practical terms, as suggested by appellant Luciano E. Salazar
himself, this means that if the Filipino stockholders cannot agree who their six
nominees will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino stockholder can cumulate his
votes. ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may even be able
to get a majority of the board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right
to vote their additional equity pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in electing directors. Petitioner
Salazar adds that this right if granted to the ASI Group would not necessarily mean a violation of
the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which
provides:
And provided finally that the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in partially
nationalized activities shall be allowed in proportion to their allowable
participation or share in the capital of such entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code.
The point of query, however, is whether or not that provision is applicable to a joint venture
with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise
legal definition but it has been generally understood to mean an organization
formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920])
It is in fact hardly distinguishable from the partnership, since their elements are
similar community of interest in the business, sharing of profits and losses, and
a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d.
183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited by most
opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin,
395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular partnership
may have for its object a specific undertaking. (Art. 1783, Civil Code). It would
seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. (At
p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos
Comments, Notes and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally
apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question
of whether or not the ASI Group may vote their additional equity lies in the agreement of the
parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as
regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right of
each group of stockholders to cumulative voting in the process of determining who the group's
nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5
(a) of the Agreement relates to the manner of nominating the members of the board of
directors while Section 3 (a) (1) relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of
members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who
would be beholden to them would obliterate their minority status as agreed upon by the
parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may even be able
to get a majority of the board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the enterprise in
violation of the nationalization requirements enshrined in the Constitution and circumvention of
the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the Anti-Dummy Act
allows the ASI group to elect board directors in proportion to their share in the capital of the
entity. It is to be noted, however, that the same law also limits the election of aliens as members
of the board of directors in proportion to their allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to designate three directors. This is the allowable
participation of the ASI Group. Hence, in future dealings, this limitation of six to three board
seats should always be maintained as long as the joint venture agreement exists considering
that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed
upon and embodied in the parties' Agreement to protect the interests arising from the minority
status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the
appellate court and submits that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which uses the word
"designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the
Filipino stockholders are allowed to select their nominees separately and not as a common slot
determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board
directors should not be interpreted in isolation. This should be construed in relation to section 3
(a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for
these nominees which is cumulative voting while section 5(a) relates to the manner
of nominating the members of the board of directors. The petitioners in G.R. No. 75951 agreed
to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative
voting procedure cannot, however, be ignored. The validity of the cumulative voting procedure
is dependent on the directors thus elected being genuine members of the Filipino group, not
voters whose interest is to increase the ASI share in the management of Saniwares. The joint
venture character of the enterprise must always be taken into account, so long as the company
exists under its original agreement. Cumulative voting may not be used as a device to enable ASI
to achieve stealthily or indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority status of the Filipino
investors as well as to maintain the minority status of the foreign investors group as earlier
discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983
annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. Costs
against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.