A. CIR v.

Suter

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 generalcopartnership,
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, L-13554, Resolution of 30 October 1964, and Koppel [Phil.],
Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal
personality of the corporations involved therein are not applicable to the
present case. In the cited cases, the corporations were already subject to tax
when the fiction of their corporate personality was pierced; in the present
case, to do so would exempt the limited partnership from income taxation but
would throw the tax burden upon the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of
their corporate personalities for tax purposes. This is not true in the present
case. Here, the limited partnership is not a mere business conduit of the
partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage,
and had been filing its own income tax returns as such independent entity.
The change in its membership, brought about by the marriage of the partners
and their subsequent acquisition of all interest therein, is no ground for
withdrawing the partnership from the coverage of Section 24 of the tax code,
requiring it to pay income tax. As far as the records show, the partners did not
enter into matrimony and thereafter buy the interests of the remaining partner
with the premeditated scheme or design to use the partnership as a business
conduit to dodge the tax laws. Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to

require that income to be included in the individual tax return of respondent
Suter is to overstretch the letter and intent of the law. In fact, it would even
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. 1 Appellant is, likewise, mistaken in that it assumes
that the conjugal partnership of gains is a taxable unit, which it is not. What is
taxable is the "income of both spouses" (Section 45 [d] in their individual
capacities. Though the amount of income (income of the conjugal
partnership vis-a-vis the joint income of husband and wife) may be the same
for a given taxable year, their consequences would be different, as their
contributions in the business partnership are not the same.

The difference in tax rates between the income of the limited partnership
being consolidated with, and when split from the income of the spouses, is not
a justification for requiring consolidation; the revenue code, as it presently
stands, does not authorize it, and even bars it by requiring the limited
partnership to pay tax on its own income.

FOR THE FOREGOING REASONS, the decision under review is hereby

affirmed. No costs.

B. Sycip, Salazar, etc.

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; 2the
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
as amicus 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 argumentsas 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: t.hqw

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 a professional 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. 9t.hqw

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, t.hqw

... 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." 11Thus, 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.

C. Woodhouse v. Halili

No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.

Taada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit

A, with the defendant, the most important provisions of which are (1) that they
shall organize a partnership for the bottling and distribution of Mision soft
drinks, plaintiff to act as industrial partner or manager, and the defendant as a
capitalist, furnishing the capital necessary therefor; (2) that the defendant was
to decide matters of general policy regarding the business, while the plaintiff
was to attend to the operation and development of the bottling plant; (3) that
the plaintiff was to secure the Mission Soft Drinks franchise for and in behalf
of the proposed partnership; and (4) that the plaintiff was to receive 30 per
cent of the net profits of the business. The above agreement was arrived at
after various conferences and consultations by and between them, with the
assistance of their respective attorneys. Prior to entering into this agreement,
plaintiff had informed the Mission Dry Corporation of Los Angeles, California,
U.S.A., manufacturers of the bases and ingridients of the beverages bearing
its name, that he had interested a prominent financier (defendant herein) in
the business, who was willing to invest half a million dollars in the bottling and
distribution of the said beverages, and requested, in order that he may close
the deal with him, that the right to bottle and distribute be granted him for a
limited time under the condition that it will finally be transferred to the
corporation (Exhibit H). Pursuant for this request, plaintiff was given "a thirty-
days" option on exclusive bottling and distribution rights for the Philippines"
(Exhibit J). Formal negotiations between plaintiff and defendant began at a
meeting on November 27, 1947, at the Manila Hotel, with their lawyers
attending. Before this meeting plaintiff's lawyer had prepared the draft of the
agreement, Exhibit II or OO, but this was not satisfactory because a
partnership, instead of a corporation, was desired. Defendant's lawyer
prepared after the meeting his own draft, Exhibit HH. This last draft appears to
be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did
not like to go to the United States without the agreement being not first
signed. On that day plaintiff and defendant went to the United States, and on
December 10, 1947, a franchise agreement (Exhibit V) was entered into the
Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse,
granted defendant the exclusive right, license, and authority to produce,
bottle, distribute, and sell Mision beverages in the Philippines. The plaintiff
and the defendant thereafter returned to the Philippines. Plaintiff reported for
duty in January, 1948, but operations were not begun until the first week of
February, 1948. In January plaintiff was given as advance, on account of
profits, the sum of P2,000, besides the use of a car; in February, 1948, also
P2,000, and in March only P1,000. The car was withdrawn from plaintiff on
March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of

defendant that the partnership papers be executed. At first defendant
executed himself, saying there was no hurry. Then he promised to do so after
the sales of the product had been increased to P50,000. As nothing definite
was forthcoming, after this condition was attained, and as defendant refused
to give further allowances to plaintiff, the latter caused his attorneys to take up
the matter with the defendant with a view to a possible settlement. as none
could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership,
an accounting of the profits, and a share thereof of 30 per cent, as well as
damages in the amount of P200,000. In his answer defendant alleges by way
of defense (1) that defendant's consent to the agreement, Exhibit A, was
secured by the representation of plaintiff that he was the owner, or was about
to become owner of an exclusive bottling franchise, which representation was
false, and plaintiff did not secure the franchise, but was given to defendant
himself; (2) that defendant did not fail to carry out his undertakings, but that it
was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also presented a
counter-claim for P200,000 as damages. On these issues the parties went to
trial, and thereafter the Court of First Instance rendered judgment ordering
defendant to render an accounting of the profits of the bottling and distribution
business, subject of the action, and to pay plaintiff 15 percent thereof. it held
that the execution of the contract of partnership could not be enforced upon
the parties, but it also held that the defense of fraud was not proved. Against
this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant

had falsely represented that he had an exclusive franchise to bottle Mission
beverages, and whether this false representation or fraud, if it existed, annuls
the agreement to form the partnership. The trial court found that it is
improbable that defendant was never shown the letter, Exhibit J, granting
plaintiff had; that the drafts of the contract prior to the final one can not be
considered for the purpose of determining the issue, as they are presumed to
have been already integrated into the final agreement; that fraud is never
presumed and must be proved; that the parties were represented by
attorneys, and that if any party thereto got the worse part of the bargain, this
fact alone would not invalidate the agreement. On this appeal the defendant,
as appellant, insists that plaintiff did represent to the defendant that he had an
exclusive franchise, when as a matter of fact, at the time of its execution, he
no longer had it as the same had expired, and that, therefore, the consent of
the defendant to the contract was vitiated by fraud and it is, consequently, null
and void.

Our study of the record and a consideration of all the surrounding

circumstances lead us to believe that defendant's contention is not without
merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse presented
himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file
of the office with regards to this matter. I notice from the first draft of the
document which I prepared which calls for the organization of a corporation,
that the manager, that is, Mr. Woodhouse, is represented as being the
exclusive grantee of a franchise from the Mission Dry Corporation. . . . (t.s.n.,
p.518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made
before the Manila Hotel conference on November 27th, expressly states that
plaintiff had the exclusive franchise. Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the

Mission Dry Corporation San Francisco, California, for the bottling of Mission
products and their sale to the public throughout the Philippines; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith
transfer to the said corporation his exclusive right to bottle Mission products
and to sell them throughout the Philippines. . . . .
(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural
acts. We find that the principle invoked is inapplicable, since the purpose of
considering the prior draft is not to vary, alter, or modify the agreement, but to
discover the intent of the parties thereto and the circumstances surrounding
the execution of the contract. The issue of fact is: Did plaintiff represent to
defendant that he had an exclusive franchise? Certainly, his acts or
statements prior to the agreement are essential and relevant to the
determination of said issue. The act or statement of the plaintiff was not
sought to be introduced to change or alter the terms of the agreement, but to
prove how he induced the defendant to enter into it to prove the
representations or inducements, or fraud, with which or by which he secured
the other party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209;
port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil., 602; III
Moran 221,1952 rev. ed.) Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not governed by the
rules on integration. Were parties prohibited from proving said representations
or inducements, on the ground that the agreement had already been entered
into, it would be impossible to prove misrepresentation or fraud. Furthermore,
the parol evidence rule expressly allows the evidence to be introduced when
the validity of an instrument is put in issue by the pleadings (section 22, par.
(a), Rule 123, Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his
own letters and his own testimony. In his letter to Mission Dry Corporation,
Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority
so that we could come to terms as far as he and I were concerned. That is the
reason why the cable was sent. Without this authority, I am in a poor
bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights
for a limited period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff
on October 14, 1947. (See Exhibit J.) If this option for an exclusive franchise
was intended by plaintiff as an instrument with which to bargain with
defendant and close the deal with him, he must have used his said option for
the above-indicated purpose, especially as it appears that he was able to
secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is

to the effect that when plaintiff called on the latter, the latter answered, "Well,
come back to me when you have the authority to operate. I am definitely
interested in the bottling business." (t. s. n., pp. 60-61.) When after the
elections of 1949 plaintiff went to see the defendant (and at that time he had
already the option), he must have exultantly told defendant that he had the
authority already. It is improbable and incredible for him to have disclosed the
fact that he had only an option to the exclusive franchise, which was to last
thirty days only, and still more improbable for him to have disclosed that, at
the time of the signing of the formal agreement, his option had already
expired. Had he done so, he would have destroyed all his bargaining power
and authority, and in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff
only undertook in the agreement "to secure the Mission Dry franchise for and
in behalf of the proposed partnership." The existence of this provision in the
final agreement does not militate against plaintiff having represented that he
had the exclusive franchise; it rather strengthens belief that he did actually
make the representation. How could plaintiff assure defendant that he would
get the franchise for the latter if he had not actually obtained it for himself?
Defendant would not have gone into the business unless the franchise was
raised in his name, or at least in the name of the partnership. Plaintiff assured
defendant he could get the franchise. Thus, in the draft prepared by
defendant's attorney, Exhibit HH, the above provision is inserted, with the
difference that instead of securing the franchise for the defendant, plaintiff was
to secure it for the partnership. To show that the insertion of the above
provision does not eliminate the probability of plaintiff representing himself as
the exclusive grantee of the franchise, the final agreement contains in its third
paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the
exclusive franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the

franchise from Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was

made to believe, that plaintiff was the grantee of an exclusive franchise. Thus
it is that it was also agreed upon that the franchise was to be transferred to
the name of the partnership, and that, upon its dissolution or termination, the
same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that

plaintiff did not have the exclusive franchise, was to reduce, as he himself
testified, plaintiff's participation in the net profits to one half of that agreed
upon. He could not have had such a feeling had not plaintiff actually made
him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel
in the making of the contract made fraud improbable. Not necessarily,
because the alleged representation took place before the conferences were
had, in other words, plaintiff had already represented to defendant, and the
latter had already believed in, the existence of plaintiff's exclusive franchise
before the formal negotiations, and they were assisted by their lawyers only
when said formal negotiations actually took place. Furthermore, plaintiff's
attorney testified that plaintiff had said that he had the exclusive franchise;
and defendant's lawyer testified that plaintiff explained to him, upon being
asked for the franchise, that he had left the papers evidencing it.(t.s.n., p.
266.)

We conclude from all the foregoing that plaintiff did actually represent to
defendant that he was the holder of the exclusive franchise. The defendant
was made to believe, and he actually believed, that plaintiff had the exclusive
franchise. Defendant would not perhaps have gone to California and incurred
expenses for the trip, unless he believed that plaintiff did have that exclusive
privilege, and that the latter would be able to get the same from the Mission
Dry Corporation itself. Plaintiff knew what defendant believed about his
(plaintiff's) exclusive franchise, as he induced him to that belief, and he may
not be allowed to deny that defendant was induced by that belief. (IX
Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount
to a fraud that would vitiate the contract? It must be noted that fraud is
manifested in illimitable number of degrees or gradations, from the innocent
praises of a salesman about the excellence of his wares to those malicious
machinations and representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code distinguishes two kinds
of (civil) fraud, the causal fraud, which may be a ground for the annulment of a
contract, and the incidental deceit, which only renders the party who employs
it liable for damages. This Court had held that in order that fraud may vitiate
consent, it must be the causal (dolo causante), not merely the incidental (dolo
causante), inducement to the making of the contract. (Article 1270, Spanish
Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with
circumstances indicative that the fact that the principal consideration, the main
cause that induced defendant to enter into the partnership agreement with
plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership. The original draft prepared
by defendant's counsel was to the effect that plaintiff obligated himself to
secure a franchise for the defendant. Correction appears in this same original
draft, but the change is made not as to the said obligation but as to the
grantee. In the corrected draft the word "capitalist"(grantee) is changed to
"partnership." The contract in its final form retains the substituted term
"partnership." The defendant was, therefore, led to the belief that plaintiff had
the exclusive franchise, but that the same was to be secured for or transferred
to the partnership. The plaintiff no longer had the exclusive franchise, or the
option thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure said
franchise for the partnership, as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal
inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise
was actually the consideration or price plaintiff gave in exchange for the share
of 30 percent granted him in the net profits of the partnership business.
Defendant agreed to give plaintiff 30 per cent share in the net profits because
he was transferring his exclusive franchise to the partnership. Thus, in the
draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall
forthwith transfer to the said corporation his exclusive right to bottle Mission
products and to sell them throughout the Philippines. As a consideration for
such transfer, the CAPITALIST shall transfer to the Manager fully paid non
assessable shares of the said corporation . . . twenty-five per centum of the
capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the
production or distribution of beverages. As a matter of fact, when the bottling
plant being built, all that he suggested was about the toilet facilities for the
laborers.

We conclude from the above that while the representation that plaintiff had the
exclusive franchise did not vitiate defendant's consent to the contract, it was
used by plaintiff to get from defendant a share of 30 per cent of the net profits;
in other words, by pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This is the dolo
incidente defined in article 1270 of the Spanish Civil Code, because it was
used to get the other party's consent to a big share in the profits, an incidental
matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del

contrato sino que significa aqui, el que concurriendoen el consentimiento, o
precediendolo, no influyo para arrancar porsi solo el consentimiento ni en la
totalidad de la obligacion, sinoen algun extremo o accidente de esta, dando
lugar tan solo a una accion para reclamar indemnizacion de perjuicios. (8
Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null
and void, the question that next comes before us is, May the agreement be
carried out or executed? We find no merit in the claim of plaintiff that the
partnership was already a fait accompli from the time of the operation of the
plant, as it is evident from the very language of the agreement that the parties
intended that the execution of the agreement to form a partnership was to be
carried out at a later date. They expressly agreed that they shall form a
partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time that the
franchise from the Mission Dry Corporation was obtained in California, plaintiff
himself had been demanding that defendant comply with the agreement. And
plaintiff's present action seeks the enforcement of this agreement. Plaintiff's
claim, therefore, is both inconsistent with their intention and incompatible with
his own conduct and suit.
As the trial court correctly concluded, the defendant may not be compelled
against his will to carry out the agreement nor execute the partnership papers.
Under the Spanish Civil Code, the defendant has an obligation to do, not to
give. The law recognizes the individual's freedom or liberty to do an act he
has promised to do, or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalismo), of which courts
may not compel compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.Tratamos

de la ejecucion de las obligaciones de hacer en el solocaso de su
incumplimiento por parte del deudor, ya sean los hechos personalisimos, ya
se hallen en la facultad de un tercero; porque el complimiento espontaneo de
las mismas esta regido por los preceptos relativos al pago, y en nada les
afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el

deudor puede ser precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin

observacion el principio romano nemo potest precise cogi ad factum. Nadie
puede ser obligado violentamente a haceruna cosa. Los que perciben la
posibilidad de la destruccion deeste principio, aaden que, aun cuando se
pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una
violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot,
Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que
obligar por la violencia seria infrigir la libertad eimponer una especie de
esclavitud.

xxx xxx xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo

de la fuerza fisica, no ya precisamente porque seconstituya de este modo una
especie de esclavitud, segun el dichode Antonio Gomez, sino porque se
supone que el acreedor tuvo encuenta el caracter personalisimo del hecho
ofrecido, y calculo sobre laposibilidad de que por alguna razon no se
realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza
publica, mediante coaccion sobre las personas, en las relaciones puramente
particulares; porque la evolucion de las ideas ha ido poniendo masde relieve
cada dia el respeto a la personalidad humana, y nose admite bien la violencia
sobre el individuo la cual tiene caracter visiblemente penal, sino por motivos
que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta
violencia cuando setrata de las obligaciones que hemos llamado ex lege, que
afectanal orden social y a la entidad de Estado, y aparecen impuestas
sinconsideracion a las conveniencias particulares, y sin que por estemotivo
puedan tampoco ser modificadas; pero no debe serlo cuandola obligacion
reviste un interes puramente particular, como sucedeen las contractuales, y
cuando, por consecuencia, paraceria salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela fuerza colectiva, las diferencias producidas
entre los ciudadanos. (19 Scaevola 428, 431-432.)
The last question for us to decide is that of damages,damages that plaintiff is
entitled to receive because of defendant's refusal to form the partnership, and
damages that defendant is also entitled to collect because of the falsity of
plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article 1106
of the Spanish Civil Code the measure of damages is the actual loss suffered
and the profits reasonably expected to be received, embraced in the
terms dao emergente and lucro cesante. Plaintiff is entitled under the terms
of the agreement to 30 per cent of the net profits of the business. Against this
amount of damages, we must set off the damage defendant suffered by
plaintiff's misrepresentation that he had obtained a very high percentage of
share in the profits. We can do no better than follow the appraisal that the
parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the
exclusive franchise which he pretended he had and which he had agreed to
transfer to the partnership, his spontaneous reaction was to reduce plaintiff's
share form 30 per cent to 15 per cent only, to which reduction defendant
appears to have readily given his assent. It was under this understanding,
which amounts to a virtual modification of the contract, that the bottling plant
was established and plaintiff worked as Manager for the first three months. If
the contract may not be considered modified as to plaintiff's share in the
profits, by the decision of defendant to reduce the same to one-half and the
assent thereto of plaintiff, then we may consider the said amount as a fair
estimate of the damages plaintiff is entitled to under the principle enunciated
in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176.
Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto
amount to an admission on the part of each of the reasonableness of this
amount as plaintiff's share. This same amount was fixed by the trial court. The
agreement contains the stipulation that upon the termination of the
partnership, defendant was to convey the franchise back to plaintiff (Par. 11,
Exhibit A). The judgment of the trial court does not fix the period within which
these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A,
we declare that plaintiff's share of 15 per cent of the net profits shall continue
to be paid while defendant uses the franchise from the Mission Dry
Corporation.

With the modification above indicated, the judgment appealed from is hereby
affirmed. Without costs.

D. Ortega v. CA

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. 8Upon 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.

E. Tocao v. CA

FIRST DIVISION

[G.R. No. 127405. October 4, 2000]

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs. COURT OF

APPEALS and NENITA A. ANAY, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision of the Court of Appeals in CA-G.R.
CV No. 41616,[1] affirming the Decision of the Regional Trial Court of Makati,
Branch 140, in Civil Case No. 88-509.[2]

Fresh from her stint as marketing adviser of Technolux in Bangkok,

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

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

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

Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook
the task of saving the business on account of the unsatisfactory sales record
in the Makati and Cubao offices. On August 31, 1987, she received a plaque
of appreciation from the administrative and sales people through Marjorie
Tocao[4] for her excellent job performance. On October 7, 1987, in the
presence of Anay, Belo signed a memo [5] entitling her to a thirty-seven percent
(37%) commission for her personal sales "up Dec 31/87. Belo explained to
her that said commission was apart from her ten percent (10%) share in the
profits. On October 9, 1987, Anay learned that Marjorie Tocao had signed a
letter[6] addressed to the Cubao sales office to the effect that she was no
longer the vice-president of Geminesse Enterprise. The following day, October
10, she received a note from Lina T. Cruz, marketing manager, that Marjorie
Tocao had barred her from holding office and conducting demonstrations in
both Makati and Cubao offices.[7] Anay attempted to contact Belo. She wrote
him twice to demand her overriding commission for the period of January 8,
1988 to February 5, 1988 and the audit of the company to determine her
share in the net profits. When her letters were not answered, Anay consulted
her lawyer, who, in turn, wrote Belo a letter. Still, that letter was not answered.

Anay still received her five percent (5%) overriding commission up to

December 1987. The following year, 1988, she did not receive the same
commission although the company netted a gross sales of P13,300,360.00.

On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for
sum of money with damages[8] against Marjorie D. Tocao and William Belo
before the Regional Trial Court of Makati, Branch 140.

In her complaint, Anay prayed that defendants be ordered to pay her, jointly
and severally, the following: (1) P32,00.00 as unpaid overriding commission
from January 8, 1988 to February 5, 1988; (2) P100,000.00 as moral
damages, and (3) P100,000.00 as exemplary damages. The plaintiff also
prayed for an audit of the finances of Geminesse Enterprise from the
inception of its business operation until she was illegally dismissed to
determine her ten percent (10%) share in the net profits. She further prayed
that she be paid the five percent (5%) overriding commission on the remaining
150 West Bend cookware sets before her dismissal.

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

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

At the pre-trial conference, the issues were limited to: (a) whether or not the
plaintiff was an employee or partner of Marjorie Tocao and Belo, and (b)
whether or not the parties are entitled to damages. [10]
In their defense, Belo denied that Anay was supposed to receive a share in
the profit of the business. He, however, admitted that the two had agreed that
Anay would receive a three to four percent (3-4%) share in the gross sales of
the cookware. He denied contributing capital to the business or receiving a
share in its profits as he merely served as a guarantor of Marjorie Tocao, who
was new in the business. He attended and/or presided over business
meetings of the venture in his capacity as a guarantor but he never
participated in decision-making. He claimed that he wrote the memo granting
the plaintiff thirty-seven percent (37%) commission upon her dismissal from
the business venture at the request of Tocao, because Anay had no other
income.

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

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

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

1. Ordering defendants to submit to the Court a formal account as to the

partnership affairs for the years 1987 and 1988 pursuant to Art. 1809 of the
Civil Code in order to determine the ten percent (10%) share of plaintiff in the
net profits of the cookware business;

2. Ordering defendants to pay five percent (5%) overriding commission for

the one hundred and fifty (150) cookware sets available for disposition when
plaintiff was wrongfully excluded from the partnership by defendants;

3. Ordering defendants to pay plaintiff overriding commission on the total

production which for the period covering January 8, 1988 to February 5, 1988
amounted to P32,000.00;

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

P100,000.00 as exemplary damages, and

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

as costs of suit.

SO ORDERED.
F. Mendiola v. CA

FIRST DIVISION

[G.R. No. 122807. July 5, 1996]

ROGELIO P. MENDIOLA, petitioner, vs. COURT OF APPEALS and

PHILIPPINE NATIONAL BANK, respondents.

RESOLUTION

HERMOSISIMA, JR., J.:

Sometime in December 1987, a certain Ms. Norma S. Nora convinced

petitioner Rogelio Mendiola to enter into a joint venture with her for the export
of prawns. As proposed by Ms. Nora, they were to secure financing from
private respondent Philippine National Bank. The credit line, it was agreed on,
was to be secured by collaterals consisting of real estate properties of the
petitioner, particularly two (2) parcels of land, situated in Marikina, and
covered by Transfer Certificate of Title No. 27307 issued by the Registry of
Deeds of Marikina, Rizal.

On January 27, 1988, the petitioner signed a Special Power of Attorney

authorizing Ms. Norma S. Nora to mortgage his aforementioned properties to
PNB in order to secure the obligations of the joint venture with the said bank
of up to Five (5) Million (5,000,000.00) Pesos. The planned joint venture
became a failure even before it could take off the ground. But, in the
meantime, Ms. Norma S. Nora, on the strength of the special power of
attorney issued in her favor, obtained loans from PNB in the amount of
P8,101,440.62 for the account of petitioner and secured by the parcels of land
hereinabove described.

On November 11, 1988, petitioner rather belatedly revoked the special power
of attorney in favor of Ms. Nora and requested PNB to release his properties
from the mortgage executed by Ms. Nora in its favor. The request
notwithstanding, petitioner was notified under a Notice of Sheriff Sale, dated
April 20, 1989, that PNB had initiated foreclosure proceedings against the
properties of the petitioner.

On May 16, 1989, petitioner filed a case for injunction against the PNB,
docketed as Civil Case No. 58173, with Branch 162, of the Regional Trial
Court of Pasig City, seeking to enjoin the foreclosure of the properties in
question. PNB filed a motion to dismiss the case on the ground that the
complaint did not state a sufficient cause of action. After hearing, the trial
court, in its Order, dated August 17, 1989, granted PNB's motion to dismiss in
this wise:
"Since the Court finds that the complaint does not state a sufficient cause of
action, it follows therefore that the prayer, for issuance of the writ of
preliminary injunction has no leg to stand on.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the complaint is hereby

ordered dismissed, without pronouncement as to costs. The temporary
restraining order under the date of May 16, 1989 is hereby lifted and set
aside."[1]

Petitioner filed a Notice of Appeal from said Order, which was noted by the
lower court in an Order, dated November 16, 1989.

While Civil Case No. 58173 was pending appeal with the court a
quo, aforementioned properties were sold in an auction sale on October 3,
1990. The PNB, as the highest bidder, acquired petitioner's properties.

On October 10, 1990, petitioner filed an action to annul the auction sale of
October 3, 1990, which was docketed as Civil Case No. 60012. The case was
raffled to Branch 154 of the Regional Trial Court of Pasig City.

PNB likewise filed a motion to dismiss Civil Case No. 60012 alleging that
"another action is pending between the same parties for the same cause of
action." Apparently, PNB was referring to Civil Case No. 58173 then pending
with respondent Court of Appeals. Attached to the motion to dismiss was a
copy of the complaint in Civil Case No. 58173 which had the same allegations
as the complaint in Civil Case No. 60012, except that the relief sought in the
first case was to enjoin the foreclosure of the mortgaged properties of the
petitioner.

Petitioner opposed said motion to dismiss.

After due hearing, Branch 154, RTC of Pasig, issued an Order, dated
February 28, 1991, granting PNB's motion to dismiss Civil Case No. 60012 on
the ground of litis pendentia. The dispositive portion of the Order reads:

"WHEREFORE, the Motion to Dismiss is hereby GRANTED, the injunction

DENIED and the instant complaint DISMISSED with prejudice, without
costs."[2]

A motion for reconsideration was filed by the petitioner but the same was
denied.Petitioner appealed before the court a quo, which rendered its
Decision, dated November 15, 1995 in CA-GR. CV No. 37940, affirming the
Orders issued by Branch 154 of the RTC-Pasig, to wit:

"WHEREFORE, the orders herein appealed from are hereby affirmed in

toto, with costs against the plaintiff-appellant." [3]

Hence, the instant petition submitting the following grounds.

I
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN
TOTO THE ORDER DATED FEBRUARY 28, 1991 BASED ON THE ORDER
DATED AUGUST 17, 1989 CONSIDERING THAT THE LATTER ORDER
SIMPLY RESOLVED THAT THE MORTGAGE IN FAVOR OF THE
PHILIPPINE NATIONAL BANK IS BINDING UPON PETITIONER, BUT HAS
NOT RESOLVED IN THE DECRETAL PORTION OF SUCH LATTER ORDER
WHETHER PHILIPPINE NATIONAL BANK HAS THE RIGHT TO
FORECLOSE SUCH MORTGAGE BASED ON THE DEFAULTED
OBLIGATIONS OF NORMA NORA, AND IT HAS NOT LIKEWISE RESOLVED
IN THE DECRETAL PORTION THEREOF WHETHER SUCH DEFAULTED
OBLIGATIONS OF NORMA NORA ARE SECURED BY THE MORTGAGE IN
FAVOR OF PHILIPPINE NATIONAL BANK; AND

II

ASSUMING FOR THE SAKE OF ARGUMENT THAT RES JUDICATA HAS

SET IN, ITS APPLICATION WOULD INVOLVE THE SACRIFICE OF JUSTICE
TO TECHNICALITY.[4]

We deny the petition.

The instant petition has now become moot and academic, because the first
case, docketed as Civil Case No. 58173, which is an application for injunction
filed by herein petitioner before Branch 162 of the Regional Trial Court, Pasig
City against private respondent PNB to prevent the latter from foreclosing his
real properties, and which was then pending appeal before the court a quo at
the time the second action (Civil Case No. 60012) was filed, has now been
finally dismissed by the respondent Court of Appeals in CA-G.R. CV No.
29601, to wit:

"WHEREFORE, the appeal is hereby declared abandoned and is dismissed

pursuant to Section 1(d), Rule 50 of the Rules of Court." [5]

Consequently, the instant petition which prays for the declaration of nullity of
the auction sale by PNB of private respondent's properties [6] becomes
dismissible under the principle of res judicata.

Section 49, Rule 39 of the Revised Rules of Court provides in part:

"SEC. 49. Effect of judgments. - The effect of a judgment or final order

rendered by a court or judge of the Philippines, having jurisdiction to
pronounce the judgment or order, may be as follows:

xxxxxxxxx

(b) In other cases the judgment or order is, with respect to the matter directly
adjudged or as to any other matter that could have been raised in relation
thereto, conclusive between the parties and their successors-in-interest by
title subsequent to the commencement of the action or special proceeding,
litigating for the same thing and under the same title and; in the same
capacity;

(c) In any other litigation between the same parties of their successors-in-
interest, that only is deemed to have been adjudged in a former judgment
which appears upon its face to have been so adjudged, or which was actually
and necessarily included therein or necessary thereto.

Section 49 (b) enunciates the first concept of res judicata known as "bar by
prior judgment," whereas, Section 49 is referred to as "conclusiveness of
judgment."

There is "bar by former judgment" when, between the first case where the
judgment was rendered, and the second case where such judgment is
invoked, there is identity of parties, subject matter and cause of action. When
the three identities are present, the judgment on the merits rendered in the
first constitutes an absolute bar to subsequent action. It is final as to the claim
or demand in controversy, including the parties and those in privity with them,
not only as to every matter which was offered and received to sustain or
defeat the claim or demand, but as to any other admissible matter which
might have been offered for that purpose. But where between the first case
wherein judgment is rendered and the second case wherein such judgment is
invoked, there is no identity of cause of action, the judgment is conclusive in
the second case, only as to those matters actually and directly controverted
and determined, and not as to matters merely involved therein. This is what is
termed conclusiveness of judgment.[7]

It is res judicata in the first concept which finds relevant application in the case
at bar.

There are four (4) essential requisites which must concur in order for res
judicata as a "bar by former judgment" to attach, viz.:

"1. The former judgment must be final;

2. It must have been rendered by a court having jurisdiction over the subject
matter and the parties;

3. It must be a judgment or order on the merits; and

4. There must be between the first and second action identity of parties,
identity of subject matter, and identity of causes of action." [8]

All the foregoing requisites obtain in the present case. The Order of Branch
162, RTC - Pasig, dated August 17, 1989, denying petitioner Mendiola's
application for injunction of the foreclosure of his properties in Civil Case No.
58173, had long become final and executory in light of the Decision of the
Court of Appeals in CA-G.R. CV No. 29601 affirming the trial court's order.
Petitioner did not appeal the Decision of the court a quo in CA-G.R. CV No.
29601.
The parties do not dispute the fact that Branch 162, RTC, Pasig, had obtained
jurisdiction over the subject matter of the first case as well as over the parties
thereto.

The judgment of the trial court in Civil Case No. 58173, as affirmed by the
Court of Appeals, is a judgment on the merits. A judgment is on the merits
when it determines the rights and liabilities of the parties based on the
disclosed facts, irrespective of formal, technical or dilatory objections. It is not
necessary, however, that there should have been a trial. If the judgment is
general, and not based on any technical defect or objection, and the parties
had a full legal opportunity to be heard on their respective claims and
contentions, it is on the merits although there was no actual hearing or
arguments on the facts of the case.[9] In the case at bar, not only was
petitioner provided an opportunity to be heard in support of his complaint for
injunction; petitioner was given an actual hearing to argue his complaint on its
merits.[10] Evidently, the Order of the trial court denying petitioner's application
for injunction was rendered only after due consideration of the facts and
evidence presented by both parties thereto.The said Order cannot be said to
be one on sheer technicality, it actually goes into the very substance of the
relief sought therein by petitioner, that is, for the issuance of a writ of
injunction against the private respondent, and must thus be regarded as an
adjudication on the merits.

Finally, the fourth element is likewise extant in this case. Required in order to
satisfy this element are: (1) identity of the parties and subject matter; and (2)
identity of the causes of action. In Civil Case No. 58173, the complaint was
filed by herein petitioner Mendiola against private respondent PNB, Norma S.
Nora, Eliezer L. Castillo, Norman C. Nora, Grace S. Belvis, and Victor S. Sta.
Ana, as Deputy Sheriff-In-Charge. In Civil Case No. 60012, the complaint was
filed by petitioner Mendiola against private respondent PNB and Nilda P.
Bongat in substitution of Grace S. Belvis. It is to be noted that there is no
absolute identity of parties on the two cases. This is of no consequence. We
have established jurisprudence to the effect that, in order for res
judicata to apply, absolute identity of parties is not required because
substantial identity is sufficient.[11] In any case, PNB is a defendant in both
cases. The subject matter involved in both cases, the real properties of
petitioner covered by TCT No. 27307, are also identical.

The similarity between the two causes of action is only too glaring. The test of
identity of causes of action lies not in the form of an action but on whether the
same evidence would support and establish the former and the present
causes of action. The difference of actions in the aforesaid cases is of no
moment.[12] In Civil Case No. 58173, the action is to enjoin PNB from
foreclosing petitioner's properties, while in Civil Case No. 60012, the action is
one to annul the auction sale over the foreclosed properties of petitioner
based on the same grounds. Notwithstanding a difference in the forms of the
two actions, the doctrine of res judicata still applies considering that the
parties were litigating for the same thing, i.e. lands covered by TCT No.
27307, and more importantly, the same contentions and evidence as
advanced by herein petitioner in this case were in fact used to support the
former cause of action.

Petitioner, now argues on equitable grounds. He maintains that, assuming for

the sake of argument that res judicata has set in, its application would involve
the sacrifice of justice for technicality.

We are not persuaded.

Equity, which has been aptly described "a justice outside legality," is applied
only in the absence of, and never against, statutory law or judicial rules of
procedure. The pertinent positive rules being present here, they should pre-
empt and prevail over all abstract arguments based only on equity. [13]

WHEREFORE, in view of the foregoing, the petition should be, as it is, hereby
DENIED.

SO ORDERED.

G. J.M. Tuason v. Bolanos

EN BANC

G.R. No. L-4935 May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER,

GREGORIA ARANETA, INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.

Araneta and Araneta for appellee.

Jose A. Buendia for appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal,

Quezon City Branch, to recover possesion of registered land situated in barrio
Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and
description of the land sought to be recovered. The original complaint
described the land as a portion of a lot registered in plaintiff's name under
Transfer Certificate of Title No. 37686 of the land record of Rizal Province and
as containing an area of 13 hectares more or less. But the complaint was
amended by reducing the area of 6 hectares, more or less, after the
defendant had indicated the plaintiff's surveyors the portion of land claimed
and occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiff's surveyors that a portion of the
area was embraced in another certificate of title, which was plaintiff's Transfer
Certificate of Title No. 37677. And still later, in the course of trial, after
defendant's surveyor and witness, Quirino Feria, had testified that the area
occupied and claimed by defendant was about 13 hectares, as shown in his
Exhibit 1, plaintiff again, with the leave of court, amended its complaint to
make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open,
continuous, exclusive and public and notorious possession (of land in dispute)
under claim of ownership, adverse to the entire world by defendant and his
predecessor in interest" from "time in-memorial". The answer further alleges
that registration of the land in dispute was obtained by plaintiff or its
predecessors in interest thru "fraud or error and without knowledge (of) or
interest either personal or thru publication to defendant and/or predecessors
in interest." The answer therefore prays that the complaint be dismissed with
costs and plaintiff required to reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant
to be without any right to the land in question and ordering him to restore
possession thereof to plaintiff and to pay the latter a monthly rent of P132.62
from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved,
defendant makes the following assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case
was not brought by the real property in interest.

II. The trial court erred in admitting the third amended complaint.

III. The trial court erred in denying defendant's motion to strike.

IV. The trial court erred in including in its decision land not involved in the
litigation.

V. The trial court erred in holding that the land in dispute is covered by transfer
certificates of Title Nos. 37686 and 37677.

Vl. The trial court erred in not finding that the defendant is the true and lawful
owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay the
plaintiff the amount of P132.62 monthly from January, 1940, until he vacates
the premises.

VIII. The trial court erred in not ordering the plaintiff to reconvey the land in
litigation to the defendant.

As to the first assigned error, there is nothing to the contention that the
present action is not brought by the real party in interest, that is, by J. M.
Tuason and Co., Inc. What the Rules of Court require is that an action be
brought in the name of, but not necessarily by, the real party in interest.
(Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the
action, that is to file the complaint, in the name of the plaintiff. That practice
appears to have been followed in this case, since the complaint is signed by
the law firm of Araneta and Araneta, "counsel for plaintiff" and commences
with the statement "comes now plaintiff, through its undersigned counsel." It is
true that the complaint also states that the plaintiff is "represented herein by
its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is
nothing against one corporation being represented by another person, natural
or juridical, in a suit in court. The contention that Gregorio Araneta, Inc. can
not act as managing partner for plaintiff on the theory that it is illegal for two
corporations to enter into a partnership is without merit, for the true rule is that
"though a corporation has no power to enter into a partnership, it may
nevertheless enter into a joint venture with another where the nature of that
venture is in line with the business authorized by its charter." (Wyoming-
Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of
Corp., 1082.) There is nothing in the record to indicate that the venture in
which plaintiff is represented by Gregorio Araneta, Inc. as "its managing
partner" is not in line with the corporate business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint,
may be answered by mere reference to section 4 of Rule 17, Rules of Court,
which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. When issues not raised by the

pleadings are tried by express or implied consent of the parties, they shall be
treated in all respects, as if they had been raised in the pleadings. Such
amendment of the pleadings as may be necessary to cause them to conform
to the evidence and to raise these issues may be made upon motion of any
party at my time, even of the trial of these issues. If evidence is objected to at
the trial on the ground that it is not within the issues made by the pleadings,
the court may allow the pleadings to be amended and shall be so freely when
the presentation of the merits of the action will be subserved thereby and the
objecting party fails to satisfy the court that the admission of such evidence
would prejudice him in maintaining his action or defense upon the merits. The
court may grant a continuance to enable the objecting party to meet such
evidence.

Under this provision amendment is not even necessary for the purpose of
rendering judgment on issues proved though not alleged. Thus, commenting
on the provision, Chief Justice Moran says in this Rules of Court:

Under this section, American courts have, under the New Federal Rules of
Civil Procedure, ruled that where the facts shown entitled plaintiff to relief
other than that asked for, no amendment to the complaint is necessary,
especially where defendant has himself raised the point on which recovery is
based, and that the appellate court treat the pleadings as amended to
conform to the evidence, although the pleadings were not actually amended.
(I Moran, Rules of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without
merit..

Let us now pass on the errors V and VI. Admitting, though his attorney, at the
early stage of the trial, that the land in dispute "is that described or
represented in Exhibit A and in Exhibit B enclosed in red pencil with the name
Quirino Bolaos," defendant later changed his lawyer and also his theory and
tried to prove that the land in dispute was not covered by plaintiff's certificate
of title. The evidence, however, is against defendant, for it clearly establishes
that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio
Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or
less, covered by transfer certificate of title No. 37686 of the land records of
Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an
area of 74,789 square meters, more or less, covered by transfer certificate of
title No. 37677 of the land records of the same province, both lots having
been originally registered on July 8, 1914 under original certificate of title No.
735. The identity of the lots was established by the testimony of Antonio
Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the
portion thereof claimed by defendant was established by the testimony of his
own witness, Quirico Feria. The combined testimony of these three witnesses
clearly shows that the portion claimed by defendant is made up of a part of lot
4-B-3-C and major on portion of lot 4-B-4, and is well within the area covered
by the two transfer certificates of title already mentioned. This fact also
appears admitted in defendant's answer to the third amended complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and

was registered in 1914, the decree of registration can no longer be impugned
on the ground of fraud, error or lack of notice to defendant, as more than one
year has already elapsed from the issuance and entry of the decree. Neither
court the decree be collaterally attacked by any person claiming title to, or
interest in, the land prior to the registration proceedings. (Sorogon vs.
Makalintal,145 Off. Gaz., 3819.) Nor could title to that land in derogation of that
of plaintiff, the registered owner, be acquired by prescription or adverse
possession. (Section 46, Act No. 496.) Adverse, notorious and continuous
possession under claim of ownership for the period fixed by law is ineffective
against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz.,
Supp. 9, p. 43.) And it is likewise settled that the right to secure possession
under a decree of registration does not prescribed. (Francisco vs. Cruz, 43
Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is
that rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil.,
796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding
that defendant should be sentenced to pay plaintiff P132.62 monthly from
January, 1940, until he vacates the premises.' But it appears from the record
that that reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10 a month for each hectare and
that the area occupied by defendant was 13.2619 hectares. The total rent to
be paid for the area occupied should therefore be P132.62 a month. It is
appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco
that as early as 1939 an action of ejectment had already been filed against
defendant. And it cannot be supposed that defendant has been paying rents,
for he has been asserting all along that the premises in question 'have always
been since time immemorial in open, continuous, exclusive and public and
notorious possession and under claim of ownership adverse to the entire
world by defendant and his predecessors in interest.' This assignment of error
is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for
further consideration.

During the pendency of this case in this Court appellant, thru other counsel,
has filed a motion to dismiss alleging that there is pending before the Court of
First Instance of Rizal another action between the same parties and for the
same cause and seeking to sustain that allegation with a copy of the
complaint filed in said action. But an examination of that complaint reveals
that appellant's allegation is not correct, for the pretended identity of parties
and cause of action in the two suits does not appear. That other case is one
for recovery of ownership, while the present one is for recovery of possession.
And while appellant claims that he is also involved in that order action
because it is a class suit, the complaint does not show that such is really the
case. On the contrary, it appears that the action seeks relief for each
individual plaintiff and not relief for and on behalf of others. The motion for
dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the
plaintiff.

H. Aurbach v. Sanitary Wares Manufacturing Corp.

THIRD DIVISION

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and

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

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.

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

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

LUCIANO E. SALAZAR, petitioner,

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

Belo, Abiera & Associates for petitioners in 75875.

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

GUTIERREZ, JR., J.:

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

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary

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

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

(a) The Articles of Incorporation of the Corporation shall be substantially in the

form annexed hereto as Exhibit A and, insofar as permitted under Philippine
law, shall specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

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

Directors, which shall consist of nine individuals. As long as American-
Standard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and the
other six shall be designated by the other stockholders of the Corporation.
(pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect

it as a minority group, including the grant of veto powers over a number of
corporate acts and the right to designate certain officers, such as a member of
the Executive Committee whose vote was required for important corporate
transactions.

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

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

... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the
body of stockholders present that a vote be taken on the ruling of the
Chairman. The Chairman, Baldwin Young, declared the appeal out of order
and no vote on the ruling was taken. The Chairman then instructed the
Corporate Secretary to cast all the votes present and represented by proxy
equally for the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated, namely,
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were
being cumulatively voted for the three ASI nominees and Charles Chamsay,
and instructed the Secretary to so vote. Luciano E. Salazar and other proxy
holders announced that all the votes owned by and or represented by them
467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted
cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in favor of the
three ASI nominees, namely, Wolfgang Aurbach, John Griffin and David
Whittingham and the six originally nominated by Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified
for the election of the following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman, Baldwin
Young, who announced that the motion was carried and declared the meeting
adjourned. Protests against the adjournment were registered and having been
ignored, Mr. Jaqua the ASI representative, stated that the meeting was not
adjourned but only recessed and that the meeting would be reconvened in the
next room. The Chairman then threatened to have the stockholders who did
not agree to the decision of the Chairman on the casting of votes bodily
thrown out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares, decided to
continue the meeting at the elevator lobby of the American Standard Building.
The continued meeting was presided by Luciano E. Salazar, while Andres
Gatmaitan acted as Secretary. On the basis of the cumulative votes cast
earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E.
Salazar voted for himself, thus the said five directors were certified as elected
directors by the Acting Secretary, Andres Gatmaitan, with the explanation that
there was a tie among the other six (6) nominees for the four (4) remaining
positions of directors and that the body decided not to break the tie. (pp. 37-
39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with
the Securities and Exchange Commission (SEC). The first petition filed was
for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young,
Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F.
Lee against Luciano Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, John Griffin,
David Whittingham, Luciano E. Salazar and Charles Chamsay against the
group of Young and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of
parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.

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

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

Upon a motion for reconsideration filed by the appellees Lagdameo Group)

the appellate court (Court of Appeals) rendered the questioned amended
decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham
and Charles Chamsay in G.R. No. 75875 assign the following errors:

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

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

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM

EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE
NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS
AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS

PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-
75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding

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

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

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

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE

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

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT

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

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

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

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

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

They specifically mention number 16 under Miscellaneous Provisionswhich

states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties

hereto partners or joint venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)

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

The parol evidence Rule under Rule 130 provides:

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

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

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

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

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

xxx xxx xxx

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

It has been ruled:

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

In the instant cases, our examination of important provisions of the Agreement

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

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

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

An examination of the Agreement shows that certain provisions were included

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

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

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of

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

Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to three
ratio. Each group is assured of a fixed number of directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint

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

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

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

In fact, the Philippine Corporation Code itself recognizes the right of

stockholders to enter into agreements regarding the exercise of their voting
rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

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

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

Appellants contend that the above provision is included in the Corporation

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

Secondly, even assuming that Saniwares is technically not a close corporation

because it has more than 20 stockholders, the undeniable fact is that it is
a close-held corporation. Surely, appellants cannot honestly claim that
Saniwares is a public issue or a widely held corporation.

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

As correctly held by the SEC Hearing Officer:

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

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

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

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

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

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

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

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

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

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

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

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

In our decision sought to be reconsidered, we opted to uphold the second

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

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

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

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

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

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

Moreover, the usual rules as regards the construction and operations of

contracts generally apply to a contract of joint venture. (O' Hara v. Harman 14
App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution
of the question of whether or not the ASI Group may vote their additional
equity lies in the agreement of the parties.

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

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

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

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

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

Equally important as the consideration of the contractual intent of the parties

is the consideration as regards the possible domination by the foreign
investors of the enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this
regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI
group to elect board directors in proportion to their share in the capital of the
entity. It is to be noted, however, that the same law also limits the election of
aliens as members of the board of directors in proportion to their allowance
participation of said entity. In the instant case, the foreign Group ASI was
limited to designate three directors. This is the allowable participation of the
ASI Group. Hence, in future dealings, this limitation of six to three board seats
should always be maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board of directors there
are provisions already agreed upon and embodied in the parties' Agreement
to protect the interests arising from the minority status of the foreign
investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC
which were impliedly affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No.
75951) object to a cumulative voting during the election of the board of
directors of the enterprise as ruled by the appellate court and submits that the
six (6) directors allotted the Filipino stockholders should be selected by
consensus pursuant to section 5 (a) of the Agreement which uses the word
"designate" meaning "nominate, delegate or appoint."

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

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

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

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

I. City of Manila v. Gambe

G.R. L-No. 3666 August 17, 1909

THE CITY OF MANILA, plaintiff-appellant,

vs.
FRANCISCO GAMBE, ET AL., defendants-appellees.

Modesto Reyes for appellant.

Del-Pan, Ortigas and Fisher for appellees.

JOHNSON, J.:

From the record the following facts appear:

First. That upon the 31st day of August, 1903, the plaintiff commenced an
action in the Court of First Instance of the city of Manila against the
defendants, Francisco Gambe, Manuel Perez, Antonio Herranz, and Florencio
Garriz, who constitute the commercial firm of Herranz & Garriz, for the
purpose of recovering the sum of five thousand dollars ($5,000), United
States currency, for certain damages occasioned by the steamship Alfred to
the "Spanish Bridge" in the city of Manila.

Second. After a consideration of the facts adduced during the trial, the
Honorable Judge Rohde, then one of the judges of the Court of First Instance
of the city of Manila, rendered a judgment against the said Francisco Gambe,
for the sum of $1,300, United States currency, and for the costs.

Third. Francisco Gambe was a pilot and member of the Pilot's Association of
Manila and was at the time of the alleged accident and injury in charge of said
steamship Alfred. Judge Rohde dismissed the cause as to the other
defendants.

Fourth. From this judgment of the lower court the defendant Gambe appealed
to the Supreme Court.

Fifth. After a consideration of the facts, the Supreme Court on the 31st day of
March, 1906, affirmed with costs the judgment of the lower court. (See City of
Manila vs. Gambe, 6 Phil. Rep., 49.)

Sixth. The judgment thus affirmed was returned to the lower court for an
execution of the same.

Seventh. On the 26th day of May, 1906, an execution was issued upon the
said judgment against the said defendant, Francisco Gambe, and was
returned upon the 23d day of June, 1906, unsatisfied.
Eighth. Later, upon the 11th day of July, 1906, another execution was issued
out of the Court of First Instance against the defendant, Francisco Gambe,
which was returned upon the 17th day of August, 1906, unsatisfied.

Ninth. On the same day, or the 11th day of July, 1906, in accordance with the
provisions of section 431 of the Code of Procedure in Civil Actions, the plaintiff
attempted to attach whatever money or effects which the defendant had in the
said Pilots' Association of Manila. These attachments were directed to the
Hongkong and Shanghai Banking Corporation, the Hon. W. Morgan Shuster,
Collector of Customs, as well as Francisco Aguado, who was the chief of the
said Pilot's Association.

Tenth. On the 22d day of August, 1906, the attorney for the plaintiff presented
in the lower court the following affidavit:

Edmond Block, being duly sworn, says:

That he is the attorney for the plaintiff in the above-entitled action.

That a judgment was duly entered and docketed in the said action in the said
court on the 20th day of April, 1906, for the sum of thirteen hundred dollars
($1,300), United States currency, and costs, against the above-named
defendant, in favor of the plaintiff.

That an execution upon said judgment was duly issued against the property of
said judgment debtor.

That the said judgment debtor now resides in the said city of Manila.

That the sheriff of the city of Manila has returned said execution wholly
unsatisfied, and that the said judgment still remains wholly unpaid.

That affiant is informed and believes that an organization or association

known as the "Manila Pilots' Association," of which Francisco Aguado is the
chief pilot, Manuel Goitia is the treasurer and custodian of its funds, and of
which W. Morgan Shuster, Francisco Gambe, and other pilots of the port of
Manila are members, has property in its possession dedicated to and for the
purpose of payment of damages caused through negligence of the pilots of
said association, or any of them, to third persons.

That the said association has in its possession and under its control, property
of the said judgment debtor, exceeding eight hundred pesos (P800),
Philippine currency, and is indebted to the said judgment debtor in an amount
exceeding eight hundred pesos (P800), Philippine currency.

That the said indebtedness to said judgment debtor arose through this, that
the said judgment debtor has deposited with the said association the amount
exceeding eight hundred pesos (P800), Philippine currency, and that the said
association now holds the said amount subject to the order of said judgment
debtor, and that the said amount should be applied, affiant believes, to the
payment or satisfaction of the judgment debtor.

That on the 23d day of June and 11th of July, 1906, the said Pilots'
Association, through the chief pilot, the treasurer of said association, W.
Morgan Shuster, and Francisco Gambe, was duly notified and each of the
above-mentioned persons were so duly notified by the sheriff of the city of
Manila, that attachment was levied against all the goods, effects, interests,
credits or money belonging to the defendant, in the possession of said
association and persons, to cover the amount of two thousand six hundred
and seventy pesos (P2,670), Philippine currency, and to make immediate
payment of said goods, effects, interests, credits, or money and forward same
to the sheriff.

That all of the above-mentioned persons denied having in their possession,

and refused to deliver any such said goods, effects, interests, credits, or
money belonging to said defendant.

Wherefore deponent prays an order of this court that the said Francisco
Aguado, Francisco Gambe, Manuel Goitia, and W. Morgan Shuster, be and
appear and answer as to the indebtedness of the said Pilots' Association to
said judgment debtor, at a time and place by said court to be specified.

(Signed) EDMOND BLOCK.

Subscribed and sworn to before me this 22d day of August, 1906, exhibiting in
the act cedula No. 175565, dated Manila, June 6, 1906.

(Signed) MODESTO REYES,

Notary Public.

Commission expires December 31, 1906.

Upon this affidavit, the Hon. A. S. Crossfield, one of the judges of the Court of
First Instance of the city of Manila, made the following order:

On reading the foregoing affidavit, it is satisfactorily appearing to me

therefrom that the Manila Pilots' Association has property of Francisco
Gambe, the defendant in the above-entitled action, which property ought to be
applied toward the satisfaction of the judgment in said action, and that
Francisco Aguado is the chief pilot, Manuel Goitia the treasurer, and
Francisco Gambe and W. Morgan Shuster are members of said association,
and that it is proper cause for this order, I, the undersigned, judge of the Court
of First Instance of the city of Manila, Philippine Islands, do hereby order the
said Francisco Aguado, Francisco Gambe, Manuel Goitia, and W. Morgan
Shuster personally to appear before me in the said city of Manila, on the 10th
day of September, at 10 o'clock in the morning of that day, to answer
concerning the said property.
Eleventh. In accordance with the above order, the said parties appeared
before the said court and testified relating to the money, property, credits or
effects which the said Pilots' Association had in its possession belonging to
the said defendants.

After hearing the evidence of these parties, the said Hon. A. S. Crossfield
rendered the following judgment:

This case is now before the court for hearing the order directing Francisco
Aguado as chief pilot, Manuel Goitia as treasurer, and Francisco Gambe and
W. Morgan Shuster as members of the Pilots' Association to answer as to any
property they may have in their possession or under their control, belonging to
the defendant, Francisco Gambe. Execution having been issued in the above-
named respondents having been attached, as in garnishee proceedings, all of
the above-named respondents appeared and the two first-named made
declarations as to the property in their hands.

From the declaration made it appears:

That each member of the Pilots' Association before becoming such, must
deposit with the association the sum of P800, to be retained by the
association for the purpose of satisfying damages which may be incurred by
others by reason of negligence or fault on the part of the association in the
transaction of its business.

It further appears from the declarations that persons thus depositing the
money could not withdraw it; that it is property of the association and may not
be withdrawn, even in case of the death of a member, and that said Francisco
Gambe is a member.

I therefore find that the above-named respondents, either as officers of the

association or members thereof, have not in their control, nor do they possess
any property, money, or effects which would be the subject of a levy under
execution against said Gambe, and the order to appear is discharged.

From this decision of the lower court the plaintiff appealed and made the
following assignments of error in this court:

1. The court below erred in deciding that the sum of P800, Philippine currency,
deposited by the defendant, Gambe, with the Pilots' Association could not be
withdrawn by him: "that it has become the property of the association, and
that the same can not be withdrawn even in the event of the death of a
member", and that the said Francisco Gambe is such a member.

2. The court below erred in deciding that the respondents called upon to
appear in this incident "either as officers of the association or as members
thereof, have not under their control nor in their possession any property,
money, or goods subject to attachment by reason of an execution against the
said Gambe."
3. The court below erred in not ordering the respondents, as officers or
members of the Pilots' Association, to deliver to the plaintiff, the city of Manila,
the P800, Philippine currency, which the said defendant Gambe, against
whom the plaintiff has an execution pending for the sum of P2,670, Philippine
currency, has in the treasury of the association.

The only question presented in this court is whether or not the said Pilots'
Association had debts, credits, or personal property, not capable of manual
delivery, in its possession or under its control, belonging to the defendant. In
other words, did said Pilots' Association owe to the defendant, a debt or have
in its possession and under its control credits and other personal property,
belonging to the defendant, subject to be attached in accordance with the
provisions of said section 431? Section 431 of the Code of Procedure in Civil
Actions provides:

Debts and credits, and other personal property not capable of manual
delivery, shall be attached by leaving with the person owing such debts or
having in his possession or under his control such credits and other personal
property, a copy of the order of attachment, and a notice that the debts owing
by him to the defendant, or the credits and other personal property in his
possession or under his control, belonging to the defendant, are attached in
pursuance of such order.

The test whether or not the interests of the defendant, if he has any, in said
association may be attached by virtue of said section is whether said Gambe
could maintain an action against the said association for the recovery of the
specific debt, credit, or personal property. It would seem clear and conclusive
that if Gambe himself could not maintain an action against the said
association for the recovery of the specific debt, credit, or personal property
which the plaintiff here is attempting to get possession of by virtue of the
action, that said plaintiff could not recover the same under the form of action
adopted by it. If Gambe could successfully maintain an action against the said
Pilots' Association for the recovery of a specific sum of money or specific
personal property, then, in our opinion, his judgment creditors, or the plaintiff
in this case, might also by the procedure provided for under said section 431
maintain the present action, but not otherwise. (Hassie vs. God Is With Us
Cong., 35 Cal., 378, 386.)

We do not believe that a mere equitable or contingent debt, credit, or personal

property can be reached by the procedure provided for in said section (431).
(Redondo Beach Co. vs. Brewer, 101 Cal., 322.)

A "debt," as used in said section, means some definite amount of money,

ascertained or capable of being ascertained, which may be paid over to the
sheriff or the court under an order, while "credits " and "personal property" are
something belonging to the defendant, but in possession and under the
control of the person attached. (Gow vs.Marshall, 90 Cal., 565;
Dunsmoor vs. Furstenfeldt, 88 Cal., 522.)
In our opinion it is also essential that the debt, credit, or the personal property
which is attempted to be subjected to the payment of the obligation of the
defendant, and which is alleged to be in the possession of the person
attached, must exist in some definite and ascertainable form at the time of the
attachment. (Norris vs. Burgoyne, 4 Cal., 409.)

The said Pilots' Association is purely a voluntary association of the pilots of

the city of Manila. The association is expressly recognized under the law. No
one can become a member of said association who has not shown special
qualifications as a pilot, and no one can act as a pilot who has not been
expressly recommended and approved by the collector of the port of Manila,
and no one can become a member of said association without having paid a
certain sum of money into the treasury of said association. This funds
becomes the property of the association for the purpose of protecting its
members against losses occasioned by its members to ships while said ships
are under the control of a member or members of said association. The
money paid in by one member of said association becomes a part of a
general fund of said association, subject to be paid out for damages done to
ships by any member of the association. The fund created by the
contributions of the members no longer belongs to the members of the
association; it belongs to the association. The association has a distinct and
separate entity from the individual members who make it up. The fund is
created for a specific purpose. (See articles 35, 36, 38, and 39 of the
regulations of said association.) Under the regulations of said association it
has assumed a certain responsibility for its members. Whether the damage
caused by the defendant in this case is of such a character for which the said
association assumed the responsibility is a question which the person injured
has a right to test in a special action against said association.

From the evidence that was adduced before the lower court we are of the
opinion, and so hold, that the said association had no debts, credits, or
personal property, not capable of manual delivery, in its possession, belonging
to the defendant (Gambe), which are subject to be attached in accordance
with the provisions of section 431. It is, therefore, hereby ordered that the
plaintiff take nothing in this action and that the plaintiff be charged with the
costs of both instances.

Arellano, C. J., Torres, and Moreland, JJ., concur.

Carson, J., concurs in the result.

J. Lim v. Phil. Fishing Gear

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

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

INC., respondent.

DECISION
PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow

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

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

WHEREFORE, [there being] no reversible error in the appealed decision, the

same is hereby affirmed.[2]

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

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this

Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modifications as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings that transpired during
the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets

covered by the Agreement plus P68,000.00 representing the unpaid price of
the floats not covered by said Agreement;

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

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

February 9, 1990;

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

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00
per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on

the nets counted from September 20, 1990 (date of attachment) to September
12, 1991 (date of auction sale);

e. Cost of suit.

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

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

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter

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

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

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. [11]

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

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

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

The Issues

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

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

COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM
ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS

ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER
LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND

ATTACHMENT OF PETITIONER LIMS GOODS.

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

This Courts Ruling

The Petition is devoid of merit.

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

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

Article 1767 - By the contract of partnership, two or more persons bind

themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.

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

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yaos partner;

(2) That after convening for a few times, Lim Chua, and Yao verbally agreed
to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of
P3.35 million;

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

(4) That they bought the boats from CMF Fishing Corporation, which executed
a Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim
only to serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping,
repairing, dry docking and other expenses for the boats would be shouldered
by Chua and Yao;

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

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

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

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

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

Compromise Agreement Not the Sole Basis of Partnership

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

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the

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

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel,

liability can be imputed only to Chua and Yao, and not to him. Again, we
disagree.
Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a

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

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

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

Thus, even if the ostensible corporate entity is proven to be legally

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

A litigation is not a game of technicalities in which one, more deeply schooled

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

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly

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

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